Succession Redefined: Family Business Succession in the 21st Century

By Richard Shrapnel

In this article – the final in the Succession Series by Baker Tilly International – the author considers how business succession has been redefined, the rewards available to those that get it right, the challenges they will have to overcome, the dynamics they should embrace and the strategies they must adopt to be successful.

Family business succession is not new but it is receiving more and more media attention as the Baby Boomer generation face the inevitable challenge of transitioning their business to new managers and owners; it’s not a question of if, it’s only a question of when.

This challenge is not going well, with 53% of Baby Boomer business owners globally (Europe 57.5%) not having commenced a succession process. By 2020 this generation will be aged between 56 and 74, with the weighting heavily toward the older age. They represent between 15% and 30% of the population in countries across the globe (Europe’s average is 25%) and they presently control much of the privately owned businesses around the world. Many of these businesses may be small but as a group they are a global powerhouse all living the same transition. In five plus years, trillions of dollars worth of businesses globally will have shifted into the hands of new managers and owners.

In this transition lies great risk and opportunity; risk for those who do not act ahead of the curve and are left behind, and opportunity for those that do move early. An even greater opportunity exists for the new generation of owners and managers to acquire a suite of businesses from the exiting generation and seize dominant positions in their markets of choice.

The key to exploiting this risk and opportunity lies in understanding how succession in families and businesses has been reset and redefined. Succession has been slow to emerge in our markets but its presence is now clearly evident. It carries with it risk but will deliver great rewards and losses; it should not be ignored.

Succession Redefined

Family business succession has changed in the 21st century. This change might be best expressed by simply saying, passing is the era of ‘family business’ and coming is the era of ‘families that are in business’.

In the past, succession was often very informal with no real planning – it was something that just happened. Children joined the family business in the first instance as they were trusted, convenient, and willing to work hard for modest rewards with the prospect of long term returns. Their involvement created a sense of obligation in the parents and a sense of entitlement in the children. Often children had no burning desire to do other things and joining the family business was seen as the least line of resistance to existing expectations. This was the path for sons with equal inheritance, no matter what their skill, with the eldest assuming the mantle of control. As for daughters, they received no interest in the business and only an equity in other assets as they were expected to get married and have their own families. This was an era in which family obligation outweighed individual self-determination and the standing assumption was that the business would remain in family hands from generation to generation.

Today the circumstances and expectations are quite different, and this has created an uncertainty that is challenging many families in business. For families that choose to be in business, these challenges are amplified by the complexity of business today, with globalisation, the internet and digitalisation, and the changing landscape of consumer preferences requiring many to adapt their businesses and business models to remain competitive.

Today, there is a language of ‘stewardship’, ‘custodianship’ and ‘legacy’ often utilised by family business consultants who are seeking to underpin business continuity across generational lines. Selling the business is always an option (73.6% agree) and children are encouraged to follow their own dreams, without any overt pressure to join the family business. In many instances the family discussion can be around questions such as, “Is this really the right business for the children to be in and do we want this life for them”. At the same time, the sense that children must be qualified for any position they may occupy in the business is strongly held. Age and gender bias are still evident but are much weaker than they have historically been, and there is almost without exception an understanding that daughters are potential successors in the business (43.5% of businesses reported having at least one daughter in their senior executive ranks).

Patriarchs can no longer impose their will according to tradition and expect ‘harmony’ will follow. Instead they must negotiate and build consensus, without certainty that their hopes will be realised (73.5% consider harmony a key issue). Individual self determination outweighs family obligation.

This era of self-determination has created an environment of uncertainty in many instances where the current family business owners do not know whether their children might have an interest in the business, and if not today, then maybe sometime in the future. If they are not interested, then selling the business may be the essence of a successful succession plan. In the 21st century, there is a far greater open-ended and negotiable conception of how families may go about their business.

Over 60% of family businesses, however, expect that the business will be retained in the family at the conclusion of their succession process.

The Rewards

So, in an era of self determination and individualisation, what is the advantage, if any, in pursuing business succession along family lines?

The answer lies in the innate competitive advantages that family businesses can possess and the benefits that may be achieved in the compounding of wealth across generations. Family businesses are generally seeded by one to two individuals (sometimes just friends and not family) and grown through commitment, endless work and a passion to be successful. Every great business started as a family business – until it was surrendered by the family into the listed company domain.

Successful family businesses are built upon values that underpin the business’ success. If the family is able to develop effective succession practices they will be able to develop trans-generational entrepreneurship, thereby compounding the family enterprise and wealth across generations. It may not be the same business, but the values that made it successful will be transferred into new business opportunities and the wealth of the family will continue to be built. Their growth comes through multiplication not division – they continue to grow and compound, not divide and separate.

Successful succession planning in the 21st century is focused on continuity of family enterprises across generations. This strategy represents a more fluid understanding of family business, both in terms of businesses (relevant profitable businesses for the time) and families (the right people in the right positions).

Families in business should develop proactive strategies designed to orienteer the uncertainties that exist for the business and the family as they recognise the substantial costs of not being proactive. These costs include loss of business competitiveness, family conflict, loss of wealth and decisional paralysis.

These families recognise that character, personal qualities and relationships of the incumbent family members and the successors matter more than ever as they seek to nurture and mature the right traits.

The Challenges

Many families today are struggling with succession as they are not able to cope with the many uncertainties in the family and the business. They sit and wait for something to happen, hoping for the best. For the Baby Boomer generation this a high risk approach as time is against them.

The top three key challenges that families identified as holding them back from commencing succession are:

• The financial capacity of the business to support the incumbents and the new generation

• The new generation not being ready to step up including lack of interest and inadequate skills

• Determining what is a fair distribution of assets among family members.

The economic uncertainty surrounding the future of the business was also seen as a key challenge.

Each of these challenges reflects a view of succession as being ‘retirement’ of the current generation and a transfer of the existing business. They reflect an inertia as solutions cannot be readily identified, and should be proactively addressed as part of the continuing succession strategy across generations. A key message from those who have completed succession: start earlier.

Understanding and managing the dynamics of the succession process is key to overcoming the challenges faced by many families. The focus, the role of spouses and the importance of formal documentation are worth considering.

The focus of the succession process, including the outcomes sought, is critical. If succession is viewed as retirement then the transition to the new generation of owners/managers (whether family or not) will not be as effective as it could be.

The key outcomes sought from a succession process should be:

• Continuity of the business (86% agree)

• Family harmony (74% agree)

• Ongoing jobs for employees (73% agree)

A focus on the sale price of the business was not considered of prime importance (70% agree).

The role of the spouse is also critical in the new era of succession. Spouses were key advisors to respondents who considered having successfully completed their succession process and achieved their principal outcomes. Spouses in the succession process were mainly concerned with (in order of importance):

• Ensuring family harmony is maintained

• Gaining clarity around ownership and inheritance for the incoming generation

• Determining fair inheritance especially for those not coming into the business.

An interesting dynamic in successful succession processes is the evolution of what is considered important. On commencement, it was skilling up the next generation; in transition, it was ensuring an understanding of the demands of the business; and by conclusion it had shifted to the importance of formal rules and processes and equitable inheritance solutions. Sustaining trans-generational entrepreneurship requires strong governance, as evidenced through family charters and alike.

The journey of succession for families and businesses that have not yet built succession into their DNA is best described as orienteering. They must make themselves ‘succession ready’, which means they are equally prepared for transition as they are for the sale and redeployment of that realised wealth. They are succession ready and market ready.

The eight guiding principles explained in the May/June 2014 edition of The European Business Review provides guidance in orienteering the succession journey:

• Succession is not retirement

• Start with readiness

• Set your goals before the journey

• Harmony is a must

• Price is not first

• Plan early, start earlier

• Equality is not equal

• Ask before you get lost

Armed with these principles, families must orienteer their way through establishing specific goals for the current transition, adapt to the needs and capabilities of the existing family, establish a wealth map and how entitlement and control will be transitioned, create a viable and competitive future for their business and understand the role of legacy in this journey. The focus is on business continuity, ongoing jobs for employees and family harmony. The risks and challenges are many and they must be aware of each of these and guide the family and business around these barriers. However, for those families and businesses that successfully make the journey the rewards can be great and enduring.

About the Author

Dr Richard Shrapnel PhD is a partner/executive director of Baker Tilly Pitcher Partners, Melbourne, Australia, an independent member of Baker Tilly International – the world’s 8th largest accounting and business advisory network by combined revenue of its member firms. Richard leads the business succession practice and is one of the three chief investigators in the research project noted below.

References

Baker Tilly International in co-operation with Swinburne University have undertaken a three-year succession research project into the success strategies, barriers and dynamics in private/family business succession. 2500 businesspersons have participated in this research conducted across 56 countries in 9 languages. The statistics included above and the general narrative is taken from aspects of the quantitative and qualitative research. The final findings of this research will be released at the Baker Tilly International Global conference in New York in October 2014.