Family businesses are too casual about succession planning – study.
Formal succession planning, or lack thereof, is one of the biggest threats to the sustainability of family businesses worldwide, according to a PwC study released on Tuesday.
Head over heart
The Head Over Heart? Family Business Survey conducted 2 378 interviews with family businesses across 40 countries (120 in South Africa) that have 50 to 5 000 employees, and revenues from R50 million to over R10 billion.
According to the report, only 13% of local family businesses (16% globally) have a clear and formal succession plan that has been discussed and implemented. Most businesses, the report said, were either not planning for succession or too casual about it.
They tend to approach the process as a personal issue between two individuals rather than one that requires the same commitment, energy and objectivity as other aspects of the business.
The second to third generation transition
PwC’s Southern African Private Company Services Market Leader Andries Brink, who presented the report, said about 90% of family business owners only had an idea of the plans for succession of ownership, or for management positions.
“But they are not documented. They are often open to interpretation and have the potential to create conflict in the future,” said Brink.
It is a reason why most family businesses, according to Brink, crumble by the second-to-third generation transition.
Business long-term continuity
Pavlo Phitidis, the CEO of Aurik Business Accelerator, says that owners assume that their children will come into the business but very often they don’t want to, as they envision a different future for themselves.
This problem’s impact extends beyond the long-term continuity of a business. In the short-term, Phitidis says the absence of a clear succession plan will have an adverse effect on staff, and struggle to attract the best talent as the top positions in the company are presumed to be reserved for family members, irrespective of their fitness to hold those positions.
“The problem is that the staff in that business never seek out a clear career path within the business. They know that somebody else will come into the business and take the top positions. It’s an environment that will attract a particular kind of staff member.”
Children and their parents
The lack of a clear succession plan can also become a problem when the founder and the successor have different views as to which direction the company should go in.
Sometimes the parent has no retirement plan and thus relies on the steady profits of the business for income, whereas the child may be determined to pursue riskier opportunities to take the company to the next level.
In other cases, founding partners have many children and conflict arises as to who is appointed to succeed the founders, even to the extent that those not directly involved in the company are remunerated.
These conflicting expectations of what succession will entail are often overlooked until it’s too late, said Phitidis.
Professionalise your business
They key to longevity is to professionalise the business. That means putting systems, process and people in place to ensure that the company can run efficiently and grow beyond the life span of its founding members and children.
Among other things, non-family members who have the expertise and passion to grow the company should be brought onto the boards and management levels of the company.
There must be formal mechanisms in place to deal with family conflict, including shareholder agreements, incapacity and death arrangements, family councils, third party mediation or family constitutions.
It is also important to ensure that children of the family are groomed from a young age, working their way up from the bottom levels of the business to the supervisory, management and eventually, executive roles as they become more qualified.
That way, the child will have a deeper understanding of the business and existing non-family employees will be somewhat comforted that there is room for their careers to grow as family members are not instantly promoted to top positions without merit.
It also allows time for the founder and potential successor to gauge whether the succession plan is a good fit, providing enough leeway to make alternative plans if that does not turn out to be the case.
Phitidis says the best succession plan is to build a business into an asset of value, which has a clearly defined niche, is run with proper systems in place and not dependent on the founder being there.
“Because that means that, if the succession plan does not work, the founders can find an independent buyer in the market.”
For more information on insurance and succession planning visit http://www.lifehappens.org/