The pandemic has prompted many family businesses to re-evaluate their future, review their operations and brought family governance and succession planning to the fore. The focus here is on family businesses, but much of what is written is equally true for families with significant wealth. The question in either case is where do we start when we, their advisors, are tasked with guiding them through the uncertainties of family governance and succession planning. We spoke to Frederick Bjørn, a Partner at law firm Payne Hicks Beach to get his thoughts. He advises a broad range of UK and international clients on personal tax and trust issues, but with his practice increasingly focused on advising entrepreneurial, business families on long term structuring and succession planning (often through the use of trusts). Despite the importance of tax in the overall thinking, the ‘tax tail should not wag the dog.’ The first question should be – what do you want to achieve? The answer is rarely straight forward and will depend on myriad factors including the stage of the family’s business, the ages of the key people in the business and the relationships within the family. It is only by exploring these factors that succession planning can begin. Often leaders of family businesses have not actually considered what their purpose is. They may have concerns about planning for the future, stemming from the perceived de-motivation of the next generation or their reservations about that generation’s capabilities. It’s vital to address these matters at an early stage. From the off, it is important to differentiate between three aspects of the family business: the control element, the economic element and the family (personal) element. Looking at control of the business, it is not unusual for a family business owner to relinquish (some) control in favour of the next generation, but only once they consider the next generation to be ready. This seems logical, until one realises that in their eyes, the next generation will never be ready (they will, after all, always be their children). The key at this point is to consider how the next generation(s) can be involved without usurping the patriarch/matriarch. This is delicate and is where structures can come in useful, particularly trusts and companies. The advantage of trust structure is that the control and economics can be kept apart and this can often protect the underlying assets (most notably the family’s business interests). The disadvantage is that not every client is comfortable with the idea of passing assets into a structure with so much flexibility and so little certainty. If this is the case, the next consideration is whether the existing company (or a form of holding company) could be used to try and break up the control and the beneficial interest. Sometimes the use of family investment companies and alphabet shares are useful at this stage. In either case tax will be a consideration and may limit the business’s options, but until the business owner knows what is on the table, he/she will not be best placed to dismiss them. Regardless of which route is adopted, once a child can demonstrate that they are capable both financially and in terms of running a business, this is when the older generation may be willing to concede a level of control. There is obviously a Catch 22 here, in that the older generation will not be prepared to do so until they are comfortable that the next generation are capable, but the next generation will not have the opportunity to demonstrate their capabilities until they have been given the responsibility. It is often this dynamic that needs to be played out. At some stage there has to be dialogue and an element of trust between the generations. Involving the next generation in discussions early in the process can help in this regard. It is not unusual for the next generation to feel the responsibility of wealth and the pressures that come with it very strongly, and for this to manifest itself in an apparent apathy or unwillingness to immerse themselves. The sums involved can be daunting and the success of the previous generation can demotivate. They feel like they will never quite be good enough. This can be rectified if they are brought into the fold and made to feel like they can achieve something within the business or with the wealth that has been provided for them. It is easy to assume that this should be done by way of sheltering the wealth so that they do not have access to it. However, in some cases this can in fact be demotivating in itself. It sends the message that their parents/grandparents do not trust them. Often this is why it is beneficial to have a third party involved who can see things objectively without the parental prejudice that can be so evident. It may be clichéd to say that it is a journey, but this does capture the essence of what we are dealing with. It is generally not a journey with an end, but it does twist and turn and produce some unexpected adventures along the way.

Succession is often not dealt with until it needs to be implemented. Succession planning is an area that many family businesses struggle to deal with, and often leave until it needs to be implemented rather than plan for the transition properly. Plan succession properly and the business can survive for generations to come. Fail to plan can be disastrous so how can families ensure that they survive and avoid the potential pitfalls? The Aims Of Succession The key objectives of succession are typically to protect family harmony, family wealth and the family business but it is during this period of generational transition that the business is at its most vulnerable. It is also a period when emotions run high too. The transition of the family business raises complex and emotion-laden problems and with so many public tales of acrimony and legal wrangling related to succession planning, it is little wonder that many family business owners fail to plan. However, ironically, it is often this failure to plan that causes the disharmony that they try so hard to avoid in the first place. Planning Ahead Is Crucial By planning ahead, effective succession strategies can be formulated and implemented in an open and positive environment. There is every reason for optimism. Whilst no two family businesses will ever be the same, there are three core elements common to them all: the family, the business and the owners. A change in the make up, structure or dynamics in any one of these will inevitably impact the other two. Good succession planning means being aware of the interaction of these three areas and adopting an approach that takes them all into account when planning the transition. Two Key Areas There are two important facets to any succession planning process: ownership succession and management succession. This distinction is important because of the important differences between ownership of the shares in the business and the day-to-day management roles that enable the business to continue to function on a daily basis. Both are important but they are different roles and should be treated differently. All too often the succession planning process fails to distinguish between the two and the optimal plan for the future is not identified which can cause problems later on. It may be, for example, that the best solution is for ownership of the business to remain within the family but the management is left in the hands of outside professionals who are engaged to perform roles within the business that the family cannot do to the same level due to lack of experience and expertise. Whatever the outcome, it is important that the business decisions are taken for business reasons, not family ones, as often happens. Things To Think About… It is crucial to decide what the vision is for the business and to be sensitive to the needs and expectations of the generations involved in the process. Clear communication is also key. When undertaking the succession planning process there are some key things to consider: Ownership Succession Is there an ownership succession plan in place and is it fully understood and accepted by everyone? Do the next generation want to own shares in the business? Are the next generation properly prepared and ready to take on the responsibilities of becoming shareholders? If shares are only going to be given to those working in the business, how can you be fair to those who do not? Management Succession Is there sufficient experience within the family to take over the running of the business? Must there always be a family leader and/or a family member on the Board? Is the next generation prepared to take over the business, and if not, what can be done to address this? What can be done to ensure that siblings/cousins will work well together when the older generation are no longer around? How do you balance the needs and requirements of working family members versus non-working? If external management is required, what can you do to recruit, retain and motivate the individuals concerned? The Key To Success… Managing the succession process in a family business tends to be most successful when it results from a well-planned partnership with the next generation. This partnership hinges upon effective communication and a clearly aligned vision between the current and future generations. Succession planning and management need not become the horror story associated with family skeletons and feuds. If planned properly, it can be a period of fulfilment for both the family and the business, and set the foundations for future growth too. All too often we read about family businesses in crisis, those in conflict, or those that did not survive the transition. Little recognition is given to those who do survive through the way that they adapt and change through the years, those that positively plan and embrace the change from one generation to the next, and those where there are good governance procedures in place to help subsequent generations deal with the transition Above all, succession planning is a journey. It certainly does not happen overnight. The journey enables families to work together and determine the best way forward and when done properly is a real force to be reckoned with, putting them on the right road to achieving their goals, both for the family and the business.

One of the common questions asked of an adviser by any family business owners is how to attribute a value to the family business and how coming up with an agreed formula can help remove challenging discussions at a later date. With a successful family business there is the challenge that all your wealth can be tied up in the business? How do you attribute a value to the family firm? What is it worth? Howard Hackney explores the key areas to think about below. Valuations of any business are subjective and very much a matter of opinion and family firms are no exception. Above all, the family firm is only worth what a buyer is prepared to pay for it, and indeed the value that the seller is prepared to let it go for. Any valuation needs to reflect the sustainability of the financial performance of the business and reflect the trust and value perceived to be in the business too. In that respect, like their non-family counterparts, family firms that are looking to sell need to make sure they professionalise the business operations and structures in order to make the business as attractive as possible to potential purchasers. As Howard explains, “It is often said that company valuation is ‘an art and not a science’ and this is very true. At the end of the day a company is worth what a buyer will pay for it – wide variations both above and below a technical valuation are not unusual. In turn there will be different valuations for different purposes and it is to be expected that two independent valuers acting on either side of a transaction will come up with significantly different values. In this respect the old joke of asking an accountant ‘what two plus two make – the answer being what do you want it to make?’ is never more true.” There are however a number of tried and tested methodologies and those that are often most useful for family businesses are the net assets as adjusted for open market values basis or the earnings basis. The net assets basis simply uses the net assets of the business as shown by the financial statements. Complications can arise when there are non-business assets in the accounts such as investment properties but even here the basic principle holds true – the value of the company is the sum of the value of its assets less its liabilities. This of course does not take into account the value of ‘goodwill’ and this is where the earnings basis comes in. The earnings basis looks at the maintainable future profits and then multiplies those profits by an appropriate multiplier. In arriving at these figures there is huge scope for subjective assessment of the ‘numbers’ to use. Where the earnings basis is less than net assets then it would be usual (but not an absolute given especially where the company is loss making) to use the net assets as the value. Where the earnings value is higher than assets the difference is by definition goodwill and the earning basis is likely to be the more appropriate. However, as Howard adds, “the simple formulaic approach is easy to say but often difficult to implement because there are going to be areas that are subjective, and therefore lead to different valuations, something that then needs to be discussed and figures agree with potential acquirers. This obviously becomes more complicated if the buyer is the next generation and there are relationship issues that need to be taken into account. The older generation may need to extract wealth from the family firm and to be seen to be fair to the next generation and the next generation may have to borrow funds to finance the acquisition and will not want to borrow more than necessary either.” The six areas of most contention in deriving the earnings value include: 1 - Maintainable Profits Best practice tends to see a weighted average over a number of years being used but in a family firm where relationships may have been built up over many years by the outgoing family business leader, there could be a challenge as to how these business levels will be maintained. 2 - Normalised Profits When assessing the profitability of a family firm it is important to compare the business practices as far as possible to open-market levels, especially when it comes to rewarding and remunerating staff. In many instances family firms pay family members more than the market rate for a role based on their financial needs and this will need to be ‘normalised’ when pulling together a family business valuation. 3 - Recent Trading History Another area for debate will be the trends in profits and trading in recent years and the level of weighting that should be used. Integrated forecasts and the previous accuracy of management accounting forecasts will likely be the subject of some debate in this area. 4 - Exceptional Items The results used in determining the valuation will need to take into account exceptional costs incurred by the business and adjust for these. Examples would include redundancy and reorganisation costs. 5 - Tax Rates Multipliers quoted in the open market are calculated on post tax profits. While multipliers themselves can be adjusted to take account of the tax affect it is more usual to arrive at a post tax normalised profit and there is then the question of which rate of tax to use. It is usually the corporation tax rate but this does vary depending on the size of the company and government policy. 6 - Multipliers If the above factors have a fairly high degree of subjectivity, it is the multiplier that is subject to the most argument. What figure to use is influenced by many factors including the business sector and the size of the company and indeed the economic climate. There are a number of possible indices ranging from quoted FTSE indices to others such as the BDO Private Company Price Index. While these are often in the low teens, a more usual multiplier for a typical family owned business would perhaps be between 3 and 8 although in the current climate this may be seen as optimistic. Determining the valuation of any business is a difficult and often contentious issue and family firms need to make sure that they are best placed to gain the best value for what in many cases is their most valuable asset. As Howard continues, “family firms that know that a transition between the generations or a sale is on the cards need to plan for the future and make sure they adopt best practice in all areas of the business to help them. Everything needs to be put under the spotlight and be addressed in order to mitigate discussions and debate further down the line. A good place to start is to ensure that detailed management accounts and integrated cashflow forecasts are prepared and maintained, areas such as depreciation are reviewed to ensure the company follows normal best practice and that areas such as salaries, reward and other benefits for family members are also considered against open market practices.” “On a final note, family business owners always want to know what the business is worth but are very often not interested in actually selling to an outsider." "Selling to a family member can be fraught with challenges when trying to maintain relationships and reach an outcome that is deemed fair and equitable to all parties." "In my experience, including an agreed valuation methodology that is not subjective in any shareholders agreement or family constitution is a good way to transition the business from one generation to the next without any major issues arising.”

Sometimes, the informality of working in some family business can be a great blessing… or a dreadful curse. Here, Rochelle Clarke of Succession Strength looks at some of the ways that can enhance and maintain good family business relationships. For some successors and other family members, the relaxed atmosphere of working with family provides welcome space to be themselves. For others, it frustratingly turns work/life balance into a hopeless illusion. Sooner or later, most family members find themselves in the second camp. When work starts to encroach on everyday life—from Sunday dinners to family picnics— family members can feel as though their lives have been taken captive by the family business. In helping overwhelmed family members who work together, we’ve seen what happens when successors fail to acknowledge the creeping pressure and combat it with healthy boundaries. The best way to build those boundaries is to talk about them early and often along the family business journey for the long term success of the business. An ounce of proactive boundary-setting early in the process is worth a pound of awkward conversation and explosive conflict later on. In these conversations, there are three critical questions that need to be addressed: How can a family member let the others know he or she is feeling overwhelmed? How can a family member address intrusive behaviour from other family members? How can the family work together to collectively balance their home/work lives? Boundaries are as individual as our finger prints. What may be OK for me, may not be OK for you. There is no way that someone else could correctly guess where your boundaries lie unless you tell them. At times, we may not even know where our own boundaries lie until we experience that feeling of discomfort. The only way that someone else will know for sure that a boundary has been crossed, is when you voice it. At the end of the day, achieving perfect work/life balance can be tough for everyone—successors and employees alike. The best way to protect all employees, whether they are family members or not, is to use healthy communication to get out in front of it as soon as possible. Just imagine working in a business where employees have the freedom to be at their best in an environment that brings out the best. Where they have the mental separation from the business when they need it; where intrusive behaviour from other family members or employees is addressed. How can family members in your business develop healthy boundaries?

The employee owned sector is changing. Over the last few years, we have seen growth in employee ownership as a succession plan for many UK family businesses. This is largely because evidence shows us that by bestowing ownership on employees and giving them an opportunity to decide on the future of a business, there is a direct positive impact for all stakeholders. There are not only benefits for individuals and their families, but also for the business, which can usually be seen through an increase in productivity, growth in profitability, greater resilience and more inclusive and effective employee engagement. Employee ownership can come in many different guises, ranging from simple option arrangements, tax-advantaged share purchase arrangements, creating specific shares (often referred to as ‘flowering’ or ‘growth’ shares), or by a simple transfer of ordinary share capital. It is possible to combine many of these elements together to create bespoke incentivisation arrangements that work for you and your business. However, if your plans are bigger than just incentivisation and you would like to realise some or all of the value you have created, you might consider your employees as the purchasers of your business. Natalie Wright, Head of Family Business at Mazars explains more. Selling to your employees, if structured correctly, can qualify for a complete relief from capital gains tax. Tax should not be the sole reason for entering into transactions but if you think your employees are the best future owners for your business then you should consider this relief more closely. To get the relief, the sale is made to an employee ownership trust (EOT) where the beneficiaries of that trust are the employees. The exiting shareholders and trustees agree a value for the company and the shareholders sell their shares to the trustees. The key conditions for the relief to apply is that the company is a trading company and the trustees must acquire at least 51% of the company shares. The consideration for the sale is usually left outstanding on a loan account until the EOT has sufficient funds to make the payment – although sometimes third-party financing is obtained. The trading company can make gifts to the EOT when it has cash available. Such gifts should not be taxable in the hands of the EOT, although it’s strongly recommended you obtain HMRC clearance that this treatment will apply. These funds are then used by the EOT to make payment to the seller. The clear tax benefit of using an EOT is that the exiting shareholders can sell their shareholding to the trust completely tax-free. Given the recent reduction of the entrepreneurs’ relief lifetime limit to £1 million, this tax exemption is now even more valuable. Moreover, there is no limit on the value of the company that can be sold to an EOT. A company owned by an EOT can pay income tax-free bonuses of up to £3,600 to each employee each year. EOT’s are particularly useful for family owned businesses where there may not be a family member in the next generation who wants, or is able, to take on the running of the business. They are also used in situations where the current business owners do not want to sell to a competitor. Employee ownership should not be a place of last resort for succession planning but a model for sustainable, scaleable, successful business where employees are the custodians, drivers and beneficiaries of a financially sound and strong business. There are many benefits to an EOT, but there can be some downsides and it’s important to understand how this could affect you, your business and your planning. The trust must control the company, in other words it must have more than 50% of the votes and must have more than 50% economic entitlement over the company. The price achieved on a sale to the trust may be slightly lower than the price you could achieve on a sale to a third party, although this may well be outweighed by the tax benefit, so your net proceeds may be similar. The sales proceeds may not be received for a number of years and the seller has no security over the deferred consideration. It will depend on the cash available in the company to make the gifts to the trust, or the trustees being able to raise external finance, but this itself would probably also rely on the company results. You cannot control the company – but you can have influence, especially if you have retained some shares. You would normally look to appoint professional trustees to help in this area. The sale to an EOT is not the same as a sale to management. A sale to the management (usually referred to as a Management Buy Out) is generally a sale to a specific group of managers, backed by a funder who provides them with the means to buy your shares. An EOT must be for the benefit of all eligible employees rather than just a few, and all employees must be eligible to participate in the bonus scheme, although different bonus amounts can be paid to employees based on remuneration or length of service. If any of the conditions cease to be met, there will be a disqualifying event. If this happens within a year of the end of tax year in which you sell, then your tax saving will be clawed back from you by HMRC. After that, it becomes a problem for the trustees who will be deemed to dispose of and reacquire the shares at their market value, probably resulting in a CGT liability. EOTs present a viable option for many family businesses, as it provides a business model that can adapt to the changing needs and demands of running a business in the 21st century.

How to keep the business – and the family – running smoothly into the next generation and beyond as the building blocks of a national economy. Family-run businesses represent the future building blocks of China’s economy. According to research, over the next few years China can expect to see six million family businesses contribute to its economic growth. Since private enterprise is relatively new in China, many family businesses are still controlled by their original founders who may soon pass their firms on to the next generation. Successful handovers are therefore of huge importance to Chinese family-run firms, and by extension, to the continued growth of the Chinese economy. A badly handled succession can put a family firm in danger, wipe out an entire family’s savings and destroy family harmony. Owners of Chinese family business are often forward-looking in business but very traditional when it comes to family governance. They tend to see their role as one of leading by example – doers not talkers. They are reticent when it comes to sharing their plans for the future with family members. Indeed, long-term planning is almost a taboo subject for them. The Yung Kee Case The owner-manager of the famous Yung Kee Restaurant in Hong Kong is a prime example of a dynamic businessman whose neglect of long-term succession planning proved to be a fatal error. Almost from the moment Kam Shui Fai, owner of the Yung Kee Restaurant, sold his first roast goose in Central Hong Kong in the 1960s, customers began flocking to the eatery. Its reputation, relying purely on word of mouth, soon spread beyond the port city. In 1968, Fortune magazine named Yung Kee one of the world’s greatest restaurants – the only restaurant serving Chinese cuisine that appeared on the list. As he got older and his sons joined the business, Kam Shui Fai never took the time to develop a formal succession plan. Simply keeping up with the ever-growing popularity of the restaurant was a major feat. His first-born son, Kinsen Kam Kwan-sing, started working in the kitchen in his teens, gradually taking over the running of the restaurant. His involvement in the business relieved the pressure on his father, who could count on Kinsen to manage the entire operation, from goose farming to keeping customers happy, and with the same attention to detail as the owner. Kam’s second son preferred to stay out of the kitchen. Instead, Ronald Kam Kwan-lai spent part of his youth earning an engineering degree from a university in Taiwan. Eventually he joined his father’s business as the manager of the family’s growing portfolio of property investments. The two brothers never had any need or desire to interact in the day-to-day management of the business since they relied on their father to act as an arbiter for any decisions. The family members met regularly at board meetings to discuss how to invest the fast-growing profits of the business. So when Kam Shui Fai died in 2004, his widow expected her sons to continue as they had in the past. But she was mistaken. Without their father as a buffer, the two brothers began to disagree on just about everything, inside and outside the kitchen, sowing discord within the family and among employees. While the mother sided with her oldest son, her daughter and third son (who died in 2007) sided with Ronald. Because he was the majority shareholder, Ronald was able to force his older brother out of the restaurant as well as off the board of the family-run holding company. With his minority shareholding, Kinsen could do little to prevent his ousting from the family business. Worse, Ronald refused to buy out his brother’s share for an acceptable price. Believing that he had the law on his side, Kinsen launched a lawsuit to force Ronald to liquidate the parent company of Yung Kee. Thus began a long, drawn-out court case that brought unwanted media attention to the family and the Yung Kee Restaurant. The restaurant’s reviews were no longer raves; Yung Kee lost its precious Michelin star in the meltdown. Worse still, Kinsen died in unexplained circumstances a few years into the legal drama, leaving his two sons to fend for themselves. As for the lawsuit, Hong Kong’s top court gave the go-ahead for the parent company to be wound up, and the proceeds divided between the two branches of the family. Meanwhile, Kinsen’s sons have opened up restaurants of their own in Hong Kong, taking some of the best Yung Kee chefs with them. Hardy Kam Shun-yuen, the younger son, won a Michelin star for Kam’s Roast Goose four months after its opening in July 2014. “It is a new beginning here,” he said, “I focus on continuing my Dad’s spirit.” Four Simple Rules To Activate Family Succession 1. Founders should understand that each high-potential family member is a unique human being with strengths and weaknesses. If they have more than one child, they should avoid treating all children as if they were all alike. 2. Founders should develop long-term succession plans, no matter how small the business. They should stop, look and listen to their heirs, note their strengths and weaknesses both as individuals and as a team players, and then drive the succession process based on their observations. 3. Founders should embed an entrepreneurial attitude within the family and the business by creating formal planning structures and written rules about succession. If some aspects of the business require different skills and competences, job profiles should be drawn up and matched with the appropriate CVs of family members. Such expectations drive young family members to acquire the right skills for a job and provide for a transparent transfer of management and ownership. 4. Finally, founders should create an organisational culture that reflects the firm’s family assets, heritage and identity. By establishing a family-based culture, founders can ensure that their businesses can survive long after they retire. It is essential stepping stone for future generations. It is unlikely that any of these four simple rules were applied during the decades that Kam Shui Fai was roasting goose in his kitchen, with dramatic consequences for the family and ultimately the Yung Kee Restaurant. By following a proactive, structured approach to long-term succession planning, founders can ensure that their families and businesses will survive for generations to come. Morten Bennedsen is the André and Rosalie Hoffmann Chaired Professor of Family Enterprise at INSEAD and Academic Director of the Wendel International Centre for Family Enterprise. He is a contributing faculty member to the INSEAD Corporate Governance Centre and is co-author of the book The Family Business Map: Assets and Roadblocks in Long-Term Planning (Palgrave Macmillan 2014). This piece was first published on the INSEAD website and has been reproduced here with their permission.

In business there are few greater questions than what comes next. This is especially true in family companies, where work is always personal, despite what management mantras might try and teach us. Succession planning is all too often left to the last minute or, worse still, until it’s too late. Between rivalries and personal agendas, it’s understandable that the sensitive nature of passing a life’s work to the next generation is a topic that most people want to avoid. But time waits for no-one, and one day the question of succession will be upon family business owners regardless. Marc Emmer is President of Optimize Inc, a growth consultancy specialising in strategic planning, and the author of Momentum, How Companies Decide What to Do Next. He explains how succession planning has been left from our vocabulary: “Our business culture does not promote candid conversations and the lack of structured performance management systems exacerbates the problem,” he says. “While uncomfortable conversations like these are entirely necessary and can unearth a litany of complicated legal and tax issues.” With that in mind, here are Marc’s eight steps to consider when planning for your company’s eventual succession process. 1. Set Specific, Long-Term Goals For Ownerships Planning should begin years before any succession takes place. During the process, both the current owner and any potential successor should set out their long-term goals for the business. Ask what you can do now to help those future goals be met. The more closely aligned your goals, the more seamless the transition – which will help both on a business level, and a personal one. 2. Establish A Set Of Managerial Competencies Draw up a list of the skills that you believe are essential in your role as company owner, and that are must-haves for any successor. This could be an eye for innovation, financial acumen, team management skills or, more likely, all of the above. This checklist can then be used to assess any potential successor, as well as help your current team understand what you’re already bringing to the company. 3. Evaluate The Management Team Who are the team around you, and what are their standout skills? Sometimes it takes an outsider’s eye to accurately map the talent in your departments, as well as to spot skill gaps. Consider hiring a firm to evaluate top level managers. 4. Debrief The Assessment Analyse the findings of this managerial evaluation against your checklist of required competencies. If any of the people you had in mind are lacking in some areas, then consider training programmes rather than writing them off completely. Offering development opportunities can be a handy way to assess if employees are moving in the right direction. And you never know, people who you never had pegged as a successor may reveal themselves as candidates, if given a chance to shine. 5. Seek Out High-Quality Legal And Tax Advice Transfer of ownerships come with significant legal and tax implications. Depending on whether you plan to give the business away, sell it, or transfer ownership in your will or through a trust – there are laws around tax avoidance and capital gains that, if not navigated correctly, can land you with sizeable bills. Always consult with quality tax and legal advisors, ideally long in advance of any succession commitment, as long-term tax planning may help ease future costs. 6. Create A Robust Performance Management System It may not be now, but stepping back from the business little-by-little – rather than leaving at once – can be a great way to help ease the transition period and help a successor bed-in. However, this process takes planning and, above all, a team who can pick up some of your owner’s responsibilities while you’re away. The best way to do this is to train your managers on staff accountability when it comes to their performance and business outcomes. With other people then concerning themselves with these daily operations, you’ll have more time to focus on top-line decisions and the succession process. 7. Identify The Successors Once you have evaluated your management team and assessed their skills and performance, it’s time to start speaking with your top people about their careers. These discussions will need to be both candid and confidential if both sides are to feel comfortable. Consider employing an executive coach to help you identify which candidates are saying all the right things. 8. Handcuff Your Best People These steps will only work if you’re able to keep the best talent in your company. That means providing incentives not only for senior managers to stay put, rather then jumping ship before you leave, but also to ensure that talent lower down the company has a path to commit to. Helping senior managers to progress through your company will allow them to gradually build the skills needed to assume your position. Promotions will create loyalty while providing a clear career path to your best staff. Not only that, a focus on talent instils a sense of purpose within your own role, setting them on the path to taking over the top job one day. “Timing is everything, and it is essential to think clearly about when to pull the trigger on transition,” says Marc. “Such decisions are vital to the sustainability of a company. They warrant methodical planning and thoughtful execution.” This article was first published by Vistage and has been reproduced with permission. It covers just one area of business where executive coaching and private advisory groups can help business leaders. From culture to growth to leadership to work life balance, no topic is out of bounds. Find out more about the work Vistage do here

Leadership succession is inevitable for most family businesses. Unfortunately all too often it is recognised as an issue but put to one side to be dealt with at a future point. This may be due to the fact that succession is seen as too hard or complex in terms of the family dynamic or because the existing governance mechanisms fail to identify the fundamental need to plan for succession. Properly managed and controlled succession becomes a process for a family business and not ‘an event’. Whilst most family businesses recognise the need to plan for leadership succession, a much smaller number actually take steps to formalise a plan and allocate implementation responsibility. Just Why May This Be The Case? It is a well-recognised fact that CEO’s of family businesses are in office three to four times as long as those from non-family businesses. This long tenure of office for the CEO may engender a false lack of priority about the importance of succession planning. Just because there appears to be plenty of time does not mean that this issue should be left to one side for the future. Indeed, what would happen should an unplanned succession event occur due to the ill health of the current CEO? Another factor as to why a plan may have been overlooked is that the family/business lack all or some elements of the appropriate governance structures, such as an effective board, family council and family assembly. These structures assist in the regulation of the inter-relationship between the Ownership of the business, the Management of the business and the Family. Achieving the right balance and connection between these three areas is vital to ensuring continuity and continued success through the inevitable changes that occur over time, both to the family and in the business world. Planning For Succession Planning for succession should typically be a 3 to 7 year event, sometimes even longer. One of the principle responsibilities of a Board of Directors is to plan for the CEO’s succession. When it comes to selecting the successor the appointment should be based upon who is the best person for the job. If a family member is to succeed the retiring CEO then their selection must be based upon ability, rather than blood line. To ensure that there are family members involved in top management successful long-lived family businesses have recognised the need for education. The concept of education for a family business has a very broad meaning, encompassing how the younger generation are educated in family values, about the family business and determining what level of formal education and work experience is required for those family members who wish to join the family business. By promoting a learning orientation the successful multi-generational family businesses lay the groundwork for family members to join top management based upon their skills rather than their blood line. Retirement Hurdles CEO’s of family business often find it hard to transition themselves out of their leadership positions as: They are used to the power that accompanies leadership and see any diminution in their authority as a challenge to their personal status, worth and reason for existing. They fear “what lies beyond the business”, because their lives have enjoyed such a strong focus on it. They cannot see anybody else in the business, the family, or an outsider who can know, love, suffer and achieve for the business as much as they have done. They want to protect their valued employees, or family, from the perceived challenges of command. They want to ensure that their retirement prospects are secure. Succession is never an easy issue to deal with for the retiree, business or the family, however if the process is properly structured and managed all the stakeholders will have confidence in the outcome. Eight Points For Successful Succession: Make succession a structured on-going process, rather than an event. The Board must take ownership of the process. Be professional and avoid nepotism. Appoint the best person for the job. Be objective, independent and impartial for the sake of your family, business and for those whose lives who depend on it. Appoint someone who understands the unique responsibilities of leading a family business. This person will act in the manner of a steward, rather than an individual seeking to maximise their personal wealth. Structure the transition between the retiring leader and the new one to ensure that years of business knowledge are not simply lost overnight. Respond to the old leader’s fear of the abyss. When the business has been their life, moving out of it is like stepping into the void. Help to ease their move. Work out how much is enough financially? How much money does the leader need to be financially secure? Do not search for, or try to create, a clone of the current leader – the successor should stand on the old leader’s shoulders, not just fill their shoes. Do not surrender your business and family timing objectives purely for tax/wealth benefits. Consider the long-term health of the family and the business.

Mike Wardlaw from Tilney sets out the key considerations for business owners Building a successful business takes years of hard work and sacrifice. Moving on from your business is one of the most important decisions an owner will make – but it’s one that is often put off until it’s too late. Planning well in advance how you will exit will ensure a smooth process and can unlock the real value of your business, whether you want to sell it, pass it on to the next generation, or whether the intention is to take money out of it now to support your retirement, or perhaps an alternative venture. Having advised many successful business owners and their families, Mike adds “the first question to be settled revolves around the future of their business and their future role. For example will it be a whole or a partial exit?” “This will include a consideration of whether you may want to pass it on to family members during your lifetime or upon death, or whether you want a ‘hands-off’ sale to a third party.” Each of these questions will influence the tax position, how existing staff members need to be incentivised and how the business should be prepared ahead of time. Smith & Williamson, who recently merged with Tilney, addressed succession in their most recent survey which found that family-owned businesses are not leaving succession to chance, but that they base family involvement on enthusiasm and merit. Few believe their children have an automatic right to succession and are most concerned about ensuring they have a family member with the ability and inclination to take over. The survey indicates that while 80 per cent of family business owners believe it is important for family members to be involved in the business, 78 per cent think it is important that they have business or professional qualifications if they are to enter an executive role. Before this process begins however, you will need to establish how much your business is worth and the type of exit that is appropriate to you. Do you want to retain a relationship with the business after exit, whether as a consultant, committed shareholder or in an executive role? “However someone exits their business, they will usually be left with a significant lump sum which may have to last for some time,” says Mike. “There will be financial planning consequences to any exit and there could also be issues around inheritance tax which need to be managed. If there is a possibility that you will hold the business until you die for example, it is vital to ensure that you minimise inheritance tax.” “Having worked hard to build a business, you may want to retire, use the capital to start again, do something else in between or pass it on to someone else." "Whether you want to transfer the business to the next generation, or discuss a management buyout, trade sale or setting up an Employee Ownership Trust, which are becoming increasingly popular, it’s never too early to ensure that your personal wealth and that of the business are structured as efficiently as possible.” Important Information - Nothing in this article is intended to constitute advice or a recommendation and you should not take any financial decision based on its content. Investments can go down as well as up and you may not get back the amount originally invested. Tilney Financial Planning Limited. Authorised and regulated by the Financial Conduct Authority.

A good Board Chair understands they are a facilitator to achieve the best outcomes rather than a ‘commander.’ They listen more than they speak, and they create the conditions in which directors can have robust and productive group discussions. "A good board chair shows restraint and resilience" They focus on the process which allows others to participate and enables directors to perform to their maximum. The leadership of a good Board Chair enables the board to function as the highest decision-making body in an organisation. From our experience working with Chairs and boards of a range of organisations, both public, private and not for profit, here are a few suggestions about the qualities and skills to consider when electing a Board Chair: Do They Have Emotional Intelligence? Look for someone who is an active listener, who can summarise the consensus from the discussion and clearly formulate and articulate actionable resolutions. Look for someone who knows when to let the discussion run, and when to corral the conversation. Can They Control The Meeting And Set The Tone? Their role is to moderate discussion between directors, directors and the CEO, directors and executive staff. The Chair is responsible for boardroom conduct and they must be able to immediately call out inappropriate behaviour and articulate what is acceptable. Are They Able To Cultivate Professional Relationships? They need the capacity to develop sound, professional relationships with both the CEO and Company Secretary. Good relationships will enable the board, through the Chair, to motivate, control, advise and mentor, and in effect, partner with the CEO. Do They Have Good Communication Skills? These are essential for working with fellow directors, CEO, executive staff, and other stakeholders such as shareholders and the media. A good Board Chair interacts individually with directors prior to meetings and communicates with them between meetings. Do They Understand Processes? A good Board Chair is well prepared. They ensure agenda items are strategic, material and ready for decision (and are something only the board can handle). They make sure the agenda allows time for directors to ask questions and discuss strategic issues. They are actively involved in the preparation of the board agenda with the CEO and ensure the board pack is delivered to directors at least five days, preferably including a weekend, before the meeting. They ensure the meeting is promptly followed up with minutes which clearly articulate resolutions that are easily communicated to the executive team. They ensure the board is supported by an annual calendar which includes all board and committee meetings and key decision topics. The Chair ensures committees do the in-depth analytical work so that they can prepare resolutions for whole board. A good Board Chair encourages self-reflection and self-evaluation. They ask themselves: “What is going to serve the board and organisation well? What is going to serve my fellow directors well?” They ask their peers “what do you expect of me as Chair?” The Chair’s job is to enable the board to fulfil their role in collective decision making. Ultimately, the Chair is the person responsible for making everyone on their board the best director they can be. About the author - John Harte is the Managing Partner at Integrity Governance where he leads a global team that is focused on making boards more effective. A boardroom expert working with multinationals and SME’s, he provides practical, impartial advice to directors, business owners and CEO’s to help improve performance. He is a regular speaker and thought leader on board effectiveness, practical governance and business disruption. John grew up in a family business and his extended family run fifth generation businesses and he has also served as a board member, chairman and adviser to many family firms. He also worked within Mars, a globally recognised family business for the best part of a decade.

Jonathan Burke, partner and head of the industrial manufacturing leadership practice at executive search specialist, Berwick Partners , explores the skills and characteristics required by the next generation of family-run manufacturing business leaders. The post-pandemic era has seen a spike in the number of outgoing managing directors (MDs) and CEOs in family-run manufacturing and engineering businesses. The surge was fuelled by a combination of pandemic-induced burnout and reflection, as well as naturally timed succession. However, potential successors from within the family sometimes lack the capability, or the desire, to assume the mantle – assuming there is someone in the next generation to hand the role to. Despite this challenge, it presents an opportunity for family-run businesses to redefine their leadership and find individuals who can steer the organisation towards long-term success. What Does The Future Family Business Leader Need To Succeed? Family-owned and run manufacturing businesses often look for a custodian; someone in the image of the original founder, or current CEO, who can ensure the business continues to succeed. However, in today's dynamic business environment, marked by geopolitical shifts, rapid digital transformation, and the relentless pace of industry 4.0, this traditional approach carries inherent risks. To ride the wave of disruption, the future leader should embody three characteristics; the ability to embrace and effect change; experience of global markets; and a technology-oriented mindset. Specifically, they should be capable of fostering a culture of modern technology creativity within the leadership team. This type of individual is not only adept at nurturing innovative ideas, but also possesses a unique blend of technical engineering expertise, product development experience, and a deep understanding of the dynamics of family businesses. They can navigate the delicate balance between embracing the family-owned culture and cultivating a positive leadership environment that encourages entrepreneurship and the sharing of ideas. To effectively lead in a technology-driven landscape, the ideal candidate should ideally possess a solid technical engineering background. This foundation enables them to comprehend complex technological advancements and make informed decisions regarding their integration into business operations. Additionally, experience in product development and design equips them with the knowledge to align technological innovation with market demands, ensuring the development of innovative products that resonate with new and existing customers. Adaptability and exposure to diverse environments is also critical. Leaders with previous experience in large corporate environments often bring valuable exposure to diverse technologies, cultures, and markets. This equips them with the ability to navigate the intricacies of a rapidly transforming global business landscape and adapt to evolving industry trends. All of this must combine with the agility to work within the hierarchical structures often found in family-run businesses, ensuring a seamless integration of top-down decision-making with technology-driven entrepreneurial initiatives. How Can Family Businesses Find These Leaders? Traditionally, a family-run manufacturer would expect its CEO or MD to work within a commutable distance from its head office. But expectations among the next generation of leaders can often include a hybrid working arrangement, with the likelihood of declining an offer if these expectations are not met. Attracting these individuals therefore requires family-run businesses to consider broadening their previous recruitment parameters. Hybrid working may look like three or four days in the office, with the MD or CEO living near the site, working from home, and travelling, for the rest of the week. This expands the pool of potential candidates beyond the geographic location of the business and improves the chances of finding the most suitable leader, while also increasing the diversity of the shortlist. While flexible working will broaden the talent pool, offering development programmes will tap into a generation of ambitious and initiative-taking leaders. During the pandemic, most manufacturing markets saw a steep decline, with many careers, particularly at the director-level, stagnating. There is now a large cohort of driven young leaders, often from large corporate backgrounds, who are prepared to make riskier career moves and work in environments outside of their comfort zones, to broaden their experience and accelerate their career development. We are seeing increasing numbers of family-run business offering succession management opportunities, such as an extended on-boarding period to become familiar with the business, while shadowing the outgoing CEO, for up-to 12 months in some instances. This progressive strategy encourages successful candidates from outside of the organisation to make the step up, while the rest of the business accommodates the new leadership era. While succession may be a challenge for those businesses without a suitable candidate from within the family, it also provides an excellent opportunity to assess and appoint a high calibre leader from outside of the family who can successfully evolve the organisation. A large cohort of ambitious young leaders exists to fill these roles – attracting and harnessing their potential means embracing and adapting to the evolving dynamics of the new world of work. By doing so, family-run businesses can position themselves for a successful and sustainable future.

Running a family business for many business owners is a privilege and something that they take incredibly seriously. Over their time in the business they have invested plenty of emotional and social capital, not to mention hours of toil in developing something and witnessed it evolved too. It is therefore not surprising that family business owners often struggle to let go of the reins. Particular reasons associated with the difficult in letting go include: Emotional Attachment : Family businesses are often deeply intertwined with the personal identity and legacy of the owners. Letting go can feel like giving up a part of themselves. Control : Owners may fear that relinquishing control could lead to a decline in the business's performance or even its demise. They may believe that they are the only ones who can ensure its success. Trust Issues : Trusting non-family members or even other family members with leadership roles can be challenging. Concerns about competence, loyalty, or conflicts of interest may arise. Fear Of Change : Change can be unsettling, especially when it involves restructuring or bringing in external professionals. Owners may resist change because they are comfortable with the status quo. Family Dynamics : Family dynamics, such as sibling rivalry or power struggles, can complicate succession planning and make it difficult to let go of control. Identity And Purpose : Owners often find purpose and identity in running the family business. Letting go can lead to questions about what they will do next and who they will become outside of the business. Financial Security : Owners may worry about their financial security post-retirement or after stepping back from the business, leading them to retain control for longer. Lack Of Succession Planning : Without a clear plan for succession, owners may delay letting go because they don't know who will take over or how the transition will occur. Fear Of What Comes Next : Stepping back from the business may indeed be the right thing to do but with age comes recognition that nobody lives forever and there may be a desire not to step back because of what might come next. Fear Of Too Much Time : For many business owners there life is the family firm and many are concerned about what they are going to do with the time that is no longer devoted to the business and this too may delay stepping back from the business. Overcoming these challenges often requires careful planning, open communication within the family, and the involvement of external advisors who can provide objective guidance. Succession planning and addressing emotional and practical concerns are crucial steps in the process of letting go in family businesses.