BusinessDesk is proud to publish The Reset series, made in association with our trusted commercial partners and designed to supercharge your business in 2021. In this article, Philip Pryor, founder of Family Business Central, explains why succession planning is critical for family-run enterprises.
Welcome to 2021, what a relief 2020 has gone; it was our collective annus horribilis. Now, while there are still many challenges, there are a lot of opportunities.
Rather than look too much at what has been awful, I’d rather look at what we’ve gained from 2020.
In many ways it taught us what is really important – family, relationships, our health. Equally, in business it taught us about our ability to change, adapt, grow, think differently, manage stress and get through.
So many family businesses have grown and thrived since the covid-19 pandemic began. It hasn't been easy, though; a good night’s sleep has been rare, and we’re all probably a lot greyer than we should be.
For a lot of family and non-family enterprises, now is a very good time to start thinking long term about the business: where do you want to take it, who is going to lead it, what do you need to do to get this transition happening? First question is: do you keep it or sell it?
Two years ago, we at Family Business Central were involved with research the Ministry of Business, Innovation and Employment undertook into why succession is so poorly done in New Zealand, and we know there is huge reluctance to think this issue through. Indeed, I still shudder at the memory of one Southland farmer – aged in his late 70s – who told me, “Don’t you worry about succession – there’s plenty of time to think about that.”
He was clearly an optimist. I would say the time to think about it is NOW.
Why bother with a succession plan?
The statistics for succession are poor. Seventy percent of businesses fail with succession to the second generation. Going from second to third generation, only 10-15 percent make it; getting to fourth, the success rate is just 4 percent. However, with some thinking we can change those numbers significantly.
You’ve work hard for many years, so maybe it is time to start doing things other than just working – perhaps enjoying the bach in the Marlborough Sounds, a long holiday skiing in Queenstown, the caravan trip around the North Island, or possibly just spending more time with those who mean the most to you in life.
Most likely you are very proud of what you have achieved, you’re probably a bit of a control freak and are not sure anyone can do things quite as well as you can, and, well, you love the business.
So, let’s increase this pride by seeing your kids and grandkids start to run the business. Let go of some control (and accept that they will make some mistakes). Give yourself the jobs in the business that you love and pass all the other ‘dull work’ on to others.
This is what succession is. It’s a process that takes time, talking and planning. It’s not painful, it’s not ‘sending you out to pasture’, and when it’s done well, the benefits to you, your family and the business are immense.
Succession involves at least three parts: succession of ownership, succession of leadership and succession of directorship. They don’t all have to happen at the same time, but they do need to be thought through, and there is a lot of discussion required.
I have recently been talking to a couple who run a very successful business both locally and internationally. Their son and daughter work in the business and have significant leadership positions. The parents are clear that they will be passing ownership over to the two children in their will. However, they also know that succession of leadership is not finished. The reason? They know that if they died tomorrow, their suppliers, their customers, their bankers and their staff do NOT yet see the son and daughter as capable leaders. The business would crumble very quickly. So, while the plan for succession of ownership is in place, succession of leadership is going to take far more time and energy to get the son and daughter up to speed.
So, what are the five things you need to do for successful succession?
1. Decide who is the right member of the family to take over
Find out who in the family is wanting to take over the business and has the skills, or can acquire the skills, to do so. Remember, the business is not the same as when you started it. Today, most family-owned enterprises are far more complex than 20 years ago. For example, a thriving logging business realised that it was not the ability to cut down trees and truck them out of the forest that was the number-one driver of the company’s success, it was knowledge of finance, leadership and business relationships. Hence the boys in the family (one a great truck driver, the other a very fine woodsman) realised that their younger sister was the best person to be the CEO. This also demonstrates the importance of merit when family members come into a business.
2. Have open and transparent conversations
Don’t try to hide things, or to put a whole lot of things into place with your financial advisers and then present them to the family as a done deal. It won’t work. Everything needs to be discussed with the family over time. They will come up with all sorts of ideas you’ve never thought of, and most importantly, all decisions you come up with together will, by definition, have their buy-in.
Two years ago, a financial adviser and his client came to me to discuss why their succession plan wasn’t working, despite spending tens of thousands of dollars on developing it. The reason? It was developed by the dad and his adviser; no one else had had any input, so they refused to have anything to do with it. The father and his adviser ended up redoing the whole plan in consultation with the family and things went so much better.
3. Find out what the founder wants
As founder, think about what you want to do going forward. What are your dreams? What are the things you love doing, both personally and in the business? I know one family business where the father, who happens to be aged 99, comes in for two days a week as an auditor for the company. He has his own office and is the best auditor they have – the rest of the time he’s playing golf!
4. Develop a plan and write it down
When you work on a succession plan with the family, it has to cover a lot, and you need to be thinking at least 40 years ahead. Some of the topics should include:
- What skills and training do the next generation require if they are going to come into the business?
- How do you balance fairness across the family?
- How does the family manage money, for example dividends, or paying for school fees?
- Who are the directors and what sort of board are you going to have?
- How are the generation after next going to come into the business?
There are many other issues, but these are a good start.
5. Manage your hats
In a family business we all wear different hats. For example, you could be mum, sister, wife, sister-in-law, or brother, dad, brother-in-law etc and could simultaneously be CEO, CMO, director, or shareholder. The biggest challenge for family-owned businesses is to know which hat you are wearing and, therefore, what conversation are you having. Most family businesses completely confuse these, to the extent that they simultaneously have a board conversation with an operations conversation with a family conversation. The discussion could go something like this: “When are we going to get that new loan from the bank organised, and who is going to fire the forklift driver – he dented my car again – and, by the way, did Suzy do okay in her exams today?” Be aware of the conversations you’re having, just one type at a time and don’t confuse your hats! Otherwise these discussions drive family members bonkers and you can never just be family having family conversations.
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