A 2016 article in The Economist stated, 'Succession is a problem for family businesses the world over. The Family Business Institute calculates that only 30% of such businesses survive into the second generation, only 12% into the third generation and only 3% into the fourth.’

The Economist, succession failure www.economist.com/business/2016/02/04/succession-failure.

Planning to pass your business to family? Consider these critical points:

1. Are they genuinely willing and dedicated to running it?

2. Do they possess the necessary skills and experience?

3. Can they maintain and grow the business's value?

A successful handover relies on "yes" answers to all three.

Capability and willingness of the next generation – do your kids really want the business?

There needs to be a realistic assessment of whether or not the business can continue successfully after the transition. In some cases, the exiting generation will pursue generational succession either as a means of keeping the business in the family, perpetuating their legacy, or to provide a stable business future for the next generation. All of these are reasonable objectives, however, they only work where there is capability and willingness.

The alternative scenario can also exist where generational succession is pursued by the younger generation. In some cases, it’s seen as their birth right. In these cases, the willingness will exist but this does not automatically translate to capability.

Failing to plan for succession, and simply assuming it will happen, risks significant financial losses and

damaged family relationships.

Capital transfer – how much money needs to be taken out of the business during the transition?

What level of capital do the current business owners, generally the parents exiting the business, need to extract from the business at the time of the transition? The higher the level of capital needed, the greater the pressure that will be placed on the business and the remaining equity stakeholders.

In most cases, the incoming generation will not have sufficient capital to buy out the exiting generation.

This will require the vendors to maintain a continuing investment in the business or for the business to take on an increased level of debt, or possibly a vendor finance arrangement that brings with it its own complications. It is not uncommon to see external bank loan repayment terms that put so much pressure on cash flow, that the buyer ends up with no extra money after taxes and repayments, which can

demotivate the buyer.

In many cases, the exiting generation will want to maintain a level of equity investment. This might be a means of retaining an interest in the business or alternatively staging their transition. In either case, it is important to map the capital transition both from a business and shareholder perspective. This needs to be documented and signed off firstly from the business’s perspective and then by both generational groups. No generational transition should be undertaken without a clear and agreed capital program.

Income needs – ensuring remuneration is on commercial terms

In many SMEs, the owners arrange their remuneration from the business to meet their needs rather than being reasonable compensation for the roles undertaken. This can result in the business either paying too much or too little.

Under a generational succession, there should be an increased level of formality around compensation to directors and shareholders. Compensation should be matched to roles and where performance incentives exist these should be clearly structured.

Operating and management control

Once the capability and capital assessments have been completed, it is important to look at the transition of control. This can be a very sensitive area. It’s essential to establish and agree in advance how operating and management control will be maintained and transitioned. The plan for operating and management control should be documented and signed off by all parties with either timelines for time driven succession or milestones for event-focussed transitions.

Uncertainty in management leads to business-damaging confusion or a power vacuum. When a founder's identity becomes inextricably linked to the business, their reluctance to relinquish control can become counterproductive and even self-sabotaging. Founder's syndrome is common, with the founder clinging to control and resistant to change, often creating an environment where successors feel stifled, undervalued, and ultimately driven away.

Without a documented (and followed) plan, issues arise:

● Successors want autonomy.

● They feel powerless without control.

● Predecessors want continued influence.

● Investment is seen as control.

● Roles are unclear.

Transition timeframes and expectations

Generational succession is often a process rather than an event and achieved over an extended period of time. The critical issue is to identify and ensure that all parties have a common understanding and acceptance of the time period over which the transition will take place. This should be included in the documented succession plan.

The need for greater formality and management structure



Generational succession often requires a greater level of formality in the management and decision making process. This formality should achieve a separation of function between management, the Board (if applicable), and shareholders.

Often in an SME business, these roles merge and there are no clear dividing lines or boundaries. Roles, responsibilities, and clear key performance indicators (KPIs) for management should be agreed and documented.

Navigating family business succession is a complex journey, fraught with potential pitfalls and emotional complexities. As we've highlighted, assuming a smooth transition can lead to significant financial and family strain. Ensuring a successful handover requires meticulous planning, open communication, and a realistic assessment of all parties involved. From evaluating the next generation's true aspirations and capabilities to structuring a sustainable capital transfer and defining clear management roles, every aspect demands careful consideration.

Don't let your legacy become another statistic.

To safeguard your business and your family's future, contact us today. We can help you develop a comprehensive succession plan that addresses these critical issues, ensuring a seamless and prosperous transition for generations to come.