SUCCESSION IN A FAMILY BUSINESS IS THE NEXT GENERATION READY FOR THE JOB OR RIGHT FOR THE JOB?June 19, 2017
Succession is a difficult issue for any business to address, and too often the apparent simplicity of passing the baton to the next generation in a family business can mean that the potential downsides are not addressed properly or early enough. Mark Bradford, a family business advisor at FBS explains the common pitfalls.
When it comes to family business succession there are so many complex issues to consider and important questions to address in laying the foundations for introducing other family members into the business. The current managing generation may ask themselves: Are the next generation motivated and enthusiastic about taking on the responsibility? Will they succeed at running the business? Can the business afford to employ the next generation? Does the business need to grow to support the wider family involvement? What is the right age to join the business and what prior experience is necessary?
It’s crucial that the current managing generation extract themselves from the day to day distractions of running the business and dedicate proper time to considering these important issues and their implications. Doing this in conjunction with a trusted advisor or specialist family business consultant can be extremely useful, and will avoid the “it just happens” scenario where you could instead be laying the foundations for future difficulties.
The next generation need to want to join the family business for the right reasons and these would typically include:
• They see potential in the business, both current and in the future
• They feel they have the capabilities
• They are motivated and enthusiastic to learn about the business, the sector, what it takes to be a manager / director.
If any of these reasons aren’t given then we would urge progressing with extreme caution because it would suggest that the most basic of foundations do not exist for a successful succession of the business management roles.
When to join the business?
Joining the business straight from school is a popular way for family members to become part of the family business. This can be seen as a straightforward approach and is probably most effective where there is a trade to be learned and so in effect the family member joins the business to serve their apprenticeship. The downside here is that the family member does not have the opportunity to learn ideas from other businesses or sectors which might bring fresh ideas into the business.
A further difficulty is this is a time when we see the most conflicts taking place between the current managing generation and the joining generation due to the age and stage of both generations. This can mean the relationships can get off to a shaky start.
Going to college or university?
If the next generation has the opportunity to go to college or university it is helpful that the chosen course has a benefit for the business and brings something new to the business. The advantage of this approach is that the natural conflict stage is played out away from the business.
Gaining employment elsewhere?
A job away from the family business upon leaving school or after college or university is often a good idea. It gives additional time for the next generation to mature, out of the family and business spotlight. It can give time to build an understanding of commerce, different businesses and sectors. It has many advantages for building future strength of the family business. It is important to think about these things and to have open and frank discussions between the generations to formulate ideas about the way forward. It could be a combination of all of the above, with the first year after school being spent in the business, then going into secondary education, and finally being sent on a series of secondments relevant to the sector or seeking employment elsewhere independently. The one issue to watch for in this scenario is the timing of the return into the family business and at what level. Nothing beats starting at the bottom and working one’s way up the management ladder through merit. Joining the business in one’s late 30’s or 40’s means this is less likely to happen and so the opportunity to experience an depth training course about the business and its sector, while earning respect of the workforce along the way, is lost.
How and when to choose the next leader?
Will it be a family member? It should not be seen as the only option for succession of the top jobs. Consider the possibility that choosing a non-family member may in fact be the best way forward for the business. This could be on an interim basis until the next generation is ready, or for the longer term because there is someone else that is right for the job.
How to tackle the equality issue and shareholding where more than one sibling joins the business?
If there are 2 or more siblings who are likely to join the family business then ideally they should join the business in a similar way. It is likely to create future difficulties if one joins from school and another joins following university. If there is a clear motivation and capability from one sibling to take on the job of running the business over others then it is natural to see them as the ‘natural’ leader. Time should be taken though to ensure that each of the siblings has had the opportunity to grow and develop their skills. It could be that the better leader is simply taking longer to develop.
It is important to recognise that there will be a natural change in management style to a sibling partnership if more than one sibling is involved in the business. This will be a source of confusion for everyone working in the business including the current generation. One of the biggest challenges is choosing the time for the next generation to actually take on full responsibility for running the business. When does the current managing generation wish to retire? Does that fit with the next generation’s motivation, ability and desire to become the business leaders? And when should shareholding be adjusted to make this work for the benefit of all? The key here is to spend time talking about it together with an impartial advisor. What is important is that shareholding is addressed at the point of transfer of leadership. A generation that holds onto all or the majority of the shareholding is stating they don’t trust the next generation which may result in conflict arising. If the shareholding is being retained to ensure security and an income stream then that would suggest not enough planning was carried out early enough to ensure a better passing on of the shares.
When should the current managing generation retire?
Sometimes the current generation will have put their heart and soul into the business at the expense of building a life outside the business at the point of retirement. It is preferable that retirement is a gradual process and working towards that is far more achievable in a family business. The key is to make sure that current and the next generation are working towards a harmonious change in leadership and ownership.
How to ensure the best outcomes?
Be prepared for a worst case scenario. What will happen in a situation where sudden ill health or worse occurs? Make sure there is a Will in place. So many family businesses are operating without a Will or Wills that have been poorly prepared. The expectations of everyone currently involved may not be met if an unexpected situation occurs, and the consequences can be catastrophic for the business, the source of wealth and stability for the family.
The overarching point to make is that it is important to recognise that time changes everything, therefore being open to discussing, planning and agreeing the way forward achieves far better outcomes for the business family and the family business.
CASE STUDY: HENDERSONS OF EDINBURGH
In 1963, Janet Henderson, a farmer’s wife from east Lothian established her iconic Salad Table Restaurant in the basement of 94 Hanover Street in Edinburgh. From the start, the ethos and values of the business were based on her passionate belief in the health benefits of freshly prepared, organic, vegetarian wholefood. Despite being a way ahead of its time, the venture was an immediate success.
Unfortunately she died unexpectedly in her early sixties, and the business passed on to her 7 children, in a form of partnership. Over the years, various members of the family worked in the business, and 5 of the 7 siblings exited the partnership at different times and for different reasons. This left Oliver Henderson (the youngest) and his sister Catherine with the responsibility of passing the baton to the third generation of five cousins, one of whom currently works in the business.
While this family business had a real benefit from the shared passion about the founder’s values, a shared desire to continue her legacy & a willingness to tighten the belt during tough times, they faced a number of challenges as a result of being a family business.
Oliver Henderson says “I now realise we had little understanding of how to cope with the complex issues associated with 7 siblings being partners in a business with only some of them working in the business and no structures or policies.” Oliver has, in retrospect, identified the need for the following structures and policies for:
• Separating ownership and management, particularly during periods when the business might have been struggling – then of course, everyone had a view, the working owners felt undermined and staff were confused;
• Employing family whilst ensuring that they had the skills for the job and were remunerated fairly;
• Decision making, accountability and performance management all of which suffered from a failure to clarify and separate the roles of ownership and management;
• Protecting the business when a partner decided to exit. Although all the siblings wanted the business to continue they still wanted the “full and fair value” of their share when they left. Without a simple and conservative formula for valuing the business, the process was long drawn out, expensive and potentially very divisive and left the business having to borrow large sums of money to fund the exit at a time when the business was crying out for investment.
Although Oliver realised that they had to strengthen the management and improve profitability to enable them to reinvest and refurbish, their attempts to address that by bringing in a business consultant just made matters worse. However by then, he had realised that unless they could first address the family issues they would never solve the business problems. Through contacting the Scottish Family Business Association, he was put in touch with Family Business Solutions.
Oliver says FBS are “a specialist consultancy that actuallyunderstands the problems that families encounter and possesses the knowledge and skills needed to provide independent practical help and enable often difficult decisions to be taken - resolving problems that we as a family would never have addressed as they were just too difficult to deal with because of relationships and emotions. I can’t speak highly enough about the contribution from FBS. “Over the last 3 years they have clarified our shared purpose as a family and a business, separated out the roles of owners and management, helped recruit our first non-family chief executive. They also helped my son with his own personal aspirations and to map out a progression route including the completion of an MBA in Hospitality Management, leading to a new and more exciting role within Hendersons. Profitability has increased substantially, a new outlet has been opened near Holyrood and a major refurbishment programme is well under way, part of which was the opening of Edinburgh’s first Vegan Restaurant in Thistle Street which has been hugely successful and highly acclaimed. The Hendersons Shop and Deli has been refurbished and the Salad Table is due to be refurbished in the near future. Hendersons continues to grow and have opened a new site occupying the restaurant at the Fraser Suites Hotel in Edinburgh’s Historical Old Town. “Fifty years on the business has evolved to meet ever changing lifestyles but the core values remain the same. Thanks to FBS we have in place Governance and Management structures that are fit for purpose and a next generation that are better informed, understand the vision and shared purpose for Hendersons and are clear about what part they will play as future owners of a business that is now well placed to take advantage of the growing interest in healthy eating and vegetarianism.”
Last year Hendersons was named Family Business of the Year in the Broons Awards and Best Vegetarian Establishment in the Scottish Food Awards.