Succession planning could be the best Christmas gift for a business
No doubt the iphone X, Nintendo Switch and Lego sets will be on many kids’ Santa lists this year. A more generous gift which you could be considering giving them might be the family business.
But without the right planning, it could be a very costly affair to fail to have the right succession plan in place. It is well documented that only about a third of family businesses are successfully transferred to the second generation and that figure goes down to 10% for third generation businesses.
Passing the business down to the next generation is commonly referred to as succession planning and it’s never too early to prepare for this.
Succession planning is effectively ensuring leadership succession, ensuring there is a capable management team in place to continue the growth of the business, as well as ownership succession, enabling owners to extract value from the business on their exit.
So, how do you start a succession plan? First and foremost, the owner-manager needs to understand what they want to achieve in the company. Preparing a business plan gives the company a clear path for growth.
The next step is looking at the right tools to enable the company in achieving those goals. It’s look- ing at issues including production lines, stock management, cash flow arrangements and financing and ensuring they are fit for purpose. It’s also considering the processes in place and seeing how they can be improved.
Drilling down into more detail, making the business more valuable and ready for an owner exit means delivering on good corporate governance.
Regular minuted board meetings mean there is clarity on decision-making. Documenting business processes so they don’t exist only in the exiting owner’s mind provide certainty to the management team.
We often deal with several shareholder disputes and their various roles can be confused. As an owner-manager there are several hats to wear — shareholder, director and employee.
As employee, you need to fulfil your role and responsibilities, as director, you must act in the best interests of the company and adhere to director duties and as shareholder, focus is on maximising the value of your shares.
Documenting the decision-making process and the various roles in a shareholders’ agreement and employment contracts for the management team helps ensure the right decisions are made for the company.
A shareholders’ agreement can provide the clear route to exit for the owner-manager and employ- ment contracts can be a useful tool to both incentivise management (benefits, pensions and bonuses) and provide company protections (non-compete clause and IP protection).
Other incentivisation tools can be used such as options over shares, giving management a stake in the business and kick-starting the exit of the owner.
To have the right management team, you need the right skills balance, and it is always best to consider where family members are best suited, but there may be gaps and therefore the need for external expertise.
This can ensure a successful management team is in place, offer a third-party view of the family business, but also provide an option for potential sale by way of management buyout.
As the new year dawns it is worth having a look at how your business can benefit from a clear succession plan.
Family planning: James Murdoch succeeded his tycoon father Rupert (left) as CEO of media giant 21st Century Fox in 2015
Byciaralagan, Corporatepartner, Tughans @tughans_news