Succession Planning Within a Family Business
”They f**k you up, your mum and dad.
They may not mean to, but they do.
They fill you with the faults they had
And add some extra, just for you.
But they were f**ked up in their turn
By fools in old-style hats and coats,
Who half the time were soppy-stern
And half at one another’s throats.
Man hands on misery to man.
It deepens like a coastal shelf.
Get out as early as you can,
And don’t have any kids yourself.”
The dynamics of family life is complicated enough but when you add the complexities of business to the mix then you have the potential for a really explosive situation. When your work colleagues are also your brothers and sisters, or your boss is your father or mother then the appeal of a family holiday isn’t quite so attractive. One of the most amazing facts of life in Ireland is that over of all businesses are family owned and account for 50 of employment in the economy . Despite these numbers there is little attention paid to this sector by the political classes, policymakers and state agencies. In fairness, this may be as a result of the fact that this is an extremely complex area and it is difficult to know where to start.
The most startling statistic of all is the high failure rate of family businesses. Only one in three family businesses survive the first generation. In turn, one in two of the businesses survive the handover to the grandchildren. So how can we lessen this rate of failure? One of the problems is that many families turn to accountants and tax advisors for direction in how to best hand over the assets to the next generation. It is understandable that the advice they get is focused on the numbers and there is a natural reluctance to stay clear of the tricky stuff. By “tricky stuff” I mean the relationships between some of the family members may be fraught. In some cases the parents maybe separated, sisters don’t get on, brothers aren’t talking and inevitably there is a black sheep in every family.
Problems become worse when there are grandchildren. The business may not be substantial enough to support the growing needs of the family. The assets of the business might be more valuable than the business itself so that some family members might want to sell out. Every family has differing tensions that can spill out into the wider family and sometimes succeeding generations. So what can you do?
From my experience of working with family businesses there are four reasons why the business fails. Firstly, the business is not viable. In this case there is little that can be done and the inevitable takes its course. Secondly there may be reluctance for the founder to hand over the business to the siblings. This is understandable in that the skills required to start up and build a successful business are completely different from the ability to stand back, plan and develop the next management team to take over the leadership role. Business founders are not known for their ability to delegate.
Different Generation With Different Needs
The third reason for failure is that the children of the founder may have no interest in continuing the business. In some cases, when the children are old enough they can’t wait to get away from hard graft that they may have had to put in after school or during the summer holidays. Or very often the children’s education is paid for from the business and the next generation are qualified in an entirely different field, therefore may not only lack the interest but they may also not have the necessary skills to run the business.
But the primary reason for failure is common to all businesses….the failure to plan. The difference here is that the family business requires a different type of plan than a standard business plan. LEAP is a company dedicated to developing leadership in Irish businesses. During my time with LEAP I have gained a lot of experience in working with family businesses. I take a holistic approach that combines the needs of the family with the needs of the business. Through its work with business owners, LEAP identified that there are particular problems in dealing with family businesses and as a result has developed a specific programme for this sector.
The approach covers four main areas:
1. Good Fences Makes for Good Neighbours
This is essentially a strategic plan that has a short-term and long-term requirement. In the short-term we need to establish Key Performance Indicators for the business. There must be clear divisions between the various strands of the business and individual accountability. There must be a well-defined organisational structure and roles and responsibilities assigned so that each individual’s contribution can be measured. This element of the programme can go a long way to reducing the tensions between family members and helps to clarify who is really contributing to the success of the business. Once this portion of work is completed it will help to lay the foundation for the long-term plan for the organisation. It is only then that we can address restructuring, leadership and ownership issues.
2. Family Planning
Now that your family is maturing you begin to realise that “family planning” is more than contraception. A plan is needed to maintain a healthy and successful family unit. For example it may include each individual developing their own personal plan that meets their own wishes while at the same time dovetailing their plan with the overall family business plan. It may also cover the entry and exit policies of the family members working in the business.
3. The Crown Jewels
The transfer of wealth and property can be a cause of major stress for family members. A plan that covers the legal and tax implications of the restructuring of the business will need to be developed. How to determine the most effective transfer of the ownership the business, the division of the proceeds of the sale of the properties etc. will require sound professional advice.
4. Succession Planning
There are lots of examples in history of family dynasties succeeding through the generations. There are some very bad examples also. The difficult subject of succession planning must be addressed in an open and frank way. Very often the only way this can be achieved is by having an outside person facilitate the process. Someone who is fair-minded and has no vested interest in the succession plan is the best option. I believe that the underlining danger to both the business and the family can be avoided by taking a methodical and structured approach in developing the above plans. If the problems are addressed in a professional manner, and a structured facilitated approach is adopted, then there is great potential for positive outcomes for all concerned.
Families, or more importantly, family businesses don’t have to f**k you up! The message is, don’t leave things to chance, get some professional help and plan your way through this potential mine field!
Senior Partner, LEAP