Succession of Family Business is defined as the framework of transitioning the management and the ownership of the business enterprise to the next generation of family members. An efficiently and effectively managed integration keeping in view the business and sentiments of family will determine the success of the process. A properly executed business succession plan will seek to alleviate impediments by setting up a smooth transition between generations.
The scope of new roles, equity stake, assets, etc can all form part of the transition process. The roles and ownership will need clear demarcation to avoid tussles when relationships go sour. Many a time, experts appointed to manage the process focus more on the technical component and the family sentiment component is totally left out.
The Benefits of Family Business
Brothers fighting for control, children dragging parents to court and family factions in a never-ending legal dispute are all hot stories shown by the media. Although these challenges do exist, there are numerous advantages of starting, managing, or transitioning businesses across generations.
The benefits of being a family in business will vary depending on the makeup and size of the family as well as its stage of evolution (i.e., first, second, or third generation). Family members are generally more loyal to each other and to the business. They are more committed to its success and are more passionate about what the business stands for. Families in business have an opportunity to create legacy that brings with it a sense of accomplishment and a strong sense of pride. Building on the efforts of multiple generations is a strong motivator for subsequent generations to carry it to new heights in the name of the family. Multigenerational family businesses have family members with different levels of education, interests and aspirations thus enabling access to a large pool of talent within the family that tend to be more loyal and more committed to the business. Family members are also more flexible in working within different functional areas and trying different tasks in the absence of concerned persons. This helps build more capability within. Key employees appreciate and enjoy the unique work environment created by a family in business. The workplace tends to be less formal, more hands on, and more personal. Key employees are treated like family members and develop a strong bond over time.
Family businesses are less driven by short-term financial results and are prepared to sacrifice short-term gains for the achievement of longer-term goals. This allows the businesses to align the deployment of resources with their strategic objectives. This long-term approach to investing is often referred to as “patient capital.” Family business owners can teach and cascade business and personal values to the next generation of family managers/owners. Family members take pride in upholding these family values and build them into their day-to-day work and personal activities and reflect in the work culture in the organization. Family business owners provide family members with career opportunities in the business and thus the platform can be a great training ground for family members who aspire to pursue business careers elsewhere or within the family business. Family members are also provided with the opportunity to become managers and owners of the family business. The opportunity to work with family members to pursue common business goals can be a very rewarding experience. Years of bonding among family members can create a strong sense of belonging and interdependency. Effective management of intra-family relationships helps in maintaining and even strengthening long-term harmony within the family and business. Successful family ventures generally pay above market salaries, to capable experts from within the family, which is considered as one of the pluses of working there.
The Challenges of Family Businesses
Resolving conflicts among family members, formulating succession plans, and developing a strategic vision across generations seem to be the most common challenges. Many factors considered family business benefits can quickly turn into liabilities or roadblocks to the business and can spoil relationships within the family if not effectively managed. As the family business moves along generations, more family members get involved in the business.
Some of the more common challenges include Conflicting goals/values that are often not clearly expressed out of hesitation. Conflicting personalities – Everyone is different. Varied personalities can often cause rifts within siblings and other family members. If these are not mended on time, they can destroy family and business harmony, and in some cases, destroy the business. The work ethics differ as the business moves through generations as newer generations may be less prepared or less passionate. This can cause considerable stress and disaccord between the generations and can also unnecessarily delay the transition of both management and ownership. The other extreme can be when each family member expecting a leadership role which is not pragmatic and could hamper business operations. Related to this is compensation as each one expects to be paid the best salaries irrespective of qualifications and experience. Misuse of funds for personal goals is also common. Generally, founders may not be well-versed at articulating and sharing their vision for the family business which impacts business, succession, and financial planning. The multi-generation management often blurs the owner’s original vision making the entity may move like a directionless horse.
The Chances of Success
Successful transition of businesses across generations, thus giving steady source of income for the family, is every founder’s dream but the reality is a stark contrast. As per Family Firm Institute, 70% of family-owned businesses globally are sold before the second generation gets a chance to take over and only 10% of family businesses survive till the third generation. The transition of a business from one generation to the next is usually a tedious process, but it can be planned for, well in advance, and executed in a defined sequence. History has witnessed families struggling through transitions, while at the same time; a structured approach has helped an amicable succession plan to be formulated for some families. Succession planning has taken centre stage in multigenerational planning in the last few years.
Succession planning is often undermined but remains a critical process that must be followed by family business leaders to ensure business continuity for multiple generations. In simple terms, succession planning requires the steady process of identifying and training candidates to fill up key leadership roles in a company for the near future. For many family-run companies, this implies choosing an heir from the next generation to take over the venture. A well-thought-out succession plan ensures a seamless and hassle-free transition of power and management, in unforeseen circumstances such as illness or death. It also instils confidence in stakeholders that the company will function smoothly even during and after handover of charge. Succession planning is a framework that takes time to fall in place and is spread out over years rather than a swift transfer of power. Several families make the mistake of not choosing and grooming a capable successor while they are in office, which eventually leads to hasty appointment of a successor without much thought. Such impulsive transitions often lead to underperformance leading to major organization reshuffles.
The Ideal Time to Start
Start when you don’t need it. Succession planning is like an insurance cover. Families should consider starting the succession process when you have next-generation family members working full-time in the business in management positions.
These impediments can be ironed out with well thought out, structured succession plans, which can enable grooming future leaders well ahead of time. A company’s revenues and reputation are both at stake during a transition period, ergo, structured plans ensure that there is minimal tumult when a change of guard takes place. Like all businesses, family-owned businesses also face setbacks and challenges. The differentiator is the additional task of managing personal relationships and company CEOs often find themselves between business and family concerns. In large multigenerational families, succession can often become a sensitive subject and it can lead to family disputes, never-ending court battles, and succession challenges that gnaw away business profits and the family’s reputation.
Hence, good governance practices are essential, as they open formal lines of communication between family members quashing away possibilities of any discontent. Setting up family discussions, shareholder meetings, and laying down family guidelines are all part of creating good frameworks that can support the process of succession planning. Good governance decisions can unlock the true potential of a family business; on the other hand, poor governance can retrograde a family, push into into long-drawn conflicts and potential wind-up. Succession planning also involves identifying family members who may not want to play an active role in business operations. It is also possible that some members may not even want ownership as they may be planning an altogether different venture. Such people are reluctant to take over reins of the family business, as was the practice in olden days. Family-business owners need to identify such members and ensure smooth exits to avoid any succession planning-related complications.
Family Offices have extensive experience in succession & estate planning and have a good understanding of how a business family functions. Family offices generally have qualified, experienced investment bankers, lawyers, and financial experts that can steer through the right succession & estate planning process as deemed appropriate for the business.
Loopholes in the Current Frameworks
What are the loopholes in family businesses and the succession process? Surely, the owners of family businesses cannot be held solely responsible for these succession failures. Professional advisers to family-owned and family-operated businesses are also equally responsible for the outcome experienced by family businesses at succession. Over emphasis on the legal component of succession (e.g., tax minimization, estate freezes, family trusts, etc.) with little attention to the human component (family communication, dynamics, expectations, strengths, weaknesses, etc.) of the succession process. The “human” or “non-legal” component of the family business succession process can be termed as “family component.” The existing study and research on family business continues to promote the need to address the family component in the succession process. It is recommended that a significant or major portion of the succession framework focus on managing the family expectations and the family dynamics. This is achieved by strictly integrating the family into the process. Professional advisers tend to be more comfortable working through the legal components rather than the family components of the family business succession process. Even though it may be viewed as more challenging, it is the people component that is the most important because people decide whether the succession looks sensible or not. It is the inability to effectively manage the family component that has proven to be the major stumbling block for family businesses in the succession process. Professional advisers to family businesses need to incorporate human elements into their advisory services to assist family business owners and their successors in managing the human side of things.
Conclusion
Establishing clarity in the transfer of charge and wealth, key accountabilities in a complex matrix structure of large family businesses takes time. One must contemplate this at the right time and in a phased manner to keep the flow crystal clear. Succession planning should be a well-thought tool to protect wealth, reputation, and interests of people. To reap full benefits, it is imperative to have a sound succession plan that brings transparency and hastens flourishing more than ever. The ‘family component’, a unique family business characteristic brings both impediments and opportunities. Family businesses must commit to managing the family components, and the first step is thinking beyond one’s lifetime.