In a series of articles, Liam Lynch, KPMG Head of Private Clients takes a look at the factors that lie behind the success and sustainability of a family business.
In this first article of the series, Liam focuses on sustaining a business through inter-generation transfers.
There’s more to the success of a family business than what it says on the balance sheet, Liam advises.
The extent of a family’s connection with the business plays an important role in the performance and sustainability of the business. The degree of family connection with the business can be seen in areas including:
Businesses with a low degree of family connection are more likely to be sold or passed on to nonfamily members or forced to close.
To build a sustainable family business that survives and prospers through changes in generations means balancing the need to preserve the family’s connection with and passion for the business with the economic needs of the business.
Communication and (healthy) conflict play a vital role in reinforcing the family’s connection to the business and the combined family and business wellbeing.
Despite the critical importance of communication, Liam says that “there is a general lack of formal communication when it comes to planning for the future of the business and the family, and how those two things tie together”.
As generations prepare to pass the business on, they need to make sure the family’s passion for and involvement in the business remains.
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 business 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 it 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, Liam advises that “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.
Liam advises that “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?”
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. With the right people in the right roles, family members can bring different skillsets to bear in continuing the family’s passion for the business.
“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?” Liam says.
Many family businesses are built around a brand that has strong personal or family association. Liam advises 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”.
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 and preserving those ties to the business through a change in generations.
“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 Liam. It can take place over 5 or 10 years, or longer.
“It might be that the founder moves from playing an executive role in the day to day management of the business to adopting the position of a Chair of the business. Stagger that process so it’s not a sudden shock. It could also be a process of having sons and daughters become key executives and Directors over time, and they’re held accountable for different parts of the business.”
When planning for the future, family businesses 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 a founder builds a business, they often use a lot of debt and build a great relationship with their banks. Over time as the next generation enters the business, funding partners need to develop confidence in the company rather than the strength of one individual to enable succession” explains David O’Kelly, Partner KPMG Corporate Finance.
Succession doesn’t just concern leadership and finances, but knowledge. “Remember all that you’ve learned through trial and error over the years” Liam advises. “In the lead up to hand over, 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. Passing this on forms part of building a sustainable future business.
Finally, when a succession plan is implemented, it must be explicitly articulated and formally documented, Liam says, even amongst family.
“A common mistake is that many founders do not break these aspects down and think they can set out 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.”
In the next of this series of articles, Liam takes a closer look at just what type of governance structures and succession plans a family can put in place to create a sustainable balance between the needs of family and business.
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