The Importance of Planning Your Exit from the Family Business in 2013

Posted by admin at 15:51 on 13 Feb 2017

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What is the business for?

This is one of the many questions we ask to understand how the business interfaces with the family.  Is it to provide security via salaries and a pension fund for the next generation? Or is it a legacy to the founder? Or both?

Whether the response is about security or stewardship, surveys across the US and UK indicate that 75% of family business owners want to pass ownership over to their family.

Yet there is a paradox. In spite of this desire, in our experience only 25% of family businesses have any succession plan in place, let alone one that is written down and communicated with key stakeholders.

Why don’t MDs have succession plans in place?

It often comes down to one or more of 5 things. There is a fear of what the MD is going to do post-retirement linked also to a fear of mortality. There is a bias against planning given how the business started in the first place. There is a fear of losing control of the baby. And finally there is the fear of upsetting people and opening up a can of worms.

So nothing gets done.

Yet this year 1:15 family businesses will face generational change. Surveys also suggest that 1:5 family businesses currently experience ‘significant conflict’. Having to take abrupt action when the owner becomes incapacitated or dies is challenging when the family is under stress and the business is in the midst of a leadership transition.

It is probably no surprise then that less than 30% of family businesses survive 10 years after the death of the founder.

But it doesn’t have to be this way.

So how does an MD overcome these significant emotional blockers?

In essence it comes down to recognising that there are two systems at play here – the business and the family. The business decision is rational. The MD knows that at some stage s/he will handover. The business needs a competent successor to guide the business through the next stage of its development. So you find the best internal candidate and if that person is not ready/available, you recruit.

The family system is more complex because it is emotional.

Yet having recognised two systems is the start of working out what to do next.

We would recommend 1-on-1 sessions with all the family members who have an interest in the business whether as a shareholder, spouse, employee or some sort of other vested interest. You find out what aspirations, expectations and plans these stakeholders have regarding management and ownership succession.

You then know what the individuals are thinking. It tells you how well the family currently communicate with each other. It tells you about the quality of relationships and what potential issues there may be when faced by uncertainty such as incapacity or death. This provides deep insight into the family system and helps establish what the key components of the Family Constitution need to be.

The Family Constitution explains in general terms how the family want the succession process to work. The Constitution is the outcome of a retreat where the family is involved in how the succession process will work. Because the discussion is depersonalised it helps define the business process in the context of the values that the family holds dear.

The combination of Constitution and some form of Family Council, where family members can talk about succession and ownership issues openly, jointly ensure that the family are creating the rules by which succession will take place for them. There are guidelines as to what works better but it is no cookie-cutter approach.  The process has to work both for the family and the business.

So what does the MD need to do?

The beauty of running a family business is that the succession issue is a known event which can be planned for at a time of your choosing, not at the whim of markets or competitors.

Now that you have started the process for handing over, you are now able to call the shots as to who, when and how, with the family’s support and understanding. This process takes time, particularly if the next generation have some development gaps that will need time to fill. What the MD does after handing over is a key issue to deal with too. There may be a role post-handover as a mentor or to develop new products/markets. Coaching with a neutral outsider is key to opening up thoughts and expectations in the family. MDs, in our experience, value the space and focus that executive coaching provides as s/he contemplates a compelling future and thinks through the issues involved in the transition.

Stephen Cowburn is a specialist coach and consultant with the Family Business Unit working with families to coach and facilitate them through their succession planning issues. Stephen can be contacted on 020 8946 8734 or via email at stephen.cowburn@familybusinessunit.com.