Succession planning is the (not so) secret weapon that allows the business to continue rather than come to a screeching halt when changes occur in the executive suite. Entrepreneurs often mistakenly assume that finding a successor is only for when the business owner dies, but your business is not a monarchy, and death isn’t the only “way out”.
There are various reasons that a business leader may be retiring, a disability or the sale of the business. In simple terms, “succession” is simply the action of inheriting a title or office. Depending on the company structure, this process can differ greatly. It may involve business partners, employees, external candidates or family members. In all avenues, the goal should be a smooth transition that maintains the business’s stability and success.
But for the purposes of this article, we will only be looking at succession planning within a family-owned business.
Dynamics of a Family Business
The dynamics of a family business are nuanced. Academic literature has emphasised that although these businesses play a crucial role in building the economy, especially in developing countries such as South Africa, the structure within these businesses sometimes makes it hard to define, except for the broad definition of at least one family member being involved with the management of the company. This “family” is usually relatives of the founder.
Succession in this context is usually seen as the action of passing your business to your heir. The heir can be a sibling, a child or a grandchild ot the member involved in the management of the company.
While it is good and encouraging to keep a business “in the family”, it can also be a bad business move in the long term if the person who is taking over isn’t the best future leader. This is what makes succession in family business so difficult: having a family member as successor shouldn’t be an emotional choice but one made with forethought and consideration for the business’s continued existence. As a parent, it might be great to have your child inherit the business and continue your legacy, but that person might not be as invested in your business as you are and may place the other employees’ livelihoods at risk.
Factors that should be considered in choosing a business successor should be interest or aptitude, characteristics of a good leader and experience (even if acquired at a different business). How many times have you heard that someone expected their child, usually a son, to take over a business, yet the person isn’t in the least bit interested in that?
Yet, it is worth noting that continuing business with a multi-generational family-owned business has its advantages. Clients in particular benefit from long-standing relationships that last beyond a founder’s tenure.
How to Address Succession Planning in Your Family Business
Succession is a topic that can be filled with a lot of emotions. Yes, it means planning for the retirement of a loved one, but it can also mean that they might not be around anymore when the successor steps into their seat. But it must be addressed, as many legal and technical aspects need to be addressed.
According to PwC, only about 30 percent of family businesses survive into a second generation. The reality is that the health and longevity of a family business depend on careful succession planning that is a robust strategy with clear communication about what the process entails and the outcome expected. In spite of leadership transitions, employees should have job security, and clients should rest easy that they can expect “business as usual”.
Having an advisor is key as they help you during this process. Not only are they able to help future leaders see the gaps that they need to develop new skills for, but they also manage to guide the current leaders in how to approach the transition.
During the transition period, all personal and business aspects should be taken into consideration. This must also include any taxes that might be applicable, or even jealousy that might arise among non-family employees or family members.
Six Tips for Current Leaders When Thinking about Succession
When planning for the future, it is imperative to think about it strategically. LGA, an American-based advisory company, provides the following advice:
1. Make No Assumptions
A huge mistake that any entrepreneur can make is to assume that their child or grandchildren want to step into their position. It is okay to recognise that your family member might have other goals and interests. Therefore, have an honest conversation without becoming angry.
2. Evaluate All Viable Candidates
Keeping the business in the family, whether for the sake of wealth or legacy, might be preferable, but it isn’t necessarily the way to go. With so many factors at play, future-proofing your business by considering external candidates, or at the very least non-family successors, is worth a try. In some cases, you might find this to be the better option.
3. Focus on Skills, Values, and Temperament
Emotional intelligence and technical abilities are equally important in business. Identify the person who demonstrates a cool head in stressful situations, who lives by company values and has good communication and technical skills.
4. Create Opportunities to Lead
Identifying the right successor shouldn’t be considered a birthright – that’s the quickest way to ruin a successful company when handed to someone just because they share your last name. Create opportunities for future leaders to show their abilities. Based on this, you will have information that empowers your decisions.
5. Rotate Roles for a Broader Perspective
Cross-functional teams are not only useful in today’s economic environment, but also a great way for potential successors to gain a broader perspective across departments such as finance, operations, and client service. This exposure helps them understand how all parts of the business connect, and turning them into a well-rounded successor can help them make better strategic decisions.
6. Communicate your Decision Clearly
Your decision should be clearly communicated as soon as possible. Approach the conversation with empathy and explain to the rest of the stakeholders what your reasoning is, what the timeline looks like and what any other details, such as compensation details, might entail. Transparency is vital.
Succession is an unavoidable part of business if you intend to have your business continue to grow and prosper beyond your retirement or death. But with careful planning, your family-owned enterprise can navigate these seas.
