Succession will look differnet for each and every business, regardless of the business setup. It can play out in varying ways depending on the specific business and the succession goals.
In this article we look at succession differences between family and non family businesses.
Non family businesses have two primary internal stakeholders and two primary forms of succession. This is a relatively simple dynamic that can be seen through the lens of each stakeholder.
The first – shareholder succession – is focussed on maximising the business value and managing the asset transfer process or “sale” process to the new owners.
Maximising the business value is not a quick process and business should ideally allow two years. Most commonly used valuation methods are based on the sum of book value of assets, a function of expected future earnings, and risks associated with the business. While this article does not detail this process, a key takeaway is the need for businesses to professionalise the business. This really speaks to business governance, systemisation and the level of reliance of the current owner for the business to be functional.
The second – management succession – is generally a human resource function. One that looks to replace key business positions through staff development, mentoring of internal staff or recruitment of external resources. While there is differences in approaches depending whether the succession is for a new board member or a sales coordinator, the process is simular.
Succession in family businesses is a very different scenario. Being a family business advisor, I having the privilege of working with families. I know all too well that some issues are specific to family businesses. Succession planning is one of those.
Like non family businesses, family business succession can also be seen through the lens of shareholder and management succession.
However, a very significant and high risk lens exists. The lens of family that overlays a level of complexity to the first two lenses and adds a third, family dynamics.
The question, “How do I successfully pass the business and the wealth to the next generation” needs to be answered and planned for to ensure the legacies of previous generations are not to be lost. Yet 43% do not have a succession plan, and many have not even discussed it with the family. Research shows that failing to plan means planning to fail.
Decades of research worldwide and across many cultures shows definitively that families are often not successful. 70% of family business fail in passing to the 2nd generation and 88% fail to pass it on to the 3rd generation.
The 43% of family businesses without a succession plan approach a 100% failure to transition. The research also provides clear insight into why these businesses fail to transition. The top six causes of failure are:
A high failure rate is due to the need for activities in three separate areas. The transfer of ownership, management and the acceptance of the transfer within the family.
Note, that legal transfers and tax minimisation planning are not listed by research as key causes of failure to transition.
The three key areas ownership, management and family are not, and can not be seen as isolated silos. They are intersecting and result in an emotional space.
Succession is more about the family and less about the transfer of private and business assets or tax minimisation. Far too often succession planning is undertaken in isolation by lawyers or accountants. The planning process cannot be myopic. It is a wholistic process that needs a whole of business and family solution.
The art of succession is defining the goals, objectives of the business and the family and the process itself. It needs a “project manager” to facilitate this process, bringing in specialist legal, tax, insurance advisors etc at the right time within the process to contribute to the collective value.
If you’re unsure about how your business and family can deliver this advantage, you can seek the assistance of an independent family specialist like Woodhouse.
You can also check out our video on family businesses.