The ability to achieve a smooth transition from one generation to the next is a hallmark of successful family businesses. However, succession planning for transition is rarely easy. The key is to recognise that succession is always a marathon, not a sprint.
Starting early is the key to success of succession planning
Family businesses are the backbone of the Irish and UK economies, accounting for over 80% of private companies and providing upwards of 15 million jobs. Over many generations, top-performing family businesses have shown they are adaptable, entrepreneurial, innovative, and forward-thinking.
At FPM, we understand that family businesses have unique challenges and strengths. For over 30 years we have been honoured to work in partnership with a wide range of successful family growth businesses. The most successful businesses reflect a good combination of professional and personal interests and a share strong focus on maintaining a healthy family dynamic. We help family businesses create the optimum balance between individual and business needs, de-risking and maximising family wealth, planning for succession and implementing governance frameworks built on sound, workable policies and procedures.
What is Succession?
Succession is the process of transitioning the management, leadership, and ownership of the business from one generation to the next. While this might sound straightforward, delivering and executing a succession plan is a multi-layered, complex process and one of the biggest challenges family businesses face. In our experience, no two family businesses are the same. It is vital in discussions with the individual family business to establish the needs and objectives of the various stakeholders that contribute to the dynamic of the specific family business.
In family and boardroom discussions, succession is often the elephant in the room, but it’s much better to start the conversation early as this makes the transition planning process less uncomfortable and helps to dispel tension. You want to be able to control events rather than be controlled by them. It can be helpful to plan for the transition of management, ownership and leadership to happen separately. This will often make the process easier to manage.
Why is succession planning important?
You may have inherited your family business or you might have built it from the ground up. Either way, it’s something you care about. While you may be struggling with the idea of succession, it’s important to recognise that you need a plan for the generations that come after you, or indeed for the eventual sale or transfer of the business to third parties to maximise potential distribution of wealth to family members. In this context, our colleagues AAB Wealth can assist in bespoke wealth management solutions.
So why do family businesses need a succession plan?
The life cycle of a business often exceeds the life of the current owner. Owners need to consider their preferred future role—one, five and ten years ahead. Do you want to be still working in, or managing the business or do you intend to be doing somewhere else? Knowing what you want and putting a plan in place to achieve it is vital. Don’t fudge or defer the decision to the next generation as this can lead to emotional and family strains.
A succession plan provides a level of certainty for everyone involved in the business from family members to suppliers, employees, customers, and stakeholders. Without a plan in place, how can the next generation begin to develop and grow into their future roles as leaders and owners of the business? That is of course, if that’s what they want, as the next generation might not want to be involved in the management or leadership of the business.
The succession planning process should allow everyone an opportunity to say what they want and don’t want. This helps to provide clarity for the future of the business. It’s not about the senior generation being put out to pasture— it’s about creating opportunity and establishing a positive culture that will guide generations to come on how to successfully work through future successions.
The key to successful family business succession planning
In our experience over the last 30 years of working with a range of family businesses in terms of size and across various sectors, there is no one size fits all when it comes to succession solutions. There will be uncomfortable conversations and emotions are likely to be heightened. Feelings of sadness, fear, disdain and anger can make succession an emotional vortex but understanding these feelings can help to clarify individual needs and achieve consensus. A key element in successful succession planning is to appoint a third-party business succession facilitator who has the trust of key family and business-decision makers. This is a role FPM has played on numerous occasions.
Honesty is key. If you look after the business, the business will look after the family. Focus on selecting the right people for each role and recognise that this won’t always be a family member.
Starting your succession planning process
At the outset, it is advisable to check that the management structure and management information systems of your business are fit for purpose. This will help to ensure that there is a sound business to hand over to the next generation.
Succession presents owners with a complex set of options, each of which has its own advantages, opportunities and threats. Key factors to consider are:
- The nature of the business activity;
- The availability of potential family and non-family people, who are willing and able to carry on the business;
- The financial requirements of the family;
- The personal and corporate tax consequences of different options;
- The health and size of the business; and
- The general commercial and business environment at the time of succession.
Succession planning doesn’t have to be a taboo subject. It’s a great opportunity to have an open and honest conversation with people that you share a common purpose with. Remember that it’s a marathon, not a sprint. Have the courage to plan and agree your business succession now—don’t defer the decision to the next generation.
Finally, keep in mind that good communication is essential. Remember to share the decisions you reach in an open and transparent way with all family members and key members of your senior management team.