Preamble
When building a family business the focus is often on the ‘now’. The accompanying failure to create a succession plan places further growth and profitability at risk, and in turn may jeopardise the sources of income intended to support the family into the future.
Indeed, it is not unusual for a family business to have grown through the considerable efforts of a husband and wife, with the intention that either the capital from the sale of the business or continuing income from the business will be used to support them during retirement. If children are to succeed their parents in the business, they too have an interest in 30 – 40 years of income to maintain a desired lifestyle and then retirement. Ideally, a plan should be in place which contemplates these needs and interests alongside those of the founding parents.
Once children join a family business, the dynamics can change dramatically. A good succession plan endeavours to make these transitions as seamless as possible, requiring business owners to ask (and answer): What are the roles of the family members? Are they written down in job descriptions like they might be in other non-family run businesses? Is the company structure appropriate? Is there an up to date shareholders agreement in place? How and when should the child or children become shareholders?
What are the fundamental aims of the participants in the conduct of the business? Is the business there to provide income with the families interests being paramount or is the family focused on ensuring the success of the business above everything else with the view that this will pass on the benefits and provide a balanced life.
To begin answering these questions and paving a path for the future it is useful, as a starting point, to consider the approaches below.
Family Council
Once a child or children is introduced into a business it is wise to consider establishing an informal Family Council to meet regularly and talk about issues that impact the family. Whilst a Directors’ meeting is designed to deal with the day to day operational issues and strategic planning for the business, a Family Council can concern itself more with the family's needs and in so doing can create a family plan or a series of family plans and a mission statement separate from the business plan and mission statement.
The Family Council should also look at primary objectives such as the need to grow the business, increase profits or maintain healthy family relationships.
Create appropriate business infrastructure
In relation to the day to day running of the business, and with an eye to perhaps selling the business in the future, it is wise to introduce appropriate infrastructure, such as business plans, job descriptions, employee handbooks, manager handbooks, operational manuals and the documentation of computer systems.
You should also consider organising an annual meeting between accountants, lawyers, bankers and any other business advisers to ensure that all professional advisers know what the business is up to and, as a result can provide better advice.
Even if you do not plan to sell the business in the immediate future it is wise to run the business on the basis that it is sale ready. This is where professional structures like job descriptions and Key Performance Indicators (KPI’s) make the valuation process easier and increase the likelihood of realising full value. It is important that family members involved in the business undergo the same process as non-family employees. They may not feel the need for job descriptions and performance reviews but it is actually beneficial for the business in the long run.
Offers to buy, and the need to activate the succession plan due to illness, injury or death can all arise unexpectedly; being prepared has the benefits of facilitating smooth transitions whilst also limiting delays and expenditure associated with the handing-over of control.
GEOFFREY ROBERSON
Principal
SUCCESSION PLANNING
