Handing a family business to the next generation is a major process, from selecting and developing the successors, to protecting the brand reputation and retaining knowledge – but the effort is crucial to develop a sustainable organisation for years to come.
Succession planning may be one of the most challenging experiences facing any leader, especially an entrepreneurial business person who has built a family business from scratch, so it is crucial to get right. A good succession plan can be the first step in maintaining the strength of an enterprise and the family’s prosperity for generations to come.
Discussing how a family business should continue beyond the career, or even the life, of the founder can be difficult, as it often crosses business and personal spheres. However, Dominic Pelligana, Partner, KPMG Enterprise, says breaking the issue down into small projects can help.
“The goal is to have an orderly transfer of management, control, ownership and equity from one generation of the family to the next, whilst acting in the best interests of the business and the family,” he says.
Many family business owners assume succession planning centres on who will run the business when they step down, but a broader perspective is necessary. The founder, and his/her board or advisors need to consider where the business is in its lifecycle and what kind of leader or leaders it needs to progress.
“The founder needs to consider which aspect of the business they seek to handover and by when. Is it management, control or ownership? Who will be the owner, the leader and the managers?” Pelligana says.
Family members may assume they are in line to take on a leadership position, but it is important to educate them that business needs must be met with the right skills and perspectives. This requires balancing what the business needs with the aspirations of the family members.
“This can start by educating the next generation that we want the ‘best people’ for the roles in the business. If the family members wish to be considered for management, how do we work together to develop them so they can be considered?” Pelligana says.
Many family businesses are built around a personal brand, and are often named after the founder. Pelligana says when preparing to hand over, it is important to retain the brand’s essence and also consider how it can be modernised.
“Think about the business’s identity and brand, and how it impacts the business model itself. If Mum or Dad aren’t around, the suppliers are going to be scratching their heads if no plan is in place.”
He recommends that the nominated future leaders enter the business long before succession actually takes place. Successors can start building rapport with clients and important stakeholders.
“Everyone may know the founder, but you need to start thinking about what happens to key relationships, and who will manage them if the founder is not there.”
This process shouldn’t be rushed, says Pelligana. It can take place over 5 or 10 years, or longer.
“It might be that the founder moves from a CEO position to a Chair position. Stagger that process so it’s not a sudden shock. It could also be a process of having sons and daughters become Directors over time, and they’re held accountable for different parts of the business.”
When planning for the future, family enterprises must decide who will be in charge from a financial perspective, as many banks consider the individual behind a family business to be a critical factor when making decisions on current and future funding.
“When the first generation builds the business, they use a lot of leverage because it’s only concerning them. But as the next generation enters, the bank may still be backing the founder, not the business. So you need to give them the confidence that there is strength in the business to back.”
Succession doesn’t just concern leadership and finances, but knowledge. Significant information will have been gained by the founder through trial and error over the years. Pelligana says in the lead up to hand over, that knowledge should be documented and communicated through the business as it can become a competitive advantage.
“The family can build up an intuition as to what works and what doesn’t,” he says.
Finally, when a succession plan is implemented, it must be explicitly articulated and formally documented, Pelligana says, even amongst family.
“A common mistake is that many founders do not break these aspects down and think they can express these instructions in a Will. Not only is this ineffective, it can lead to confusion and disputes. This cannot act in the best interests of the family or business.”