Making Succession a Success
25th July 2014 Phil Emmerson, BDO LLP
A practical insight into five tips for family business harmony during the succession process.
To create a successful business takes courage, commitment and vision. But preparing to leave that company, after giving the best part of your life to its creation and development, can be extremely hard. With family businesses the owners often have a real passion for what they have been building and it can be emotionally difficult to hand the reigns of the business to someone else – even if that someone is your own flesh and blood, or a colleague who has worked tirelessly with you for many years.
While most business leaders feel a real regret at leaving the company problems can be caused by those who have a real desire to exit. This can happen when some business leaders choose not to make investment decisions and it may be that with the market having moved the business has failed to react to change. In the worst-case scenarios second tier management may be disillusioned due to a lack of career progression, cash resources may have been depleted, the banks may be concerned about strategic direction and investment from banks may be needed to ensure the business’s future, which means that a renewal of facilities may not be guaranteed.
To avoid these issues key questions that family business owners need to look at when planning their succession include: Who do the ‘managers’ of the business turn to for advice? Is the next generation willing and able to take on the business? Is there an exit plan? When should the leader exit?
Five tips for family business harmony during the succession process are:
- Have a plan
- Be flexible about exit timing
- Involve the rest of the business
- Keep your bank satisfied
- Tell a story
Have a Plan
In some cases the owner remains at the helm as succession planning has not been developed. Advance planning is indispensable (as is a succession strategy) as it can help the rest of your organisation commit and participate with the new leader of the company. A smart business leader will have been planning for this day from the outset and will have made sure that his children or managerial team, who are set to take over from him, have always been involved with the business helping make this strategy a reality.
By not adopting this approach there can be significant problems with staff feeling overlooked after decades of service and not being chosen to lead. Children, who may not wish to run their father’s or mother’s business, could be left heading an organisation that they have very little interest in.
Be Flexible About Exiting and Involve the Rest of the Business
There are reasons, other than the obvious emotional attachment to their work, why heads of family businesses may choose to delay their exits. During the recession for example there may have been a gap in the valuations of the business, and the worry could be that if the owner exits then the business may not be in a position where it is seen as being able to grow, succeed and ultimately live up to its potential.
Succession planning can also be an evolutionary process which requires visionary leadership and the wider participation and commitment of the rest of the organisation. Employees, particularly those with real potential to form the next generation of leaders within the company, need to be included and form an important part of the programme from the outset.
It may be that while a new owner – whether that is a child of the previous owner, a previous member of the managerial board or a complete outsider – is bedding in, that the old owner is prepared to be flexible about when he or she retires. This might avoid multiple sensitivities, including the successor trying to stamp their own personality on the business by fixing things not broken, as well as showing an obvious respect for the legacy of the outgoing leader.
Keep Your Bank Satisfied
At BDO we once experienced a situation where the bank, despite having a long-standing relationship with a business and plenty of security, challenged management about the business’s strategic direction, and refused initially to fund changes to the business. The decision to restructure was probably taken 2-3 years too late, although it was the right decision. If you are planning to restructure, do it when the business is seen as being in a strong position.
If the market changes, the value of the business can be reduced dramatically and it may be that the business is no longer as attractive a proposition to trade buyers as it once was. Sometimes family members may have continued to draw funds from a business without reference to its current performance, resulting in depletion of cash reserves. When a cash crisis arises the bank may be unwilling to support an overdraft (despite plenty of security), due to the remuneration strategy of the family shareholders. Therefore, to avoid a crisis, it would be better and more cost-effective in the long run to protect the business by ensuring that the withdrawal of any assets has to be sanctioned by the leader of the company and by the company’s board.
Tell a Story
When planning who will succeed as the new leader, family businesses need to assess some important criteria. By evaluating where the business is now, and considering where it is going, firms can create a story which allows them to remain credible with third party stakeholders, potential investors and the bank. The story needs to promote the firm’s ambitions, show a clear strategy with detailed plans, robust financial modelling and scenario planning.
The best management teams not only connect with investors, employees and consumers, but they are prepared. For example having a Plan B shows that they have considered what the business would do if it were hit by a crisis.
The key to making ‘succession a success’ is to use the same courage, commitment and vision that was used when creating the business when an owner is preparing to leave, thereby leaving the business in a strong position.