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Effective succession planning is all about focusing on the needs of the business, asking yourself the right questions and being prepared to make some tough decisions. Leave it too late or make an emotionally-led appointment and you can unravel all the good work you sweat blood and tears to achieve in building up your business.
On recently getting married to Britain’s favourite pop star, Nancy Shevell willingly gave up her role as a board member and vice-president of her family’s multi-million dollar haulage firm in the US. She and Sir Paul McCartney agreed to live in England after they were wed, which meant pulling back from her old life’s professional commitments.
Not every board member relinquishes their grip on the family firm quite so easily, as Oliver Hoffman, a Partner in Corporate Finance at Mazars and his team can testify. “Succession planning when it’s a family-owned company is fraught with issues, in that there are the non-commercial sensitivities to consider that don’t exist in businesses where there isn’t that familial link.”
According to the UK Government’s Business Link Agency, we’re not very good at deciding who takes over the reins of power in a company - either that or the act of replacing ourselves is just too repugnant to contemplate. Some 65 per cent of UK private firms are family-owned and yet fewer than half of first-generation family businesses have succession plans. Transferring ownership is an emotional and complex affair when it’s your own business, but the complexities and emotions multiply a hundred-fold when it’s a family run business.
These complicated family bonds often end up with the wrong people being appointed to the wrong roles, which can have a detrimental affect on the business. “When you can see this happening, it is important to challenge the owner and the board and ask are you doing the right thing?” Tantamount to lobbing a grenade into the room, such a question often brings about a whole host of sensitivities that require careful navigation.
Being focused on a clear course of action can make it easier, but no less difficult: “We’ve had cases of clients bravely telling the next generation down that they’re not right to take over the business,” says Hoffman who tells the story of a client who made his sons redundant from the company due to concerns they would not be able to run the business in the right way. Instead the owner insisted on the business being sold and the proceeds shared with the family.
Hoffman explains that the challenges to a family-controlled business increase with each new tier of generation. “When it becomes a third or fourth generation business, you’ll find that often the shares get divided amongst cousins who don’t have that same family bond that existed one or two generations up. It’s common to see a situation where one side of the family is active in the running of the business, and the other side being passive. This can bring about huge resentment. It can tear out the heart of a family and foster a very unpleasant litigious environment. When it gets to this level, it’s all about money.”
Another fairly typical scenario when problems arise is where there are several siblings. Questions such as who gets the MD’s job and who stays in the business intensify sibling rivalry and rows. Hoffman finds that tradition will often play its part here as he often sees the eldest son given the MD’s role with the other siblings handed out other directorship roles. “There is real potential for resentment and difficulties to build up in the future,” he warns. “If you think about family businesses where the primary intent is continual succession of the business, then it’s similar to the family silver getting passed down from generation to generation. The question is do the shares get divided equally, or do they get passed to the eldest sibling with other assets given to the rest of the siblings to compensate. There are many complications and there’s no right or wrong way of deciding,” he adds.
And there lies the trap. What’s right for the business and what’s right for the family?
“It’s crucial to challenge some of the thought processes and decisions being made and say, ‘are your decisions right for the individuals and are they also right for the business long-term?’” concludes Hoffman.
There’s a lot at stake if a business owner fails to put a succession plan in place. Advisers warn against leaving such planning to the last minute as a forced, ill-informed or panic decision could mean the business is transferred into reluctant or unqualified hands.
Oliver Hoffman, a Partner in Corporate Finance at Mazars, agrees that the business itself could be severely disrupted as conflicts take place over who should own or run the business, while uncertainty and lack of leadership will have a disastrous effect on sales and staff morale within the business. Which is why succession planners urge business owners to think in terms of planning over a five year period.
There are a number of business transfer options for an owner to contemplate. These include transfer or sale to family; sale to non-family (existing board member or senior manager), or a ‘trade sale’ on the open market. In all cases, succession planning is vital, and also offers a business owner the opportunity to update themselves on the latest developments in the mergers and acquisitions (M&A) sector.
Hoffman provides the example of Vendor Initiated Management Buyout (VIMBO) as one such concept helping to smooth the transition between owners. “Unlike a conventional management buy-out, which is usually initiated by the management team making an offer to the owners, a VIMBO is where the vendor and vendor’s advisers offer the management team the opportunity to take succession and ownership of the business and allows the owners to dictate the terms of the transition at the same time, which usually means a better price,” he explains.
In terms of selling a business on the open market, a departing owner has to see it from the buyer’s point of view and plan accordingly. The buyer will want to know will the customers remain with the company? Or whether the management team will remain with the company? “One of the most important elements in a successful sale is getting the buyer comfortable that when the major shareholder leaves, the customer relationships don’t walk out of the door with him,” says Hoffman. He recommends that owners put in place specific plans to develop their management team so they become more involved with the customer relationship side. “It does make a difference. The businesses we’ve sold where the owner has significantly stepped back both operationally and from customer facing activities typically are those that we’ve achieved the best prices for,” he says.
Hoffman adds that it is crucial to find ways of locking everyone’s objectives into the deal. One way is to offer management team equity ownership of the business or by offering them options to buy shares. “These options can be structured in a tax-efficient manner and they give ownership rights to the business at a future point in time. However, if the managers leave beforehand, they lose their ownership rights. So you lock in loyalty, continued interest and the commitment of the management team to grow the business throughout the process of the sale of the business.”
To read more from Mazars on succession planning click here