The 3 Ingredients for successful succession

Will Your Enterprise Endure?

As a private client lawyer, I am often asked to advise on business succession. The trigger for this is most often a financial adviser discussing life insurance, and the consequences of death or disability of a person on the business.

 This article summarises the key issues I deal with family business succession.

Whilst life insurance is an important tool in assuring a known financial outcome from the death or disability of a client, it only contributes to a business succession outcome.

If the succession of management and ownership of a business is to occur, the controllers of that enterprise need to manage a large range of factors. This complex task normally includes dealing with the following aspects of the enterprise.

People

Who are the critical people on whom the business depends? Some 70% of all businesses in Australia meet the definition of a family business. This means that in addition to the normal concerns a business may have about its operations and management, the business needs to have a plan to deal with shareholder and stakeholder engagement in the enterprise.

A family business needs to know is it a family first business or operated by a business first family.

Has the family made a formal decision to retain the business in the next generation or is the value of the business needed to be liquidated to fund the retirement strategies of the business founders?

Is there a non-family manager of the enterprise? How is that person to be replaced? Should they become a shareholder? How is exit to be managed for non-family business leaders and managers?

Are there critical skills in the family which cannot be easily sourced from the employment market?

Do next generation family members have the technical skills and education to continue to drive the business?

Strategy

Is there a settled strategy that drives the ongoing success of the business?

In the 2015 KPMG Family Business Survey, 43% of businesses surveyed stated “We stick to what we know to do and do it as well or better than anyone else” (Defenders). A further 43% stated “We are innovators and are willing to take the necessary risks of providing new products or services.” (Prospectors). Understanding the type of ongoing resources a business needs to support its ongoing operational strategies is essential for successful business succession. The business owners need to understand the resource requirements for succession before they can establish a funding model for succession.

Leadership Intentions

In my experience, this needs as to be seen as a duality of leadership that may or may not coincide. The operations and day to day management of the enterprise is normally a part of an executive mandate from shareholders. The business may be led by a family member or a non family CEO or executive. Irrespective of who fulfils that function, the success or not of the enterprise will also depend on the relationship of that executive leader with the family shareholders or stake holders in the business. Balancing the family accountability of the business with its external market forces and internal operational dynamics means that family business succession is a complex task, especially if the business is to be retained across generations.

An approach to business succession

Business succession is rarely an objective that can be achieved just by completing a buy/sell agreement or having a keyman insurance policy.It needs to be seen as a project that will involve the input of a number of professionals including:

Inevitably, the input of these professionals will need to be co-ordinated across the business by a lead adviser or general counsel within the business.

Identifying who will perform this general counsel / co-ordinating role is critical to the success of a business succession project.

No less important is making sure that the business succession project meets the common objectives of the business owners. Defining those common objectives inevitably comes first and so, the most common service sequence for a business succession project remains:

Just managing the legal issues, will never be enough if you want to achieve a high quality outcome for the family interests in the business.

 

Michael Perkins

23 April 2017

Posted on April 22, 2017