With two thirds of family businesses in the United Kingdom failing to make the transition from first to second generation, according to the 2014 Family Business Survey by Family Business Place (FBP).
“When you've built your business from scratch and made every decision from how many paper clips you need to order to massive commercial multi-million pound questions, it's a huge deal to get your head around the idea of letting go and handing that control on to the next generation,” says Julian Washington, Head of Intermediary Relationship Management UK.
It’s a daunting prospect – to compress the history of something so complex, something so riddled with working parts, into a transferrable blueprint that can be used by future generations. And simply put, some owners don’t want to do it, aren’t certain they even know how to transition or formulate a succession plan.
To Washington, there is no singular approach to succession planning. Instead, it’s a spectrum of solutions ranging from building a simple will to crafting a plan years in advance of stepping down. Unfortunately, an overwhelming majority of family businesses in the U.K. veer towards the bare-minimum approach.
Ninety per cent of the family business owners surveyed by FBP say they have no governance structure or succession plans in place. It’s a startling number, but one that could be lowered with a little illumination surrounding the succession-planning process.
Here are some tips to help family business owners plot out that transition from one generation to the next.
Knowing when to start succession planning is one of the biggest challenges. While elements like ailing health or offers to buy the business often trigger an exit strategy stage, there are arguments for starting to lay the groundwork now so the plan can be enacted the second the business owner starts thinking about moving on.
“Succession needs to be planned and executed carefully, paying as much attention to the letting go of the seniors, to the holding on of the juniors,” says Nigel Nicholson, co-author of Family Wars: The Real Stories behind the Most Famous Family Business Feuds and professor of organisational behaviour at London Business School. “Professionalisation and good governance practices can help enormously.”
The long lead-in allows for a step-by-step approach with the incumbent owner working alongside the incoming executive to really examine and grasp the finer details of running the company.
“They can start to learn to handle the money, learn the management skills, or appoint external managers if you need (them) to make this business work beyond the lifetime of the founder,” adds Washington.
For big business families with complex affairs, a family constitution is also a helpful tool.
“They tend to be a mix of legally-binding and non-legally binding elements like mission statements or family objectives,” explains Washington. “For example a long-term goal could be to ensure that this business stays in the family as long as possible to benefit (future) generations,” says Washington.
Don’t overlook the emotional side
Nicholson cautions family business owners against focusing so much on implementing the structural elements that they ignore the psychological or personal effects of the transition.
“The chief need is to deal with emotions alongside a rational planning process and not let them get intertwined – the fears of incoming and outgoing generations need to be addressed sympathetically, while the rational planning process unfolds at a pace people can handle, with good handholds along the way as people feel their way into their new roles,” says the family business expert.
“It must be forward looking; celebrate the past so as to let go of it, and move with positivity and confidence towards the future.”
One way outgoing owners can manage the handing over control, says Washington, may be to set up a trust. A trust is a legal relationship created when the ownership of certain assets are transferred to another person or company (the trustee). The trustee then manages and administers those assets in the best interests of those involved.
“The control point comes up immediately because when you create the trust, if you're using those sorts of structures to take assets out your own name as part of a succession planning exercise, then you've got to be comfortable with the idea that you're giving up that personal control of them,” he adds.
The founder can offer guidance through a letter of wishes but will have no legal ownership of the assets.
Build your team
Using a trust and choosing a trustee may be just one part of the succession planning process.
“You may well need asset and wealth managers, you will most certainly need good accountants and lawyers,” says Washington.
A solid advisory team can help develop and assess different strategies, weigh scenarios for selling and allocating assets, if this is the direction a family business owner is going, and support the former head of the business through the emotional elements.
In the case of many family businesses, the succession planning team will include relatives.
“You can only bring the best advice if you're properly sitting down to make a plan for how the succession is going to work,” adds Washington.
If the business is to be valued, the advisers will have to think not just about a dollar figure, but look into how the timing of the transfer will affect the company’s worth; they may even need to consider a disposal in the event the next generation doesn’t want to move forward together.
The team can also assist in valuing the company; not just a dollar figure, but look into how the timing of the transfer will affect the company’s worth and how it can be broken into pieces and divvied up in the event the next generation doesn’t want to move forward.
“Not every business is going to neatly enable itself to transition itself to every generation,” adds Washington. “Sometimes there are no mechanisms and the best thing to do is to achieve a good sale at the right time.”
Keep it evolving
Perhaps the most critical element to keep in mind when setting up a succession plan is to see it not as a static guidance but an evolving blueprint for transition, one that should be documented at every stage.
“You can't do this exercise once and leave it,” says Washington. “If you've got a big, complex business family you have to, at least every five years, come back and check and make sure it's still meeting your goals.”
Nicholson agrees adding that revisiting the succession plan with an eye towards the future and the flexibility promised by a changing leadership can offer fresh new ways to look at the company’s future.
“This should not be rushed,” he says. “But it is important the next generation have a proper sense of ownership – either to maintain a winning status quo, or to find fresh ways of reinvigorating the firm.”
It is important to note that the capital value of, and income from, any investment may go down as well as up and you may not get back the full amount invested.