Succession Planning for Family Businesses

12 May 2021

Family businesses come in all sorts of guises, with varying internal challenges and external market forces. But one thing they all have in common is that eventually someone else will need to take the reins. While it’s possible that the business could be sold, most know with certainty that succession will be passing to the next generation. So, with such inevitability why is this a subject that often isn’t discussed until the eleventh hour?  

Succession isn’t an easy discussion in non-family businesses either. Interpersonal dynamics and conflicting future aspirations are a feature of every business, and we see our clients in every sector regularly leaving transition conversations to the last minute. What’s even harder to navigate for a family business is the matter of balancing the needs of all the family members with the needs of the business and this can throw up significant challenges. Let’s also not forget that the patriarch or matriarch may not feel ready to discuss relinquishing control, and in a family dynamic that’s a harder conversation to have than it is when the board and CEO aren’t related.  There’s often an overwhelming feeling of responsibility for the legacy (some of our clients are fifth and sixth generation). Senior family members may not want to relinquish that responsibility, while others view it as a burden that they want to delay passing on to their children for as long as possible.  

Encouraging open and honest debate around succession is crucial as delaying the discussion to keep the peace can be detrimentalOn-going constructive challenge protects business families from destructive conflict, especially in transition times. Healthy debate is essential, but understandably some find it incredibly uncomfortable. Family business advisors should encourage family members to share what they want, where they see that they can add value, and where they absolutely don’t want to be involved.   

Early discussions are not just about the outgoing leader knowing when it’s time to go and having a period to prepare for this. The next generation also needs time. To build the skills the business needs them to have to take the helm, and if the last year has shown us anything, what all businesses need going forward will be different from years gone by. The AAB Family Business Team held a virtual round table event last month to discuss succession planning and it’s clear that the next generation’s voices are being heard now more than ever, which is great to see  

That said, while some see it as a birth right, it’s not necessarily the right decision for the family business that the next generation succeeds the previous one. We see this increasingly with clients: third party senior management being brought in, either until the next generation has earned its stripes, or on a permanent basis, because the upcoming family doesn’t have the desire or the skillset.   

Lastly, effective communication doesn’t just happen. There’s often a misconception that family businesses can conduct their business affairs in the same informal way they do their personal conversations. Family businesses need to be focused on addressing external challenges rather than dealing with internal conflicts if they want to thrive, and this requires an effective governance structure.  What that means can vary between families but setting out rules of engagement in a family charter or constitution can be incredibly helpful. A family constitution can cover such areas as family involvement in the board and what the responsibilities are; employment of family and non-family members; and succession management.  

If these areas are considered, agreed, and integrated into a clear succession plan, then whoever takes the reins of the family business next will be well placed to continue to drive forward on the road to success.  

If you would like any further information please contact Lyn Calder or your usual AAB contact. 

Find out more about our family business team here

 

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