Family Businesses ultimately come to a stage where they need to either be sold to an independent party or pass down to the next generation.
If you are looking to pass the business down to the next generation, careful planning is required. Statistics show that:
- A total 70% of family businesses fail or sell before the second generation takes over; and
- A total 90% of family businesses fail or sell before the third generation takes over.
Some reasons why family businesses fail are as follows:
- Poor management, including lack of leadership and training
- Unresolved family discord and indifference
- Lack of, or inadequate, business succession and wealth transfer planning
- Identifying the ideal successor and knowing what the business requires of them
- Not planning for the change
The following 5 Steps will help steer you towards a successful transition:
- Select managers for the next generation.
This process is vital. We recommend that a meeting with key employees and family members to discuss the current owner’s retirement and succession plans be held. Examine the candidate’s leadership qualities as well as their performance skills to help determine where they need to develop.
- Introduce a comprehensive development program for these managers.
This can include a combination of formal training, mentoring and performance evaluation.
Encouraging a culture where promising employees and family members are given jobs and responsibilities to broaden and develop their skills will help towards giving them the best chance at success. Create a leadership group of employees and family members and make them aware of challenges, business plans and strategies across the organisation.
- Understand the personal and business goals of the next generation managers.
- Develop plans for management succession.
These plans should be realistic of both past and present performance and include strategies for continued operation of the family business, retirement of current managers and transfer of assets. The plans must be flexible for the timing of the transfer, as sometimes something can happen when the timing isn’t planned.
- Work in improving and keeping good working relationships between family members.
This is essential. Be mindful of the challenge of ensuring that there is equitable treatment of the family members – spouse or siblings – who do, and do not, participate in the business.
Other issues to consider:
Conflict Between Generations – it is normal and expected for some intergeneration conflict to exist between the current business owner and their successor. Differences of opinion can be minimised and worked out over time through planning and communication.
Unresolved issues and misunderstandings – if these are not discussed, they may result in power struggles. Strategic planning can prevent these. It is an important step to resolve these as they can cause severe problems, especially if the business owner dies unexpectedly.
Retirement Goals – these must be defined and be clearly communicated to the successor so that conflict and frustration does not arise. These also need to link with the successor’s personal and career goals so that they work together.
The earlier that planning can be done, the higher the chance to success. Early planning allows for approaches to be revised and updated and in most circumstances, the opportunities for tax planning are much greater in the early years.
Independent Board of Advisors:
Consideration may need to be given whether to appoint an independent board of advisors. Such a board can be a very useful sounding board for management. The board can provide a sense of objectivity and independence as well as be able to provide constructive criticism that will help the business prosper.