Family run businesses: Exit or succession plan?

Family run businesses: Exit or succession plan?

Lee Bradshaw | 2017-06-20 10:21:05

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“Succession planning is like peeling an onion – it’s got lots of layers, and it makes you cry’, so says Peter Jenner, brand new Vistage speaker and succession planning expert. Peter has over 20 years’ of organisational change experience, and currently runs workshops for Vistage members on business exit and succession.

We asked Peter what he thought the key challenges were for the owners of family businesses looking to ensure the future success of the endeavours that they may have devoted their lives to. The headline is that it is never too soon to start succession planning, but the planning should be grounded in a strategy, not clouded with emotion.

He’s is clear that succession planning is not simply a “changing of the guard”. Instead, it is creating the platform for the next spurt of company growth, looking at not only current activities but the future steps needed for success. This is a problem for all kinds of businesses, but can be particularly acute for family-run companies, thanks to the emotional nature of such decisions.

So what are his tips for succession planning for family run businesses?

Establish the aspirations

Peter asserts that the first question to be tackled is that of aspiration. What is the founder’s view of the future and how does that compare to that of his or her children? In his experience, there is usually a disconnect between the two.

“The founder or owner wants the business to survive and thrive, whereas their children may not have the same passion or emotional attachment”. With some baby-boomer founders holding on to control of the family business for so long, younger members of the family may have already moved on to build businesses or successful careers of their own.

Build a strategy

The second question to ask relates to business value, and is a hard, but important one. Is the business worth saving? To offer some insight into this struggle, Peter suggests that business owners ask themselves a different question, “Do I have a job, or a business?”

This boils down to how essential the business owner is to the day-to-day operation of his or her company. If they are the only one with the skills, knowledge, contacts and experience, then they don’t really have a business to pass on, they simply have a job that no-one else can do. If the founder is the business and the right succession frameworks have not been put in place, the pragmatic decision may be to wind the business up.


Family affair: Do you have a plan in place of your doesn't want to take the business on?

The best way to avoid such an outcome is to focus on strategy, ensuring that everyone involved in the business has a clear idea of where it is headed. Peter compares strategy to a ladder: “It takes us from where we are now to where we want to be,” he says, “But  to make it work, you’ve got to put the ladder against the right wall.”

Fill capability gaps

There are pivotal objectives in a good strategy that make the direction of travel quite clear, making selecting the ‘right wall’ much easier. “Once the strategy ladder is in place, we can decide what future skills are needed, assess the current skills and address the gaps,” Peter tells us. But he’s seen some companies take the opposite approach: “What can happen in a family business is that the leaders look at the skills of the people in the family and almost design the organisational structure around those skills.” This leads to capability gaps that can leave businesses exposed.

It is only with a clear strategy in place that business owners can address the next challenge – selecting and developing successors and thus filling those capability gaps. It is here that succession in family-owned businesses can be particularly hard, as it is where decision making can be most clouded by emotion. Peter firmly believes that selecting a successor should be based wholly on merit, but this is not as easy as it sounds. “The worst thing a business owner who is also a parent can do is focus on ideas of ‘fairness”, he argues.

Consider a business owner with two sons. He chooses to split the business evenly between them, giving them both 50% of the shares, because he thinks this is the fair thing to do. If one son is more capable than the other, with a vision for the future of the business, he may be hamstrung by having no overall control and doomed to power struggles with his less capable sibling.

Have honest conversations

Honest conversations are required. Sons and daughters may be reluctant to explain to their parents that they don’t actually want to run the family business – they may make a more honest appraisal of their own skill shortfalls. Business owners should consider their children’s inheritance in the wider context of their estate, not just the business. If merit demands, it may be best for the business to put it in the hands of a single sibling, compensating others with money or property if ‘fairness’ is still a concern. Just be aware that even a successful business is a far riskier asset than a house or hard cash.

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Peter is keen to point out that with the right framework in place, even reluctant inheritors can choose to persevere: “I’ve known family business where the children originally intended to close the business and sell up, but by the time the succession structures have been created, they find they’re enjoying doing the job, they’re in control and they know where it’s going, so they hold on to it.”

If a succession plan must look outside the family, Peter is clear about the best approach: “Business owners should build a talent pool: appraisal, recognition and reward systems should be aligned with company strategy. This allows potential successors to understand what they need to do to deliver the goals of the company and to prove their own capability.”

However, it is a concern that a lot of companies are moving in a direction that could put this in jeopardy. Businesses are shedding their white-collar staff and outsourcing. They’re building lean businesses, but they are also draining their talent pool and destroying potential for internal succession.

Don’t leave it too late

The single driver that encapsulates all of these aspects is a sense of urgency. It is never too early to begin building a strategy for succession. This particularly pressing for baby-boomers who may be hitting their 70s, but should also be a factor for business owners of all ages. As Peter puts it, “We’ve got a demographic time bomb. You need a minimum of two years to get a succession programme to work, normally three or four”.

He sees aging leadership as the elephant in the room, which is problematic if no-one is seen to be addressing it – succession plans should not remain a closely-guarded secret. “Everybody in the company can see the owner getting older and are left wondering what happens when he or she dies? Key staff may look at the son or daughter, see that they are ill-equipped to take over the business and so start planning their own exits.”

The sad fact is that death does not focus solely on the old. Issues around succession planning can be particularly acute for business owners in their 30s, 40s or 50s, whose children may not be old enough to take over or have yet to build the right skills set. It may not seem to be a priority, but a good succession plan can ensure that the business is kept ticking over until such time that they can take control.

In short, to build a succession plan that secures the future of their business, owners should:

  • Consider both their own aspirations and those of their likely successors
  • Take a step back and consider the true business value
  • Build - and communicate - a solid strategy for future growth
  • Identify and fill obvious skill gaps
  • Recognise talent and reward it appropriately, funneling it to the top
  • Start succession planning NOW

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