Succession is not only a concept for a TV series or billionaire families, it is about passing your business successfully and increasing its capital value for you, the owners. When it is the matter of generational succession of a family business, there are some vital aspects:
- business succession
- succession of the business ownership
- succession planning
- shifting from a business family to an investment family.
For generational succession to succeed, even though that succession is the business sale and sale management proceeds for the benefit of the family, communication is vital. Where generational succession fails, the reason behind this is that succession has not been formalised until retirement planning or a catalyst event needs it.
The idea of a “legacy” is insufficient. When the guiding concepts of governance, family rules, aligning values, dispute resolution, succession, and estate planning are managed effectively in advance of discontent tearing it apart, successful succession occurs.
The transfer of commercial interest to a subsequent generation of a family, typically a younger generation, is known as generational succession. Instead of being a family in business, it is frequently a family business.
The possibilities for how interest may change are numerous and diverse, but they typically centre on the transfer of some or all of the equity owned in the company over time or at a specific date and the payment of compensation in exchange for the equity that is transferred. Alternatively, the estate may eventually handle a portion of the equity transfer. There are certain problems associated with generational succession that must be resolved, including:
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Willingness and Capability of the Next Generation
An assessment to check whether the business is able to continue after the transition. In some cases, generational succession will be pursued by the older generation either as a means of perpetuating their legacy, keeping the business in the family, or giving a bright business future for the next generation.
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Capital Transfer
Take into account the capital requirements of the older generation. To what extent do you require to get capital from the business during the business transition? The higher the level of capital required, the greater the pressure on the equity stakeholders and business. In many cases, the next generation will not have enough capital to buy out the older generation. It will need the vendors to maintain a continuing investment in the business or for the business to take on a maximised level of debt. Either plan requires to be assessed for its continuity at a shareholder and business level.
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Managing Remuneration
In various small and medium businesses, the business owners manage their remuneration from the business to satisfy their requirements. It can show whether the business is paying too much or too little. Under generational succession, there must be a high level of formality around compensation.
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Who has Operational Management and Control?
It is important to establish in advance how management and operating control will be maintained and transitioned. It is important not only for the generational stakeholders but also for the business. Uncertainty in the management can result in confusion. Tensions often arise because:
- The next generation wants freedom of decision-making.
- With no operating control, they think that they have management in name only.
- According to the older generation, their experience is necessary to the business and entitles them to a continued say.
- A perception that capital investment must equate to operating control.
- An uncertainty by either or both older and new generations about the extent of their ongoing roles.
Transition Timeframes and Expectations
Generational succession is a process. Active management is required for the extended timeframes to make sure that there are common expectations and to avoid derailed processes by frustration. The established generation may have recognised that they don’t want to scale up their business involvement and want to bring on other family members to succeed them. It doesn’t mean that they want to withdraw fully.
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The Need for Greater Formality and Management Structure
A danger for many SMEs is not knowing the boundaries between the role of the shareholders, board, and management. This may intensify as generations succeed one another. These structures must be formal, with explicit descriptions of the roles and expectations. For instance, what is the function of a director? For some, a family constitution—an established set of guidelines—manages the function of the family. For others, a family will receive advice from an outside advisory committee to make sure the necessary independent knowledge is applied.