Key Takeaways
- Despite their dominance in the business world, family firms are often in our blind spot.
- Bankers also miss the importance of family businesses in their portfolios.
- Family enterprises need to think about their legacies.
- A succession plan spanning multiple generations requires a significant investment of time and resources.
- It can be accomplished with the proper guidance from the CEO.
You may discover, in the vast beyond, that you left a family business in chaos and without a lasting future. Your family members despise you even though you left a successful enterprise. You have regrets, but it's too late. As a family business entrepreneur, you had a cognitive blind spot; now, the family is starting to have disagreements, and there's nothing you can do about it. If you only had the acumen to understand the importance of succession planning.
Misfortune strikes twice
Maria built a successful manufacturing business (this is a fictional story, but it often reflects what happens) together with her two sisters. The family enterprise was founded by their parents, who discovered a more efficient way to design and build kitchen cabinets. Maria's Kitchen Designs was over thirty years old and entering the third generation. Since Maria had shown early interest in the venture, her parents named the business after her, and she was appointed CEO, serving as the entrepreneurial mind behind the company.
Later, Maria was mentoring her nephew to take over the leadership position. One day, they learned that Robert died in a car crash. This death hit the family hard, but they have no choice but to move on. Shortly after, Maria was diagnosed with a rare and incurable form of cancer. Maria decided to retire early and enjoy the rest of her life.
To make matters worse, Samantha, Maria's younger sister, got a call from their bank expressing concern about the family business's ability to meet its loan commitments. They wanted a plan to ensure that the commercial loan used to build their state-of-the-art factory was secure. They never dealt with Samantha and wanted to meet her as soon as possible. What should Samantha do?
What is a succession plan?
Succession planning is a roadmap that plots the transfer of management and ownership of a family business. It is often thought of as the key position of the CEO; however, it is the identification of critical positions and roles. Succession is about continuity and transferring the legacy. In my book, Build Your Legacy Business: Solopreneur to Family Business Hero, I described it as one way the current generation can achieve immortality in business.
However, succession plans can be complex and are best described as performing major renovations in your house while the family is still residing there. Some family members will be sceptical of the process and be concerned about the transfer of wealth, status, and employment opportunities. There are several options for transferring the enterprise. First, there is no plan, delay and hope for the best. Another common alternative is that the CEO says they are leaving but return at the first sign of trouble. Others will have no choice but to appoint a non-family member to manage the top position.
Why do bankers ask for a succession plan?
Since family enterprises, like any business, often have commercial loans or other financial commitments to banks and other suppliers, they need to understand what will sustain long-term relationships. Often, as in the case of Maria's Kitchen Designs, the bank is dealing with a key person, which can be disruptive, as was the case in their situation.
What worries banks is exposure to loan risk and long-term loss of business. Frequently, the company may continue, but the entrepreneurial culture does notโthe firm stagnates and often declines. Financial institutions prefer large clients with good long-term prospects. Since most businesses globally are family-owned and operated, many banks have greater financial exposure than they realise.
Caterpillar recognises that delivering support for its long-life machinery requires a dealership network that can last as long as its products. They provide consulting and guidance on succession planning and talent development.
Elements of the plan
In crafting your continuity plan, you will need to consider some key components:
ยง Communication: Call a family meeting with key persons and announce that you plan to initiate the succession planning process. You will need to avoid making it top-down and form a small team with assistance from an expert with a specialisation in family business.
ยง Identification of key positions: A talented individual who goes missing and could harm the business's long-term success requires a replacement. Key persons may not only be senior managers but also highly skilled people whose knowledge makes them invaluable.
ยง Training and development: The key personnel replacements must be prepared to fill the position and be ready to take over. These mentees can be either family or non-family members. In addition to technical and management training, a mentorship plan is necessary to transfer skills and practical knowledge.
ยง Project plan: A plan must include a timeline, tasks assigned to specific individuals, a budget, and a designated project manager. Succession is no easy task and will require dealing with conflicts as the plan is crafted and implemented.
ยง Financial: Succession has an ownership transfer component. Some of the current shareholders want to sell some or all of their shares. They may also want dividends or a steady stream of income after retirement. At times, in the event of a sudden death or similar incident, the inheritors may not wish to join the family business and instead opt to cash out.
ยง Legal: If a shareholder dies and the beneficiaries are unable to be paid, they can take legal action. Often, there is a need for a buy-sell agreement that outlines the details of the share transfer. Since private companies' shares are illiquid, valuations should be done in case shares have to be transferred.
While some family business entrepreneurs spend more time on day-to-day management, they must also dedicate time to the strategic aspect of succession, as this ensures they leave a lasting legacy. Your final act of greatness is developing a succession plan and educating the next generation to continue building a legacy business.
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Sajjad Hamid is an Entrepreneurship Educator who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he attempts to cultivate organic tropical fruits and vegetables, practising sustainable farming in his home garden.
He is the author of Build Your Legacy Business: Solopreneur To Family Business Hero. Sajjad is a Fellow of the Family Firm Institute. You can contact him at [email protected] or visit www.entrepreneurtnt.com.
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