Succession is an ongoing topic of interest within family businesses. After all, who continues the life’s work of parent, grandparent or great-grandparent?
A family business is a business that is passed down from parent to child and thus remains within the family for generations. This romanticized image of transfer is a beautiful principle at first glance, but it must be done with care. Even if it should take place at all. Because transfer within the family is not a given. Not only the family circumstances must be considered – in case a transfer is at issue – but also the company itself, the market in which it operates and its financial position. A good analysis of this gives a picture of the competitive strength and the possibilities for the future. For this purpose, a company can, for example, use a SWOT analysis. Often, however, when the issue of “succession” arises, the focus is exclusively on the family and decisions are made primarily on an emotional basis.
Strategic Analysis
In order to address the issue in a balanced way, a strategic business analysis will first have to take place. Then it will become clear whether the company can continue to exist independently and whether it makes sense to maintain family business status because it offers added value. And that added value concerns more than emotional motivations such as “pride” and “wanting to continue a family tradition. More important is whether the company has a right to exist in the future and can at least maintain its market position. Emotions are a part of family businesses. At an important moment like succession, it pays to test whether the emotions are real and what in reality are the opportunities and threats for the company. For example, the business analysis may show that the company’s financial or market position is not strong enough to transfer it to the next generation or that it makes sense to sell a part of the business. When a company does not have a clear picture of its position and does not know in which areas the organization needs to be improved, a clear mission and strategy are also often lacking, leaving any next generation in the dark.
Is the next generation capable enough?
If the analysis shows that the company has a sufficiently strong position for independent survival and succession within the family is a possibility, entirely different challenges present themselves. For example, the fact that son or daughter is not capable, or because appointing or not appointing a family member as head of the company may cause mutual conflicts. And who is the most suitable candidate for succession? This question must also be answered within the family.
The issue of succession is and remains a complex one within a family business. Both on the emotional and the rational level. For example, an owner/DGA of a family business may have difficulty relinquishing his position because it also requires him to relinquish his position of power, control and status. Also, not wanting to hurt family members may influence the choice to delay decision-making. And succession is further complicated when no new family generation is available. Socio-demographic developments that mean the number of children per family has declined over the decades and young people today are far from all wanting to work full-time, mean that succession within the family is no longer always a given.
Succession within the family
There can be several reasons for choosing to appoint a successor within a family business: Death, Disability, Retirement or Divorce, in short OASE. When succession occurs within the family, it is obviously necessary to determine who from the next generation will take over the business. Often this is a process that has already been set in motion years ago, and often the future “crown prince” or “crown princess” has been working in their own business for some time. Sometimes also – and this is advisable – the potential successor from the family works in an external organization to gain experience outside the door. This ensures that the company will later still bring in “fresh blood,” and the family member in question gets the chance to learn real lessons that he or she is often spared in the own family business. Be that as it may, it must be clear that the potential successor has a desire to take over the business and he or she must also be suitable for it. By having the candidate in question tested in a timely manner for competencies, personality, motivation, and so on, it becomes clear whether he or she meets the prerequisites. If the family member in question still lacks skills or competencies, time should be taken for training and guidance. Sometimes it is also advisable – once the succession has taken place – to put an external administrator or professional next to the succeeding family member for a longer period of time. In this way, the missing competencies are compensated for and the family member at the helm has the opportunity to learn from the knowledge and experience of an external.
External director: right man, right place
Succession, by the way, does not always have to be filled with your own family members. Sometimes it is desirable or even necessary to have the company run entirely by an external director. For example, to bridge a period before the next generation is able to take the helm, to supplement the competencies of the available family members, or because there is simply no suitable next generation available. Incidentally, the majority of family businesses do not consider it necessary for succession to be carried out by family members. More value is placed on “the right man in the right place. This is partly due to the fact that family businesses also realize that when succession within the family is not possible, this does not have to mean the end of the family business. After all, control can be arranged in various ways: through share ownership, through a Foundation Trust Office (STAK) or by having family members sit on the Supervisory Board. In addition, among potential external successors, the family business values entrepreneurship and affinity with the family values at least as much as the education or experience of the successor. The idea that external directors feel less connected to the family business often proves unfounded in practice.
A prerequisite is that the right candidate is selected. Family businesses often face a choice in this regard. Either they can choose a director who fits in seamlessly with the culture and vision of the family but is not the best on the list in terms of management experience. Or they can choose a director who has more than earned his spurs in the business world, but who does not have sufficient affinity with the family business. The trick is to keep looking for a candidate who is both experienced and sufficiently in touch with the family business.
Letting go: Distancing must be done
A director or owner of a business does not always have the opportunity to carefully plan the succession. However, such planning is necessary. Family businesses should keep in mind that arranging succession properly is a process that takes years. The earlier one thinks about this and the better the business plan, vision and strategy are put on paper, the easier the transfer will be. It is then up to the director who is leaving the family business to create the right conditions for the next generation by distancing himself or herself from it and, at most, taking on an advisory role. He or she should no longer be involved in day-to-day management. Only then will the new generation have room to take up its own position. Too often, a retiring director still finds it difficult to let go of control. It is a trap that many family businesses fall into. But distancing oneself is necessary.
Source: Clifton Finance 2015