Buckle up for a succession collision course

As family business owners age without considering their handover, the chance of a smooth succession plummets. But two thirds are making the fatal mistake of ignoring the issue.

In the next 10 years, family businesses around Australia will undergo a massive disruption. Expect a wave of consolidations, trade sales or businesses just closing down. The family business sector could be a lot smaller a decade from now.

Two forces are at work here: demographics and an apparent lack of succession planning.

According to MGI, over a third (38 per cent) of family business owners are in the 50-59 age bracket and 25 per cent are over the age of 65. The oldest is 88. That means over the next 10 years, we can expect to see a rush to the gates as family business owners retire, either passing off their business to their offspring or selling it.

The problem is few family businesses have any succession planning. According to the latest MGI family business survey, 75 per cent of family businesses had not agreed to proposed succession plans, only 42 per cent said the incumbents and successors had a shared vision for the business, and 41 per cent said it would not be feasible to implement leadership succession in the family business.

While some of it might be due to the fact that their children are not that keen to go into the family business – 58 per cent said the younger generation were not as interested in actively managing the business as the older generation (Thanks but no thanks – NextGen is branching out, October 17). MGI also revealed that 37 per cent said letting go of leadership and control was one of the most critical issues facing the business. All this suggests that succession planning presents unique psychological issues confronting family businesses, something we looked at last week (Avoiding a psychological thriller, November 6). 

Some will survive. Brown Brothers, for example, is thriving despite losing Peter Brown to a motorcycle accident in November 2005. His daughters Eliza and Angela and son Nicholas are now building the company. But others won’t make it.

Doug Munro, who runs the Munro Group and is an accredited FBA adviser specialising in HR and recruitment, says the upheaval in the family business sector is an inevitability, not a maybe.

“It’s going to be a major issue and not enough organisations are planning,” Munro says. “It will be a problem when you look at the mass of it and the value of the businesses.”

“We do a lot of recruitment and finding a CEO, CFO, COO or a managing director for a family business is really difficult because you have to consider the cultural match as well as experience. Multiply that out by thousands of businesses and you will have a problem.”

Why aren’t family businesses planning for succession? Simple answer really: it’s hard work and who has the time? But it can be done by following some key steps.

The fear of the business owner facing the abyss is only one problem. In making a smooth transition to the next generation, there needs to be an alignment of family interests.

It’s a process that raises a number of questions: is the position open only to family members? If it isn’t, what sort of criteria is the family looking at to bring in an outsider? If it’s only open to qualified family members, what exactly do they require to ‘qualify’? What role will directors and the family council play? Will the business be using external consultants like a recruitment agency or human resources specialists? What happens when the interest of one family member is not aligned with another family member, say, if there has been a divorce? How much money does the old leader need to be financially secure? What’s the time frame? And is there a plan B if Murphy comes calling?

The first thing family business owners need to do is determine the importance of continued family involvement in leadership and ownership of the company. The option of bringing in professional management should also be looked at as would the goals of the next generation of leaders, both personal and professional.

A time frame needs to be established and there has to be a transition period dealing with a range of issues including the successor’s title and role, the reporting lines, remuneration and entitlements and office location. The focus here has to be on transferring quantifiable knowledge and unquantifiable nous from the business owner to the successor. That means they need a good working relationship. It also requires coaching, teaching, behavioural change and managing egos. It also needs milestones and process stages.

Announcement of the successor has to be made as soon as possible to the unsuccessful candidates, family members working in the business, the wider family, all staff, suppliers and customers, relevant trade and industry associations and appropriate media.

There needs to be a handover ceremony where the outgoing leader is acknowledged and where it is made clear that the business and the family welcomes the successor into the fold. There should also be a period of time where the outgoing leader remains as a mentor.

Succession is a challenging process because it requires business owners to consider all options.

And finally, it is important not to assume that the new and younger leader will be a clone of the old one. The new leader is not just filling their shoes, he or she is using what the previous owner built up to take the business further. As Isaac Newton famously said, “If I have seen a little further it is by standing on the shoulders of giants."

That’s good succession planning.