The Generation Game
5th August 2016 Dr Stephanie Hussels & David Molian, Cranfield University
Without formal succession planning, family-owned businesses run the risk of not being sustainable.
Family businesses play a vital role in economies across the world.
In the UK, for example, two-thirds of all private sector firms are family businesses, contributing over half of GDP and around 40% of private sector employment. Although they cover all sectors and come in all shapes and sizes, they share the common challenge of juggling family priorities and emotions with the needs of the business.
Most will want to pass the business on to the next generation but relatively few actually do so. Less than half of family businesses will pass to the second generation, and only a fraction will pass to the third. In the next three years alone, over 170,000 family businesses in Britain will no longer be controlled by the senior generation, and nearly 50% of these have yet to identify the successor for their business. Without formal succession planning, family-owned businesses run the risk of not being sustainable.
Some owners regard succession planning as simply a question of informally handing over the business from one generation to the next. They do not want to plan or think about their withdrawal from the business. This reluctance typically arises from a strong sense of attachment to the business; an aversion to letting go of control and power; fear of retirement; and also the inability to make succession choices between their children. Financial factors often also play a part. In short, if there is not an adequate successor selection process in place, a business can either cease to exist or fail to realise its true potential. Those families who do successfully pass their business on, stand a good chance of seeing their business go from strength to strength.
So what are the key issues family businesses need to consider when succession planning?
1.Plan for the business and plan for the family
Succession is a process rather than a one-off event of handing over the baton. Families that understand this consider it a multi-stage process that happens over years, beginning long before the time when the heirs step up to their new roles. The planning for that process will encompass not just the roles of the next generation in the business prior to succeeding, but the preparation of the business for the succession. It will also cover the role of any non-family management in the process; changes to shareholding structures; board membership and management; decision-making processes and impact on the family. All too often succession planning focuses just on technical issues - financial, tax and legal aspects - whereas the bigger challenges of the human dimensions are often completely neglected, because everyone wants to avoid the ‘zone of uncomfortable debate’.
If we look at multi-generational family businesses that continue to flourish, we see that these families share common goals concerning both the business and the family. For example, they have mechanisms to resolve conflict and deal with emergencies and continuously build trust among family shareholders who are outside the business. There must be a clear vision of the relationship between the family members and the business, which may well evolve over time along with clearly articulated values.
2.Prepare the next generation
When succession is managed smoothly, the next generation is prepared not just through the right education and development, but often through gaining their early experience elsewhere. When they do then join the family business, they arrive as managers in their own right, with skills and experience, and are not viewed as the ‘kids with silver spoons in their mouths’.
At Cranfield we see an increasing number of students from family businesses on the MBA and other master’s programmes to prepare them not just for their eventual role in the family business, but for their professional careers. In a growing number of cases where a family business has philanthropic interests, the next generation will take responsibility for managing charitable or social enterprise projects, as a means of cutting their teeth prior to entry into the main business.
It is also common for the next generation to take a director role in the business at the same time as the senior generation steps back into non-executive roles. This means they can offer advice and guidance when asked whilst giving the incoming generation the room to breathe and put their own stamp on the business.
3.Hire from outside the family
Attracting and retaining staff from outside of the family is the third key element in the process. It is a fortunate but very unusual family that has a gene pool capable of supplying all the ability necessary to take the business into the second, third, fourth generation and beyond. Non-family members from board appointments downwards will be attracted to a business where achievement and performance are justly rewarded.
Many family businesses treat inter-generational transition as an opportunity to reassess the governance structures they have in place and recognise that employing more non-family involvement can be a step forward. Both outside advisors and board members often bring a detachment and clarity to decision-making that is inherently difficult for those family members who are often too emotionally attached.
It is never too early for a family business to start planning for succession. The perception that succession is a brief episode occurring over a short time is almost certainly a significant barrier to getting it right. Today’s family business has access to an ever-growing range of processes and tools such as family charters, constitutions and councils that smooth the path and create a roadmap for a long-term, sustainable evolution that works for the family, its business and all of its stakeholders.
Reproduced with permission from Cranfield University and first published in the their Spring issue of Management Focus