Succession Planning in Family Business
The Covid-19 crisis has prompted many family business leaders to think about and review their plans for the future, with questions of succession planning and next generation engagement coming to the fore at a growing pace.
In family business, thinking about the future involves not just the company at an operations' level, but also at a management and ownership level. This adds different layers of complexity, making succession planning a challenge.
This page provides guidance for those leaders who want to find out more about how to plan for successful succession in family business.
What is succession?
Family business succession is the process of transitioning the management and the ownership of your business.
This process is both sensitive and daunting, especially for founders or senior leaders who often find it difficult to let go of the day-to-day management of the family business.
Despite common belief, it is useful to know that transfer of management does not mean transfer of ownership, and both transfers do not have to happen at the same time.
What is key to a successful succession is planning and taking the time to do things properly.
Why THINKING about succession?
Family businesses are different from other types of businesses. This is because on top of business management and operations, family and ownership dynamics come into play.
To better understand this concept and its importance, it is useful to look at family business through a simple model.
TAGIURI AND DAVIS, 1982
Family, business and ownership roles often overlap. Roles and relationships are complex, and crucially this system shapes the way a family business works.
‘The 3 Circle Model shows where family members are holding different identities. Identity is fundamental to how we show up as leaders, and family members can be unaware of how it is affecting their feelings and behaviour. This major source of ambiguity, and confusion often leads to friction and conflict. Once personal identities are better understood, these points of friction can be managed."
Source: Nick Mayhew, Managing Director, Alembic Strategy.
The 3-Circle Model helps individuals within the family business system understand what role(s) they play and how these interplay with others within the same system.
Because there are multiple roles, or ‘hats’, coming into play when being part of a family business, it is important to be aware of them and how they might impact the family business, today and in the future.
Different individuals, with their roles and objectives, naturally equal different perspectives and opinions.
• If everyone has a different view, what does this mean for your family business, now and in the future?
• Does the family have a vision for the future? Does everyone agree with it?
• If not, how do you make sure the owners are aligned and have a common vision for the family business?
Addressing these questions is crucial for the long-term survival of any family business.
As families naturally grow and evolve through the generations,
• How will this affect the family business in terms of ownership and management?
These are some of the key questions that are unique to family business and which need to be thought through if you want to keep the business in the family for generations to come.
But it doesn’t have to be as hard as it sounds, if we understand the challenges at play and make sound plans.
Succession: a challenge and a paradox
Succession planning is one of the greatest family business challenges. Research by PwC revealed that 43% of family businesses don't have a succession plan in place, with only 12% making it the 3rd generation.
At the same time, family businesses are well known for their long-term outlook. The saying goes that they think in quarter centuries, rather than in quarters like their non-family counterparts do. This gives family companies a great competitive advantage, as they tend to be more forward looking and focused on purpose more than profit.
These features are crucial to making successful business in the 21st century.
But there’s a catch.
These issues also get postponed often because leaders are busy in the day-to-day management of business operations, and because thinking and talking about retirement and long-term plans is emotive and difficult. This is a paradox because, at the same time, family business owners see themselves as stewards for future generations.
In order to deliver their long-term intentions, there are some key considerations family business owners need to take into account.
PLANNING SUCCESSION IS A PROCESS
Successful succession is a lengthy process that requires inter-generational teamwork. Is it not an event. Getting the family aligned, having difficult conversations, creating the right structures and re-assessing them as times change are what makes succession a process.
A common and potentially fatal mistake is leaving succession to the last moment, or to when there is no other option. This can and often has put the very survival of the family business at risk. See the famous Yung Kee case.
But the challenge should not scare family business owners off of planning for succession. On the contrary, this process can have many advantages, including helping to make both family and business stronger.
Because it requires different generations working together, as well as open conversations among the owners, succession planning can help strengthening family ties and engagement to the business.
A safe space to communicate
‘The greatest strength in a family business is a clear and strong sense of shared purpose among the owners and the wider family. It can generate a sense of belonging, worth and shared resolve that non-family businesses are unlikely to be able to generate among their owners. This is a competitive advantage that family businesses should try to maximise. Without a shared purpose, there is nothing to bind family members to each other and their collective investment in the business. As time unfolds, no amount of governance or technical structures can prevent disintegration, often at the cost of much conflict and unhappiness.’
Source: Ken McCracken and Hakan Hillerström (2010) “Fourteen Steps to Stronger Family Governance”, Campden FB, Summer, pp.46–49.
To capitalise on their competitive advantage, it is important that family businesses create opportunities where owners can have open and honest conversations about their vision for the future of the business.
If you encourage positive communication, without judgement, you will have a better chance of making sure that the direction of travel for the family business is one that suits everyone.
Giving your family the time to discuss and explore individual and business objectives freely also enables greater trust and can help strengthening relationships.
BUILDING YOUR COMMUNICATIONS SKILLS
It’s vital that family owners, their spouses and their children learn to communicate and to share their thinking about the important issues the family must face up to. In working to build inter-generational communication skills, cultivate:
- awareness (“what’s going on now, in you, in me, and between us?”);
- clear thinking (avoiding the use of vague and emotionally charged terms);
- empathetic listening (“listening with your heart”); and
- being prepared (when developing communication strategies, you can expect certain differences and tensions to arise – they are predictable – so it makes sense to be prepared).
Source: IFB Research Foundation, Strengthening Family Communication
Often, the fear of conflict hinders conversations from taking place at all. As humans, we are wired to protect ourselves from harm at all costs. This often translates into avoiding confrontation with others altogether, with many important issues being left unsaid for fear of ruining relationships.
‘Undiscussables are typically highly charged emotional issues where pain, guilt, embarrassment or shame often lurk. Heightened emotions prevent family members from feeling comfortable enough to open discussions without hurting feelings or causing mayhem. Sometimes topics are undiscussable because family members are afraid of pushing someone further away emotionally and psychologically.… In a family business, too often the issues break loose in an unsuspecting manner where pent-up emotions spill forth in a destructive way. Unfortunately this reinforces the family’s fear of these topics, leading to more avoidance and creating more tension.’
Source: Deb Houden and Wendy Sage-Hayward (2016) “Undiscussables: Dealing With the Elephants in Business”, The Family Business Advisor Newsletter (available at: www.thefbcg.com/undiscussables-dealing-with-the-elephants-in-family-business).
In a family business, leaving sensitive issues unsaid can have catastrophic consequences. The longer things go unsaid, the more likely it is that relationships will suffer a breakdown that is harder to repair. And when this happens, your business is likely to suffer too and, in the worst-case scenario, it can fail.
Start planning early
It is never too early to plan for succession.
You might be thinking – ‘my children are too young’, or ‘I’d rather focus on growing the business first’. But the earlier you start thinking about the future of your business, the easier it becomes to make the right decision when it becomes time critical or, even better, you won’t have to make difficult decisions at all, because structures are already in place, and roles already agreed.
If you are a first-generation family business, think about whether you would like the company to stay within the family.
Research shows that the first transition is the most challenging one, as the firm moves from a centralised to a shared form of control. In this case, you should be considering questions like:
• How do I nurture the next generation to create the responsible owners of tomorrow?
• What kind of skills will the next generation need to succeed as responsible owners, whether or not they work in the family firm? What structures should I put in place to achieve this?
• How will the business attract the best talent going forward? Will this be family or non-family?
• If or when non-family comes into the business, how do I make sure their ethos is aligned to the one of the family firm?
All transitions involve change and uncertainty, not only first-generation ones.
In a multi-generational business, where both family and firm keep getting bigger, there are some additional questions to think about, including:
• Do we have the right governance structures in place to keep the family’s purpose aligned with that of the business? If not, what needs to be done about it?
• What kind of structures, if any, does the family business need when it comes to ownership and management transitions?
• Will all the next generation own shares equally? Can they all join the business in some capacity, or do they need to develop certain skills first?
Ownership vs management
Another common misconception about succession planning is that it means giving up the business altogether.
Ownership succession and management succession are two separate things, which do not have to occur at the same time.
When we talk about succession planning in family business, we mainly refer to having conversations and making plans about who will run the business in the future. This is a very complex process in and by itself because it entails a series of challenging questions, including:
• Is there a next generation who is engaged and interested in playing a role?
• If so, are there requirements for them to be able to join? What are they? Or can anyone join at any time? What are the implications?
• If not, who will manage the business? Is the business going to hire external directors? If so, is the family aligned and able to relay their vision for the family business? Or if you’d like to open up doors for the next generation, how are you going to get them engaged?
Engaging the Next Generation
Engaging the next generation is a perennial family business question, and one that is vital when planning succession.
Reesearch shows that almost half of entrepreneurs come from family run businesses, highlighting that the spirit of entrepreneurship still lies at the heart of many family firms (PwC 2016). However, we also know that many next generation members feel they don't have the space or the voice to make a contribution in the family firm.
If the current crisis has brought anything positive, this is a fresh look at the crucial role that the next generation can and has to play in family business. They have much to contribute and giving them a safe space to offer ideas and views about the family business and its future can only be beneficial, for the family business and the development and confidence of young individuals.
NUrturing LEADERSHIP TALENT IN THE FAMILY
Sometimes owners don’t think about engaging the generation until they think they are ‘old enough’, other times they are in doubt as to when starting to talk to the kids about the business.
The answer is that it is never too early for your next generation to become familiar and engage with the business.
Most of the time, you will find that they are interested in finding out about it and care for the business at some level, if only as a matter of pride for the family achievements.
And even if the next generation do not want to start their career working in the family firm, this does not mean they never will. In fact, it is often better for the next generation and for the business if younger family members gain experience outside first, so they come in committed, with new skills and fresh perspectives.
THE successor's perspective
Approaching succession as a successor brings a whole new set of questions and challenges. This section offers some insights and tools to help younger family business members in their decision as to whether to join the family business or not.
As a member of the next generation, the question of whether to join the family company will always present itself, at least once.
If you desire and/or are planning to join the family business, what is an effective way to introduce you as successor?
‘The challenge is to balance suitability and fit with the requirements of the family company. Prompts from an 'emotional' angle can influence you to make decisions on the family business prematurely and with sparse information.'
Source: Philip Mackeown, Successful Successors think ‘Informed’ Opportunity, IFB 2020
According to Philip Mackeown, it is useful to first think about how the opportunity of joining the family business might work in favour as well as against you.
'There is no more sure-fire way to inform yourself on the 'opportunity' to you of contributing to the family business than 'hands-on' experience. This is your foundation to turn 'opportunity' into possibility. An opportunity becomes a possibility only if and when you as successor are as fully informed on circumstances, have sufficient variation of input to the decision in front of you and have considered the potential impact on you.'
Source: Philip Mackeown, Successful Successors think ‘Informed’ Opportunity, IFB 2020
Importantly, it is not just about what the business can offer you, but also what your value to the family company as a successor is.
How to go about finding this out?
By tapping into the immense pool of knowledge and experience available within the family, the business, as well as outside within the family business community. By talking to other family members, senior managers and other successors who have gone through similar experiences you can start shaping your family business journey.
Culture and values, which are at the heart of many family businesses, are just as much part of the business legacy as they are of its future.
The Covid-19 crisis continues to show that family businesses care about their people and communities, with many having taken center stage in supporting the nation cope with the crisis.
As a family business owner, you might know very well what the company culture and values are, but do all stakeholders involved, family and non-family, know what they are and live by them in the work they do?
Research shows that a company’s culture is often the deal breaker, both when it comes to employees and customers. Consider these questions:
• How are you ensuring that your values and culture will live on after you retire?
• Who is the guardian of your values in the family business?
• Is the next generation aware of the family business value and culture? What does this mean for them?
• If you are thinking of hiring non-family, are they clear and committed to them too?
• How do you ensure your family business values and culture live across generations, and that they stay relevant as times and family change and evolve?
Family business governance
Family businesses are unique because business structures intertwine with family ones, and a great part of the latter revolves around feelings and emotions.
In family business, developing family governance is just as important as developing corporate governance.
Having a clear structure that defines roles and responsibilities in the family business, aligning the needs of individuals within the family with the needs of the business, helps to prevent issues and conflict from arising later on.
Power in family firms is shared among the board, current owners and the wider family in a way that is often complex. As long as everyone understands who does what and why, conflicts and misunderstandings can more easily be avoided and a smooth management of the business ensured.
Communicate across the board
Once governance structures are in place, ensuring this structure is known and understood by the whole family and the business requires a smooth and effective communication flow between all stakeholders, across generations.
Open communication helps to achieve clarity of roles and responsibilities, of the vision and goals of the business and family members, of the hopes and dreams of individuals, and of how to effectively navigate and connect the talents of individuals with the needs of the business.
Know who to turn to
You know your business better than anyone. But that doesn’t mean you have all of the answers all of the time. So where can you turn when you need support?
Fellow Family Business Owners
Every family business is different, so there is no one size fits all answer to the challenges that owners can face. But it can be helpful to remember that whatever challenge you may be facing, another family has already been through it. Whether it’s how to encourage your children to take an interest in your business, or how to deal with a difficult family member, someone else will have found their way through it. Talking to other business families, and hearing how they have overcome their challenges, can help you find the right path forward for you and your family.
Having a Board, which includes independent directors, has many advantages – including providing you with a source of expertise you can call on for advice and guidance. Your Board can help bring new ideas to the business, as well as providing another viewpoint when it comes to assessing investment and growth decisions.
Evidence shows that employees in family businesses feel a greater sense of loyalty than those who work in other types of businesses. Part of this is due to the fact that they are more likely to regard their managers as good at responding to suggestions and allowing them to influence final decisions. Building an environment that encourages employees to communicate with you can be a great way to harness the new and innovative ideas that will help your business to continue to grow.
As well as those you may already turn to – lawyers, accountants, etc - there is a growing network of professional advisers who can support you with many of the common issues that family business owners face. Family businesses have a different set of complexities, and getting the wrong advice could be expensive and damaging. So before you engage an adviser it’s useful to make sure they have experience of working with family businesses, and you all understand what it is you are working towards.
One of the key advantages of family business is the long-term family involvement, and the knowledge that is built up within the family. So call on family members for their input, make use of their experience and their passion for the business and family.
Remember – you are not alone
Whatever issue you are facing, remember you are not alone. There are plenty of people you can turn to for advice on all sorts of issues. The IFB is always here to offer support, and to help you make the connections you need to address your challenges and find new inspiration.
BUSINESS FAMILIES, CONNECTIONS AND SHARED EXPERIENCES