This is a business for which youve risked capital, forgone sleep and probably shed the occasional tear and you dont want to see that time and energy wasted. The process of planning for your successor is never going to be easy; Penny Lovell, Head of Private Clients at Close Brothers Asset Management looks at what you can do to make the process as smooth and painless as possible.
Alongside Family Business United weve visited 39 family businesses across the UK as part of our Family Business Road Show. One of the key issues, raised time and again is that of ensuring a smooth transition from one generation to the next. Succession planning requires a good deal of time and commitment and it’s vital you dont shy away from some difficult conversations.
When planning for company life after youve left, there is often confusion between the need for management succession (selection of the next family business leader), and ownership succession (developing the next generation of responsible owners). Most successful family business owners imagine they have set up a business that will last, however this is rarely the case. Only ten per cent of family run firms make it to the third generation. There are various reasons for this – economic factors, changing trends and Mother Nature herself have ruined many a business.
These elements are hard to predict and a business owner can be excused for not forecasting accurately; they emphasise the need to be in command of the factors which will always remain in you control, such as who you should select to succeed you.
First and foremost, a successor should be picked on their skill set alone; not your own relationship with them. You must try, no matter how difficult the situation, to leave emotion out of the process. You often see family owned businesses slip up because they are inherited by a family member who has neither the skill set nor experience to lead. Be objective in your thought process and seek counsel from individuals outside the company; a fresh set of eyes can often give you the clarity of thought you need to make a decision for the good of the business.
There are also many advantages to forming a plan of action early. It is often difficult to even consider handing a business over that youve nurtured and pieced together in a way that best works for you. Having a timeframe in mind of when you want to retire, be that three years or 30, and dedicating time to selecting your successor can be invaluable.
Not only does this give you time to change your mind if your selection doesnt look as though it’s going to work out, but it also allows you time to mitigate the considerable tax liability that comes with transferring ownership of a business it’s advisable to seek the advice of a qualified financial planner at this point.
It is always important to remember that, if youve planned in advance, you have time on your side. If the structure for succession is well established you are in a position to hand over the reins when it’s most appropriate or feels most natural. The later you leave it, the more likely you are to see cracks form in the future.
When any leader steps down from their position there is always a teething period the successor is forced to navigate. They will often have to combat numerous problems, ranging from a lack of staff confidence in the new boss to dissatisfaction with their newly assigned roles.
By planning in advance and gently phasing in a successor, you will slowly instil confidence in your workforce that your decision is the right one. If it becomes clear it is not, then be bold enough to admit your mistake, it is not too late until youve stepped down.
The transition process also calls into question the need to consider the longer term for the retiring generation if you have more than one child how are you going to divide the estate down the line
The transition provides a timely opportunity to review and update wills and consider other aspects such as inheritance tax planning too. Seeking the advice of a qualified financial planner could potentially save much time, money and hassle here.
It is important to draw up a simple plan and refer to it often. If you cannot tick off each step, you are setting yourself up for failure. The five crucial steps are:?
- Establish a time frame for retirement;
- Evaluate potential successors on their skillsets, not your relationship;
- If it isnt working out, be brave enough to make a change;
- Create a transition plan;
- Show faith and trust in your successor (most importantly, your staff will appreciate it).
We know from our experience with family businesses that a carefully planned succession strategy and an enthused successor will be far more likely to fall into the ten per cent of successful third generation family businesses.
Penny Lovell is head of Private Client Services at Close Brothers Asset Management
Penny Lovell and her team at Close Brothers Asset Management recently completed the Family Business Road Trip 2014 as part of the firms Family Business Club which launched in January, to help family businesses and bring them together to share knowledge and experience.