Lance Ranger, Attendus Company AG director, is a practicing solicitor and owner of the Attendus Group Zug in Switzerland. This article will look at business succession planning, outlining factors that business owners need to consider in ensuring a smooth transferral of ownership and protecting the future viability and success of the business.
For family businesses, smart succession planning is crucial to ensure the long-term success of the enterprise. However, many family business owners fail to undertake adequate preparation in terms of preparing the next generation for the challenges and pressures involved in owning and running a successful business.
Succession planning is a tough topic for many business owners. In order for the next generation to take over, current leadership must hand over the reins. Having spent years or decades building the business and making it a success, many founders find it hard to let go, no matter how educated, accomplished and diligent the child. Nevertheless, no business owner can go on forever. Choosing a successor and planning an orderly transfer of control is vital in terms of protecting the long-term future of the business.
Accordint to a PwC report, succession planning is a perennial problem for family-run businesses. Indeed, a Family Business Survey published by the National Bureau of Economic Research Family Business Alliance suggested that a staggering 43% of family-owned businesses did not have succession planning in place, despite the fact that roughly three in four of those business owners planned to pass the enterprise on to their children.
Most owners of family businesses are so involved in day-to-day operations that they are not thinking of what is next for them or their family and how that intersects with the business.
A lack of proper succession planning can create numerous problems from both the business and the family’s perspective, potentially leading to legal disputes and heated family disagreements. Unfortunately, these are often played out under the watchful eye of the media, which is bad news for all involved.
For business owners who expect one or more of their children to take over leadership of their enterprise at some point in the future, the earlier they start planning that transition the better. Aspects of succession planning include taxes, estate planning, ownership stakes, voting rights and liability.
Long-term succession planning provides the next generation of business leadership with sufficient time to learn management skills, as well as presenting the outgoing business owners with ample opportunity to gauge their children’s leadership skills. One way of achieving this may be for the outgoing business owner to set up a board of advisors that they also sit on themselves, giving their child non-voting shares. Once the child can prove that they are capable of running the business well, they may be given the option of paying off the non-voting shares before purchasing voting shares in the company, giving them more responsibility and control.
The longer the succession planning process, the better the chance to mentor. Of course, in creating a succession plan, there are a variety of important factors to consider, chief among them, which child or children will take over, a decision that can be fraught for families. It can also be an emotional process. Not only are there financial implications to consider, but choice of leadership will ultimately impact what the business will look like in the future, affecting how it intersects with both the family and the community.
A report published by Harvard Business Review suggests that most firms fail to remain a family enterprise past the second generation. Of those that do succeed, a key consideration is how non-family personnel will receive the successor. Perceptions of nepotism in the workforce can significantly undermine the commitment of non-family employees, causing them to question their future participation in the business. Addressing this can be incredibly challenging for business leaders in the process of handing over power, as their primary concern is likely to be choosing a family successor and providing employment opportunities for family members.
However, having conducted a review of more than 30 years of research on non-family employees working in family businesses, the Harvard Business Review report did not suggest discarding family succession altogether, finding that, in many instances, non-family employees actually preferfamily successors over non-family outsiders due to the family-like cultures that attach to family succession. Nevertheless, it is crucial for family firms to reassure their employees that the next generation of leadership is well-suited to the role and capable of coping with the challenges they will unavoidably face.