Family businesses are the most prevalent form of business system globally. As the family business structure dominates the global economic map, their economic impact is enormous. In the UK, family owned businesses make up two thirds of the economic landscape – a vital component of the economy. They employ millions of people, generate more than a quarter of the UK’s annual GDP, and contributing over 20% of its total tax revenues each year.
Even for the most successful entrepreneurs, one key decision poses a complex challenge and that’s the question of succession. Successful succession seriously addresses the question of continuity and how to pass on the business in better shape than it was inherited. Generational succession in the family business has become increasingly complex, both from a legal and financial perspective. Family firms survive from one generation to the next by taking a long-term, sustainable and structured outlook. They must respect and utilise the experience of those who have built the business, while adapting to stay relevant to the modern, constantly-shifting world.
As families grow and change, so does their relationship with the business. That’s why setting up plans and processes for the family’s involvement with the business is key. You may think it’s too early or complicated to have formal structures in place, but it can help you avoid conflict in the future.
What makes planning more complex in the case of the family business is the overlap between family and business. The many practical business sides to successful succession include tax implications, assets transfers, family trusts, buy-sell agreements and wealth management. These business issues, whilst complex, are often more easily addressed than the family issues of communication, differing expectations, family values, individual competencies and family dynamics. Seeking guidance from your accountant at an early stage can help provide clarity on some of the more complex issues, as would engaging a solicitor for legal advice. A family constitution could be a useful formal document of the succession planning process, which can be adapted as needed.
Very often the key issue to be considered in succession concerns the suitability of any particular family member to take over the business. Do they have the skills, experience or even interest? Research shows that succession is successful when there are clear and consistent succession intentions communicated and documented between family members.
Developing a family forum to deal with any potential conflict through training, education and mentoring could help the family business survive and thrive. This would be a prudent step and something that should be not just a one-off event but possibly set up as an annual or biannual meeting. There would also be benefits in including not just those family members involved in the business, but also other key management personnel. Family members who are not currently involved in the business may also bring a valuable alternative perspective.
Having a clear and transparent plan for the future ensures successful succession where all members of the family are aware of the role they’ll play in the future, be it inside or outside the family business. The view of succession as something that happens when a business founder makes the decision to retire is the source of many of the problems outlined above. If it is viewed as a key part of planning throughout the life of the business, the business and family bonds will stand a much better chance of thriving and enduring.