5 Ways to Prepare Your Business for Succession
F.S. (Rick) Hirtle, FCA, Partner
Grainews
February 2008
Succession within family businesses has been a hot topic in the past few years, and it will be more important than ever in the years to come. Based on current demographics, there will be an unprecedented turnover in family business leadership over the next 10 to 15 years as baby boomers retire. Some business owners will choose to sell their business, while others will pass their business on to the next generation. No matter what option you choose, it’s never too early to increase your chances of a successful transition. To achieve this, it helps to have both an effective family business and harmonious business family. The following points can help you prepare your business for a smooth, trouble-free transition.
1. Professionalize Your Business
Professionalizing your business means harnessing the advantages family businesses enjoy, while adding professional business practices to help manage the interaction of family issues within the business. Part of this process will be to add structure to the organization’s business practices.
As an example, a contentious issue that many family businesses face is the employment of family members. Where policies don’t exist, decisions on who will be employed in the business and who won’t can become arbitrary. Unchecked, this could result in having family members fill roles they aren’t able to handle, and can make it more difficult to keep key non-family employees.
However, if specific policies are set before a family member is asked to participate, this will make future decisions seem less arbitrary. Also, all members of the family will know where they stand, and what they must do before joining. Different families will set different policies, so the fact that policies have been discussed and set is often more important than the policies themselves.
2. Draw on Family Business Strengths
Family businesses draw upon a vast pool of strengths to create a successful business that can endure through good and bad times. Here are a few of the typical strengths most successful family businesses have in common.
Commitment - Family business owners are passionate about their business, and this passion translates into dedication and commitment, which extends to all the family members who come to have a stake in the success of the business. Family enthusiasm can spread to non-family members too, as these people care more about their role and feel they are part of a team.
Knowledge - Family businesses often have technological or commercial know-how not possessed by their competitors. In addition, they are better at keeping this special know-how within the business.
Flexibility in work, time, and money - Many family businesses can perform the work first, and figure out how they’ll be paid for their work later. This flexibility leads to a competitive advantage.
A stable culture - Family businesses tend to be more stable when compared to other businesses. The leader has usually been in place for many years, along with other key members of the management team. Relationships within the company usually have ample time to develop, so everybody knows how things are done. But this advantage can become a disadvantage when a business becomes set in its ways.
Reliability and pride - Family businesses are generally very solid and reliable organizations, a fact recognized by the marketplace. Many customers prefer doing business with a company that has been established for a long time, and they appreciate dealing with management and staff that is not constantly changing.
3. Mitigate Family Business Weaknesses
Family businesses also share a number of common weaknesses. Unfortunately, these weaknesses are often overlooked. The key here will be to recognize potential weaknesses and keep these issues in check.
Intrusion of emotional family issues - Family values can add a great deal of value to a business. However, in addition to the positive aspects, it is difficult to keep non-business family issues from creeping into the business. This problem often comes to a head during the succession process, but it can also affect the day-to-day operations of the business.
Specific business challenges - The business challenges that particularly affect family businesses include modernizing outdated skills and managing transitions. The skills possessed by a family business are quite often a product of history. As a result of developments in technology or a change in the marketplace, these skills can quickly become obsolete. We tend to think of drastic changes in areas such as computer technology as being the major risk, but problems can arise due to more subtle changes over time.
Succession - Any change in leadership is an important and difficult process that must be carefully managed. For a family business, the issue will be far more complex, as choosing the best candidate can mean choosing one family member over another.
4. Create a Family Council
A family council is an organized forum where family members participate in the development of their strategic plan and policies for the family. The meetings allow the family to start tackling the “forbidden agenda” and to lay down some clear, sensible ground rules governing the family’s involvement in the family business. Although family members may not agree on every issue raised, each family member will have a voice in the process.
For many families, setting up this process is the key step —as it promotes a dialogue on the issues that the family faces, many of which can be difficult. Without family council meetings, many of these issues may not be discussed. As a general rule, the severity of unresolved issues will increase as time passes, and the options available to deal with the issues can shrink.
Some common, key issues to consider at family council meetings include:
- Code of conduct for family council meetings
- Involvement of family members in the business
- How will we decide on who can join the business?
- What preparation or qualifications are required?
- What if the employment of a family member does not work out?
- Can in-laws join the business?
- Compensation and ownership
- How will we evaluate and remunerate family members?
- Who will be allowed to participate in ownership?
- How will we deal with a divorce?
- Family harmony
- How will we deal with conflict between siblings and generations?
- How do we educate in-laws on the business and traditions of the family?
- How do we deal with family members with financial or career problems?
- How will we keep non-active family members more informed and involved?
- What responsibilities do we have to the community?
- Management policies
- How much financial information should be shared among the family and employees?
- How do we retain good non-family employees?
- Leadership succession
- How will the next leader be chosen?
- How will the transition take place
An important point to keep in mind, however, is that family council meetings are not meant to replace meetings held by other groups within the business. The goal of the family council is to set policies involving the interaction of the family and the business, and to deal with other family issues. A family council is generally not the right venue for discussing issues that are purely business decisions.
5. Enlisting the help of a facilitator
The chances of a successful initial meeting can be greatly improved by asking an impartial person from outside the business and the family to act as a facilitator. Ideally, this individual should be a professional consultant with broadly based commercial and financial experience, who is skilled in managing group dynamics and helping family-owned businesses. He or she should be responsible for setting the agenda (after consulting with the family), chairing the meeting, and ensuring an atmosphere in which everyone feels free to express their concerns.
After the initial meeting or meetings, many families hold subsequent meetings on their own, with family members taking turns acting as the chairperson for the meeting. These families may still call on a facilitator when dealing with difficult issues, or when the family council reaches an impasse on a particular issue.
As is the case with so many other issues facing family businesses, the use of a family council will not provide an instant solution to the issues facing the family and the business. However, it will provide a powerful process that your family can use to tackle the issues that you face.
Succession is a sensitive subject for many family-owned businesses, but by taking steps to professionalize your business, you are working to ensure a smooth transition when the time comes to pass the reigns along to the next generation.
Rick Hirtle, Chartered Accountant, has a large dairy, orchard and vineyard, and ranching clientele and has helped many farm families achieve their optimum succession. Rick is located in BDO’s Salmon Arm office, but travels throughout the province to meet and work with clients. He can be reached by telephone at (888) 832-7171 or by emailing rhirtle@bdo.ca.
This material is general in nature and should not be relied upon to replace the requirement for specific professional advice.
