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Family Business Succession Planning

Family business succession planning is not the same as normal business succession planning. Those people who have worked in their own, or indeed someone else’s, family business know that family businesses are special. They look like other businesses and indeed operate like other businesses, but they are not the same.

Old family portraitThe principle difference is that the management team is usually related to each other – at least in part. This means that normal political rules do not apply and the outsider can often find themselves in the middle of a dispute that makes no sense, because the real root of the problem lies not in the immediate business situation, but in some unrelated domestic issue. It can be brutal.

However day-to-day brutality can pale into insignificance when the issue of succession rears its head and if this is not planned for properly, things can get very ugly indeed.

It needn’t be so and a plan can make a real difference. This is true of any succession issue, but with families there are added dimensions to consider that can make a philosophical standpoint be as crucial to the future as strong leadership and a clear vision.

In their recent article for the Boston Consulting Group (Use a Charter to Sustain a Family’s Business And Legacy – June 2015), Jean-Werner de T’Serclaes, Luis Gravita and Sandro Marzo argue that the plan be framed in the form of a charter.  The purpose of the charter is to detail not just the mechanics of the transition, but the underlying principles of the associated business and how it is to be taken forward. The idea is to tackle head on the issue of lost revenue in those family businesses that have not planned and then lost out significantly following a succession.

They outline in the article 7 key areas to be covered by the charter:

1 – Definitions
– Just who is a family member. For example, a valued manager within the business may be regarded as part of the family, the prodigal son may be excluded for everyone’s protection.

2 – Values
– What are the philosophical drivers in the business which may include how the business fits in to the local community (eg: it may be a major employer)

3 – Governance
– the organisation of the family to make the values and transitions happen. It could be argued this is the heart of the charter as, without clarity in this area, everything else can fall apart.

4 – Management
– that is, the management of the business ownership – what rules should apply with respect to changes in ownership (eg: if one family member decides to sell up, or dies, etc.)

5 – Succession
– outlining involvement in the business and the process by which decisions will be made on roles and responsibilities for family members. This may include certain trigger points or goals that need to be achieved to take on responsibility. This may not be obvious, eg: the youngest son may be picked as the CEO because he is deemed to have more drive and ambition than other siblings.

6 – Philanthropy
– effectively the ties that bind, such as internal support for family members and external outreach activities such as contributions to charitable institutions, or community support.

7 – The Term
– This outlines how long the charter will be in place and the processes for making revisions. This needs to work in line with the governance element and may require an external intermediary such as a lawyer, or broker.

In many ways these ideas reflect what could be in any succession plan, however a key difference is the way in which it uses the concept of shared ideals as a unifying element. The whole idea of ‘this is how we do things’ is the platform on which everything else stands. To specifically pick out how the business interacts with charitable institutions and local community may seem remarkable from a cold hearted, purely financial, perspective. However, it is perhaps this idea of reflecting back into the business how it is seen externally that provides a special constraint that binds everything else together. It is a bit like any family caring what the neighbours think about them.

One area not covered fully in the article is the thorny question of money. As with anything in life the prospect of earnings can be motivational and unifying, but it can also be corrosive and ultimately destructive. For the founder, or incumbent CEO to retire or withdraw from the business it must be financially feasible. This may require additional funds to buy out shares, but it can also mean the departing leader retaining shareholdings and receiving dividends.

It does not take too much of a leap of imagination to see that if that if the previous CEO still has a major shareholding, they are unlikely to let go entirely. As with any succession this can be hugely problematic, but the prospect of emotional blackmail can make it doubly so.

The article outlined above sets out what we would regard as a highly recommended process for dealing with the difficult issue of family succession planning. However the devil is always in the detail and the details are what really matter when the mechanics of making it happen come into play.

At A2Z Business Brokers we are old hands at this game and have handled many successions and business transfers, both within families and without. If you would like assistance in drawing up your own charter to sustain your family’s business and its legacy –  we can support you at all stages.

Download here the Infographic on Retirement & Succession Planning.

Please get in touch for an initial no obligation consultation on how to get the process started for your own family business succession planning.

This entry was posted in Business Investment, Business Management, Businesses for Sale, Family Business, Succession Planning. Bookmark the permalink.

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