Wednesday, January 09, 2008

Succession planning for family businesses

Succession planning for family businesses

While many entrepreneurs happily devote their time and energies to building a business, they pay less attention to what will happen when they are no longer running the show. They find it difficult to address issues such as illness, incapacity, retirement and death, and therefore postpone dealing with such problems. Passing the business on to the next generation is difficult. The majority of family firms are either sold or wound up after the founder's death. This is sometimes because the business itself is not viable, the founder does not want to let go of the reins or the offspring are reluctant to join the firm. But the main reason why so many family businesses expire after just one generation is lack of planning.

A good succession plan outlines how the succession will occur and what criteria will be used to judge when the successor is ready to take on the task. It eases the founder's concerns about transferring the firm to someone else and provides time in which to prepare for a major change in lifestyle. It encourages the heirs to work in the business, rather than embarking on alternative careers, because they can see what roles they will be able to play. And it endeavours to provide what is best for the business; in other words, it recognises that managerial ability is more important than birthright, and that appointing an outside candidate may be wiser than entrusting the company to a relative who has no aptitude for the work.

PricewaterhouseCoopers recently conducted a Family Business Survey, involving top managers of 1,454 family businesses across 28 countries. In the survey, ''family businesses'' are defined as those companies in which at least 51% of the shares are held by a family or related families, the family members comprise the majority of the senior management team and the owners have day-to-day responsibility for the management of the business.

A quarter of the companies in our sample are expected to change hands within five years. And the older the company, the more likely it will remain in the family. For example, 62% of proprietors running firms that have been trading for more than 50 years plan to hand the reins to their offspring, compared with just 35% of those running firms operating for less than 20 years.

However, nearly half the companies we surveyed have no succession plan in place, and the percentage is even higher in small firms or those that are relatively young. More than half of all companies with a turnover of less than USD73m a year and of those that were founded within the last 20 years have not made any preparations for transferring key management positions to another generation. This is a grave oversight, given that creating a suitable new holding structure typically takes between three and five years and that uncertainty about the future can seriously impair a company's earnings or, worse still, jeopardise its entire existence.

Does your business have a succession plan? For those companies that have drawn up succession plans, many have overlooked the most important details. For example, only half of these have actually chosen a successor.

It's important that management succession plans commence some years before the handover. Mentoring and developing the next generation is a critical dimension to the succession plans such that, in due course, not only the capabilities of the future management are soundly in place, but also their desire to assume the role of successor.

Some of the questions a family business owner should reflect on include:

FHow do I choose among several potential successors?

FWhen should I retire?

FHow can I keep active after retirement?

FHow can my successor be trained through education and in practice?

FHow can my key employees be motivated and stay committed?

FWhat is a fair arrangement for my family members involved in the business and those who are not?

FWho would constitute the best management team?

FWho should sit on an advisory board?

Once a succession plan is in place, it should be revisited annually to ensure that it continues to meet the objectives. New issues may arise that could affect the plan. Such issues may include restructuring of the business, birth of children or grandchildren, marriage or divorce (of a child or shareholder), and tax or other relevant legislative changes.

Developing a succession plan may, ultimately, involve hiring outside professionals to run the business, position the business for sale, or develop a grooming strategy to prepare the next generation to assume leadership. But whatever the outcome, effective succession planning is essential to the success of any family business.(The above is based on 'Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08' which can be downloaded at, along with Part 1 of this article, which looked at conflict resolution.)

Kulvech Janvatanavit is a Partner at PricewaterhouseCoopers. We welcome your comments at leadingtheway.

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