A family run business will eventually have to pay particular attention to succession planning. Here’s how to successfully hand over the business reins.
Time waits for no man. All business owners will reach the point where thoughts turn to stepping down and handing over the reins to someone with the youthful energy to take the business further.
In many instances, this is a family member who wants to grow the family legacy.
Unfortunately, ideals and reality don’t always intersect, says Ravi Govender, Head of Small Enterprises at Standard Bank, who points out that even in the wealthiest of families, it is common for massive fortunes to vanish over just three generations.
Safeguard your business legacy
Guarding against this means taking a hard, honest look at a business and the roles family members will play in the future.
The second step is ensuring that there is a sustainable succession plan in place. This is especially important in companies like some currently being featured on the ‘Think Big - Building Business Champions’ TV series.
“It is not uncommon for someone who has spent their life building a business to have misgivings about whether the next generation is capable of running the business. There are, however, tangible steps that can be taken to safeguard a business’ legacy.”
“The overall objectives of a succession plan should be to ensure that the retiring family member can rely on the business for a pension, whilst incoming family managers can expect to make a reasonable living out of the company.”
Typically, issues that can impact the smooth transfer of a business to younger family members include:
- Family disputes. These can vary from siblings disagreeing over their roles in the business or even in-fighting surrounding the person who has been appointed as the successor. These disputes can become all-consuming, especially when the death of an owner complicates issues.
- Alignment of family interests. Complications can arise when the present owner, who is concerned with receiving a steady annuity income as a pension, sees the new generation wanting to take the business in a direction that he or she does not agree with.
- Inheritance issues. If the business can only support a few members of the owner’s immediate family, the others can feel aggrieved and expect compensation via a will or passive shareholding scheme.
Solving these issues upfront, through a succession plan, means that the present owner is reducing the future risks facing the business.
The longer planning is delayed, the higher the chances of the owner having little or no control of the outcome. The result could be an estranged family, and even legal battles.
Sit down and discuss
“By bringing all issues to the table for a succession debate, most of the conflicts that could arise can be openly aired. All family members can contribute to discussions regarding the future of the business. Most importantly, the skills required for the business and the issues regarding who wants to be part of it can be resolved. Following this inclusive discussion other key issues can be catered for,” says Govender.
These should include:
- Establishing goals and objectivesfor the business by defining the roles family members will play in guiding the business forward, and how specific skills can be used to their best advantage.
- Decidingto what extent different family members will be involved in decision making.
- If equity is to be allocated to family members, who will receive what portion of the shareholding?
- How the exiting owner will benefit from the transition. This could be in the form of payment for equity he or she relinquishes, or annuity payments over a set period.
- If ownership is to be transferred, who the beneficiaries will be and rules surrounding the way they can dispose of shareholdings if they choose to.
- Establishing a realistic transition plan. This should provide a guide as to when family members will join the company, what training and support they will receive, and when they will take on their management or support roles.
- How family members not fully involved in the business are to be treated. In this case, it is important that their roles and benefits are clearly defined.
- Deciding what to do if an employee, other than a family member, isa natural successor. All involved should agree on their involvement if this scenario is regarded as the best option.
“A strong succession plan is merely a document outlining how the present owner will exit the business and how the business legacy is going to be protected.
"It is, however, a process that can be difficult to discuss and finalise. But, the benefits far outweigh the risks associated with not having a proper plan in place,” says Mr Govender.
‘Think Big’ episodes can be viewed on SABC 3 at 9:30pm every Thursday, with a repeat every Sunday at 4:30pm. You can also visit www.standardbank.co.za/thinkbig to view the show. For an array of additional tips and tools on how to start, manage or grow a business, visit bizconnect.standardbank.co.za.