Sun, Nov

The line of succession

The line of succession

Do you know who will take over the family business when it's time for you to wave goodbye? Unless you have a plan in place you might find yourself dethroned withoutthe due level of financial support.

Who is going to succeed you? It's not a question any of us like to contemplate. It's one of the things that drove Shakespeare's King Lear mad. He banished one daughter who loved him (but wouldn't flatter him) and divided his land between the other two daughters who, for all their toadying, didn't love him at all and chucked him out. Most royal successions are simplified because one monarch has to die so another can take over. And the details of such a succession - being a matter of national importance - are worked out well in advance even when, as in 1714, the queen (Anne, last of the Stuarts) is succeeded by her second cousin (George I of Hanover). The rest of us are less organised and have given the issue less consideration than the royals. More than half of private businesses in the UK don't have a formal succession plan. With 75% of private companies being family owned, the assumption is often that the heir will step up. Yet international statistics show this doesn't happen as often as we might think: in Canada, for example, which has the same proportion of family businesses as the UK, 37% of companies were sold to someone who didn't belong to the family. And, as a rule of thumb, 70% of family businesses do not survive into the second generation and 90% do not last into a third generation. Even if the succession you envisage is as straightforward as sole proprietor handing over to a sole proprietor from the next generation, it is best to have a plan. Without one, your sudden incapacity or a natural disaster could trigger a rushed, panicky transition or leave your successor unable to complete all the technicalities in the time needed to acquire the business. Look at it this way, succession planning is as essential as a will. But a good succession plan will also identify whether there is anybody in the business who should succeed by dint of ability, performance, character or blood. If you start to plan the succession and decide that your potential successors are simply not up to scratch, the onus is on you to recruit someone you could have faith in - or start planning to sell the business. Deferring serious consideration of succession planning could destroy the business and, depending on the financial arrangements, wreck your retirement. So here are a few issues to consider.

1.Ask not what you can do for your company,
ask what your company can do for you. When you consider transferring the business, start with a realistic assessment of what you hope to get out of it.Have you built your retirement plans on the idea that you'll get a lump sum when you sell? Do you expect to draw some continuing dividend from the business? And how flexible can you be on finance? In Canada, where the government has studied the economic risk posed by small to medium sized enterprises mismanaging succession planning, 31% of successions involved the previous owner making a personal loan to the new owners. Sidney Bobb, chairman of the British Association of Print and Communications (BAPC), says: "Many transfers of business in our industry involve the owner selling to a management buyout team. Typically, these buyouts pay a lump sum and make up the balance from profits in years to come. So if you are going to get the full value from selling your business, you need to groom your top managers to make sure they can run the business."

2.Get the Formalities right
A good succession plan should state how the company is owned at the moment, identify the new leader or leaders (and suggest how they might be trained to better fulfil their roles), define the roles of other key players in the business during transition, specify the process by which stakes in the business are bought or sold, address any issues raised by tax, corporate law, or finance, explore the current leader or leaders retirement, set out a procedure for monitoring the transition (and resolving disputes) and define a timetable.

3.Know how much the business is worth
Without an accepted, accurate independent evaluation, any succession plan will fail because it will be extremely difficult, in most cases, for the successor to finance the deal unless they can impress potential financiers with projections of future profits. That valuation should include an estimate of how dependent the business is on your goodwill. Timing the valuation is crucial - that's why the timetable is so important. If you're not handing over for five years - especially with the economy as volatile as it is now - you might as well wait. But don't leave it to the last minute. The valuation provides the foundation for your successors to define a viable business plan.

 4.Don't make the usual excuses
The most common reasons for not having a succession plan are: it is too early to plan a succession because we're not retiring yet and we're too busy. But life is, John Lennon once said, something that happens to us while we're busy making other plans. And retirement - or succession - may come on us unplanned. In family businesses, even a divorce can change the parameters within which a company operates. With orders and cashflow such urgent priorities, succession planning might seem a waste of time and effort. But recessions, by placing severe strains on a business and its leaders, can make the issue suddenly, nastily pertinent.

5.Talk it over
Don't be tempted to write your own succession plan and shoulder all the responsibility for making it work. Studies show that successions where the plan is discussed and debated by all parties are more likely to generate the expected returns. These discussions are a useful opportunity for all parties to air concerns, priorities and strategies creating a sense of shared responsibility. In this way, you can find out whether your successors share your vision of the company. In a wider, more open discussion, they may offer insights that could help the business now. Or you may conclude, after all the talking, that the business's goals are not what you once thought they were. That could redefine your strategy even before you hand over the business.

6.Use succession plans to think deeper about your staff
A formal plan will normally focus on the transfer of ownership or the replacement of senior executives. But your business will depend on leaders at all levels. And by thoroughly examining the business, you may identify other key staff and consider how - if part of the sum you are paid for the company is related to future trading - they can be persuaded to stay with the business.

7.Give yourself time
KPMG's advice to entrepreneurs is that creating a succession plan can take 12-18 months, with an orderly transition taking three to five years. KPMG may be in the consultancy business, but it has a point when it says an external adviser "can keep the ball rolling when day-to-day business issues threaten to interfere."

8.Pick the right leaders
Ted Clark, executive director of the Centre For Family Business at America's Northwestern University, says businesses should ask early on: "Who is the successor?" This is especially pertinent in family businesses where, Clark suggests, this process can be important in addressing the issue of entitlement: "You have to instil in the next generation that they have to earn what they get". As owners, it is easy to overestimate or underestimate the competence of potential leaders (especially if they are within the family). An outside adviser might inject some objectivity into the process. Picking the wrong inside candidate could destroy the business and endanger your retirement plans. One study of American companies found that 40% of new CEOs fail within 18 months, so do everything you can to be sure you gave made the right choice.

9.Let go
You've sold the business, so move on. There may be ceremonial occasions when your presence is required - and you should always be willing to offer advice when asked - but don't inhibit the new management. In the Canadian survey of SMEs, 24% identified persuading the previous owner to let go of the reins as the biggest obstacle to a successful succession. We all like to think we could move on when the time comes but would we? The great Bill Shankly, who built up Liverpool to become one of Europe's biggest football clubs, eventually had to be effectively banned from the club because, after his retirement, he insisted on turning up at training sessions. Ironically, local rivals Everton were happy for Shanks to drop in on training, even though he had once quipped: "If Everton were playing at the bottom of my garden, I'd draw the curtains."

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