Succession is not simply a question of whether we keep the family business or sell out.
One owner, who recently shared his views on succession, stated ’Most of the time it won’t work, either the next generation is not up to the job, or with family, it just gets too complicated.
The best succession plan is to sell the company when the
owner is ready to step down’.
Options Available
The owner of the family business has a range of
options. These options include:
> appoint a family member
> appoint a caretaker manager
> appoint a professional manager
> wind up the business
> sell, in whole or in part
> do nothing
Each option carries its own distinctive set of advantages, disadvantages, options, opportunities and threats. Also, the scope and impact of these will vary from one family business to another depending on, for example:
> the availability of potential family and non-family successors who are willing and able to carry on the business
> the needs of the family (for example, what cash needs ‘to be extracted’ from the business to provide for the owner’s retirement)
> the personal and corporate taxation consequences of the different options
> the health and size of the business
> the general commercial and business environment at the time of succession
The first option of appointing a family member to succeed is often attractive, although the second and third options also involve retaining direct control over the business. The fourth option requires realization of the company’s assets, paying
its outstanding debts, and dismissing the workforce. It can involve substantial expenses and is highly unlikely to result in the ‘best price’ being obtained.
A sale as a going concern (fifth option) is likely to recover more value from the business. Alternatives within this option include a trade sale (i.e. an outright sale of the whole business), which may be particularly appealing where no suitable successors can be found.
Alternatively, an equity sale can be the best answer if external capital to finance growth is a priority. Similarly, a management buy-out (a sale by the founder to the existing management team, which may include family members) can offer a compromise between transferring the shares to the family and an outright trade sale.
Finally, the founder may simply avoid planning for succession by adopting the ‘do nothing’ option. It is here that we encounter the central paradox, in that it is the most costly and destructible of all the options, yet it is still very prevalent.
So, what does the owner or founder need to do?
Essentially, when you strip everything else away, the core long-term decisions for business succession, in a family business, are those relating to control and wealth.
The central issues become:
> who has or should have the power and control of the business today?
> what can be done to ensure the appropriate return on the business assets?
> how to ensure the proper distribution of control and wealth transfer to the next generation?
Too frequently the owner, or founder of a family business does not realize the critical importance of these questions and that the way they are handled will affect not only the business’ present situation, but its very existence and survival into the future.
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