Ask the Experts

PwC Partner John Dobson – February 2016

I’m the owner of a family business and I’ve been told I need a proper succession plan. How do I go about setting one up and how do I ensure it’s complied with should anything happen to me?

It is never too early to plan for what will happen to a business down the line and there are several aspects to consider.

The first step in the successionplanning process is to confirm the feasibility of retaining the business within the family.

This should be undertaken well before the current leader intends to step down.

In close consultation with advisers, family members and senior management should evaluate the implications of keeping the business in the family or pursuing other courses of action.

Discussions around a potential successor should identify if that individual has “the right stuff”.

While they may share the owner’s passion for and commitment to the business, that’s not enough.

The knowledge, skills and tactics required to establish and build a company are often quite different from those needed to lead a larger, growing enterprise into the next era.

In some cases, the family business may be better off pursuing other succession options, such as bringing in management or selling and reinvesting in passive assets.

If a family member is selected as the future leader, they should undergo a long apprenticeship.

Not only will this enable the individual to thoroughly learn all aspects of the business; it will help them establish credibility and credentials among key stakeholders.

There may also be a juggle ensuring equity and harmony in the family, and dealing with any discord among family members about the appointed successor.

Ensuring that the whole family is treated equally is also a challenge where the business needs to be valued and not all the family will succeed as owners.

It is also important to confirm the chosen heir wants to and is committed to eventually taking the helm.

An acknowledgement of this well before the current leader steps down will allow sufficient time for the successor to balance outside work experience with ample on-the-job training in the family business.

Once these aspects are considered and agreed on, a formal written succession plan should be developed.

It is valuable to get counsel from trusted advisers and talk to other family businesses that have been through the transition to learn how they dealt with it.

The plan should grow out of these recommendations, as well as family discussions held in family meetings.

Challenging matters, such as compensation and earnings distribution policies, may need to be addressed in the plan.

Dealing with these will help to remove uncertainty and misunderstanding, which in turn could be detrimental to both the business and the family.

As a business grows, provision should be made for the orderly transfer of ownership.

A good succession plan should evolve as circumstances change.

Essentially, it is not something to simply tick off the business “to do” list it should be revisited regularly and modified as needed.

Your business is your baby and it is only natural that you want it to survive when you are no longer around.

But remember that the world is rapidly changing and what might fit today may be totally inappropriate in the future. Attempting to bind your successors to your dream could be fatal.

So, when it comes to succession planning, all you can do is ensure that your plan is robust, that all your immediate family have buy-in and that the governance processes you leave in place ensure sound commercial decisionmaking.

As published by Fairfax in February 2016.

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