Successions
Successions

When is the right time for succession?

23 January 2021

The answer is at once simple and complex… it is when you are ready.

A succession can occur without warning if the timing is unfortunate.  Ill health, a sudden decline in mental capacity, accident, separation or any number of other situations may force an unexpected change on the family business.

If your business is unprepared, the challenges of recovering from an unexpected succession can make it difficult to produce adequate returns and keep the business afloat, putting at risk everything the senior generation has worked to create.

A range of actions need to occur before the business and family are truly ready.  And they can (and should) occur well before a conscious or sudden forced choice is made to trigger the succession, so that uncertainty is reduced.

Here is a short list of the critical milestones and actions that will contribute to a successful transfer of management and ownership.

For the business to support the family

The business must run on its own and generate profit.  Some multi-generation businesses are successful in surviving only.  They generate sufficient cashflow to provide jobs for the generations involved, but they don’t work without the senior generation’s input and they don’t generate profit on their own.  

This is not a business that is ready for succession.  

In contrast, a business that can run successfully without the senior generation at the wheel is one that is positioned for a successful transfer and where the senior generation have the luxury of choice over their position in the business and the timing of change.  

For a business to sustain itself, a business plan must be created, intellectual property must be transferred, and role definition must occur at a minimum.

There must be a business plan

Any business benefits from having a plan that lays out the vision of the leadership team and the resources that will be made available to achieve it, but none more so than a family business.  

A business plan will help the leading generation articulate the purpose and values of the business, why it exists and explain its decade-long goals to family and non-family alike.  The business plan and the family charter (described below) are interlinked and for a successful transition between generations to take place they must be understood and agreed by all generations.

Intellectual property must be transferred into the business

The senior generation has typically had decades of experience in the company, sometimes an entire lifetime.  The business needs the information that comes from that experience to be able to support the family.  Effective process shortcuts, manufacturing techniques, business contacts and decision-making tools are all examples of intellectual property that may be locked-up in the knowledge of the senior generation.

Holding back on depositing that intellectual property with the business’ leadership team will force excessive consultation and permission-seeking post-succession, and while that may make the senior generation feel important, it will stymie growth.

Roles and responsibilities must be defined

In larger families, there may be more than one person who could assume a leadership position.  The decision-making capacity of each role must be defined so that the business doesn’t suffer a power struggle.  Operations Manager, CEO and CFO are all positions that can influence actions in the business.  

Different family members can occupy each and it is the process of defining roles before a succession that will produce collaborative effort post-succession, not competitive dictates.

For the family to support the business

Succession planning should start early. 

Just as with a business the owner wants to sell in a few years, planning for a succession ahead of time will provide many benefits to the business.  

For example: 

Setting out the method of succession will mean a communication plan for the family stakeholders and the wider company can be communicated.  Widespread knowledge of an eventual succession will reduce uncertainty and increase employee retention during a transition.

If control of the business is to be transferred to a select few family members and not others, the facts can be communicated ahead of time so that a family rift is not created in a sudden event.

Expectations around the sale price of the business to the next generation, if that is how the asset is to be transferred, can be established so that the next generation understands what will be required of them well in advance, can plan for it and access funding.

A family charter or family constitution should be created. 

A family charter creates a policy document for the family to follow that defines how the family will govern the business.  Effectively, it sets out the “family business rules”.  It defines how difficult decisions will be made and how conflicts will be settled.  It articulates the family’s values, agreed in times of collaboration, so that when stressful times are upon you, you can refer to it and use it as a reference point for making decisions family members will abide by.

The legal and tax implications of succession must be planned-for

Estate planning and equity transfers that might otherwise be an obstacle in the succession process should be considered well before the process culminates.  

Succession should not be seen as a birthright. 

Non-family employees and directors must have confidence in the succeeding generation of leadership.  The next generation must be given the opportunity to get “runs on the board” in the form of an undergraduate degree, post-graduate learning, experience in other companies, promotions, and performance in leadership positions that are regarded as successful.  By contrast, a family member who is promoted simply because they are family will face an uphill battle to work with and attract loyalty from those around them.

The next generation must be trusted.

It is not enough to be qualified for the position of CEO, or COO or General Manager etc.  If the family unit is to support the business unit and be prepared for eventual change, it must start somewhere.  The next generation must be given responsibility in the business so that the senior generation can trust that when full control is passed-on, the business will be in safe hands.  This is an important step that is, in many cases, left too late.

Succession is a process, not a one-off event.  

Many senior generation leaders worry that the next generation will struggle if they suddenly assume all the decision-making responsibilities.  They make the mistake of thinking that for them, a succession means playing an important role one day, and full retirement the next.

Thus, they put off commencing the elements of a succession: the planning and gradual transition, until it is too late for a controlled transfer in many cases.

We see succession as a multi-year effort to plan for and gradually introduce the change required to steward a business asset from one generation to another.

A note on what Succession means to the senior generation

Succession does not have to mean permanent exit.  It is up to each generation of leadership to define a desired role for the senior generation post-succession.

e.g. If the circumstances are right, the company may benefit from a titular figurehead; a permanent reminder of what its values are.  The senior generation can play a very important role as the keepers of history and chief storytellers to the next generation of family and senior management.  Only they can bring the perfect mix of credibility and experience to that role.  

Ideally, the timing and manner of the succession from the senior generation to the next is in your control.  But if not, and the actions above have been taken – your business will be positioned to survive and thrive.

Corporate Momentum offers a comprehensive service, with our team and selected specialist able to provide all the services your family business needs leading into and out of a succession.  For a confidential discussion, please call us on 1300 36 20 27 or fill in this form.

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