The Succession Conspiracy
27th April 2018
Susan Hoyle considers why some family business owners are so reluctant to plan for succession, and what to do when they have been brought around.
The grit and determination that is so often characteristic of family business founders can bring great success, but can also be the undoing of the business when the founder won’t let go. There are many reasons why a founder may not want to let go _ “I’m immortal”, “nobody can run this business as well as I can”, fear of an uncertain future and so on.
For the next generation, from where they are standing, the inability of the founder to let go can be hugely frustrating and demotivating.
But what does it look like from where the founder is standing? Leaving aside feelings of immortality and “nobody can run this business as well as I can” the founder is faced with a veritable Pandora’s box of complex issues, as illustrated in the diagram below, that he will have to face if he is to let go and pass the business onto the next generation.
Letting go, and succession planning, requires many things to be worked on at once, and often a solution to one issue will raise many more questions in relation to another issue. Succession is not just about retirement planning, or wills, or tax.
Given the complexity, lifting the lid on this can be scary, so it should come as no surprise that many founders are reluctant to let go. Many will just put the lid back on and leave well alone.
Succession in a family business involves change – major change – so the success of any transition depends very much on the willingness and ability of the family and the business to change.
In the rush to provide a solution to business owners who say they want to retire, or who wonder which of their children should inherit the business, advisers often overlook this very important fact and then wonder why either the business owner gets “stuck” or the succession does not go as smoothly as it might have done.
This article seeks to show that succession planning, and the inevitable changes in the family and the business that will occur on a transition, needs to be managed as a process, and that providing solutions and implementing those solutions is only part of the process.
To the outside world, succession can appear to be all about titles – who is going to take over as managing director or chairman – or about who will inherit ownership control and how that will affect the family and the business.
On the other hand, inside the family business system, succession is really about whether the family glue is strong enough to keep the family in business together - to grow and manage, or govern, the business. Drilling down further this raises questions about the personal life aspirations, career plans, readiness and capabilities of those who will be affected by the succession plan – not just the next generation, but also the seniors and the employees.
That help and support can be provided by advisers who understand that succession is a project that needs to be managed, and who can guide the family through the process.
The key stages in the planning process are:
- Identifying the event that will trigger the start of the process, and an acceptance by the family (and key management) that change is inevitable.
- Managing the uncertainty that is inevitable during a transition when different options are being explored, and investing in educating the key players to create an acceptance and understanding of what’s happening, and the work that needs to be done.
- Identifying and testing the feasibility of all the alternatives, always keeping a focus on the future, and avoiding a premature choice.
- Compromising on what is the best possible outcome in all the circumstances, and mourning the alternatives not taken and the costs of abandoning them.
- Creating a timetable for the transition, and putting in place the building blocks for the transition whether they be an announcement strategy, mentoring for the next generation or the legal and financial structures required to effect the transition.
Who starts the process?
Succession in a family business entails the seniors letting go and the next generation being able and willing to step up to the mark. But who starts the process? The seniors may be anxious about pushing the next generation into making decisions, while the next generation may be reluctant to be seen to be pushing the seniors out of the way.
In reality, change cannot happen until those currently in power – usually the seniors – indicate that they are ready to start discussing letting go. It is preferable for that willingness to be made very clear, rather than vague signals being given that are open to interpretation.
If the seniors have to accept responsibility for starting the process of succession planning, it is equally important that the next generation are willing to enter into discussions, based on a clear understanding of what they want for themselves, as opposed to passively accepting whatever they think the seniors want.
Succession planning is best viewed as a negotiation in which each person taking part has a clear understanding of their own “best outcome” and a willingness to work collaboratively to achieve the “best possible outcome” in all the circumstances. This will enhance the quality of the negotiations and help everyone move to achieving a consensus. A practical definition of consensus here is “I don’t agree with everything, but I don’t disagree strongly enough to want to sabotage the outcome”.
Case Study – The Jones Family
Ted owns and manages a substantial manufacturing business. Ted and Anne have 4 children, Kate, Sarah, Andrew and Robert. Kate and Robert work in the business with Ted, while Sarah and Andrew have forged successful careers outside the business.
Ted has decided that he wants to retire at 65, and that he needs to make a new will. Aside from their house and some modest savings, Ted has a reasonable pension pot, but the bulk of the family’s wealth is tied up in the business. Ted is minded to leave the business to Kate and Robert because they work in the business, and although he feels this is fair, he does feel slightly uneasy about leaving Sarah and Andrew out. Ann has other ideas! She is strongly of the view that being fair means treating the children equally and that means they should each inherit an equal share of the business.
Ann is aware that Kate and Robert are wondering what the future holds for them, but so far Ted has played his cards close to his chest – not so much because he isn’t acknowledging things will have to change, but more because he is unsure about what to do.
For the Jones family, the planning process might go along the following lines:
- Ted has decided that he wants to retire at 65, providing the trigger to start the process. However, he needs to communicate his intention to retire, and what he means by retirement, to the whole family and key management, and there needs to be an acceptance by the family and management that change is inevitable.
- A plan, including a timetable, is drawn up for a series of meetings involving Ted and Ann, each of the children and key management, and the topics for discussion at these meetings. Each family will have a preference for whether these meetings should be individual meetings or group meetings.
Key issues for the family which will need to be explored include the following:
- What does Ted mean by retirement? Does he want a continued role in the business, and if so what will that role be?
- How do each of Kate, Robert, Andrew and Sarah feel about the business and about being in business together? The feasibility of all the permutations of ownership need to be tested, taking account of, amongst other things, the children’s personal aspirations and abilities, and what is best for the business
- Who will take over Ted’s role as managing director? Will it be Kate or Robert or an outsider?
At the end of the exploration period the family will have to make a choice – from a number of options for the future that are feasible, or if there is only one feasible option for the future to choose that option as opposed to doing nothing. Given that it’s unlikely that any one option will be the “perfect” option, this choice has to be made on the basis that everyone can honestly say about the chosen option “I don’t agree with everything, but I don’t disagree strongly enough to want to sabotage the outcome”.
A timetable for the transition will be drawn up, setting out when Ted will announce his intention to retire at 65 to the employees and the wider world, the management succession route for Robert and/or Kate or an outsider and when ownership will transfer. The financial and legal structures that might be required to implement the plan include wills for all the family members, pension planning, life insurance and a family constitution.