Are you talking openly about family business succession?

By TEC Chair John Broons

Family businesses are among the most dynamic parts of the Australian economy and each one is certainly unique. No matter how large or small, there are certain characteristics that set each one apart from the rest and provides a unique culture.

These companies also face a range of challenges that come from this structure. Families run on emotions and relationships, while businesses run on facts and figures. Reconciling the two is no easy feat and takes a lot of time and investment from everyone involved.

Of course, many family businesses are also considering how they might pass over the reins to the next generation. While this changing of the guard is important for many individuals, it is equally important to retain those same features that made the enterprise successful in the first place.

The good news is that many companies are investing in a succession plan to ensure the company continues into a second, third or fourth generation. A study from Ernst & Young (EY) found that 87 per cent of family firms have established who is responsible for this planning. A similar number (90 per cent) also have regular meetings with the family or shareholders to discuss succession.

That said, every family business is different – and there is certainly no one-size-fits-all when it comes to finding the right succession process for companies that want to hand over the reins to another person. Finding the right solution requires the current owners to start an open and honest conversation with family members and then create a plan that takes their interests into account.

An example of this is in a recent case study on TEC members Andrew Hewison from Hewison Private Wealth and Zina Hopgood from Bev Marks Beds, they both came into their Managing Director roles after a lengthy succession process, with each of them having this process overseen by their respective fathers.

Starting the conversation early

An effective succession requires businesses to practice what they preach, regardless of the sector they are working in. This means being honest about the succession process and keeping open the lines of communication within both the family and the organisation as a whole.

For the owner looking to pass on their business, it’s important to start having a conversation early with the family about when and how the reins will be handed over – not to mention what qualities the successful candidate will have.

This discussion is also a vital process in articulating and explaining the underlying long-term strategy the company is taking to ensure future growth.

There are two parts to this conversation:

What is going to be best for the company and;
What is the best outcome for the family.

This is something I see many family businesses skimming over. Those that do have a succession framework in place will often treat it purely as just another aspect of their strategy planning. In many ways, having a plan for the family is just as important and this needs to start with an honest conversation about where the company and family are going to develop in the future.

One option is to write a “Family Charter” that lays out the rules and expectations that are normally implied in a family but that need to be spelt out when a company is involved.

Chances are the majority of businesses won’t have taken the time to spell out the beliefs and values of the company in a concrete way like this. But, for those that do, a Charter or similar document can provide a valuable starting point for the evolving conversation around succession.

What will the ideal candidate look like?

Part of the reason this process is so important is because it helps a company to distill the qualities they need to look for when choosing a successor. While many owners will imagine handing the business over to their children, there are many factors that can affect who is the best candidate for the job.

In the past, I’ve seen a few key qualities that make for an effective leader who can take over an organisation. These include:

  • Strong communication skills – to keep both family members and the rest of the company on-side during the succession process.
  • Emotional intelligence.
  • The ability to listen to people and work with a team.
  • A good education – both in terms of knowing the business and also having some knowledge of the broader world through University study or similar experiences.
  • Drive and passion to keep a company moving forward.
  • A vision to take the business in a new direction and put their own stamp on the company.

In some cases, it may be that the next generation is not interested in taking over the reins, so that responsibility will shift to another person within the family – like a grandchild or extended relative of the current owner.

Other times, the responsibility for leading a company will fall to another individual outside the immediate family. This may also require the owner to take a step back from day-to-day business activities and assume a role on the board of directors, for example.

No matter where this leadership position moves, the common factor is that owners need to have a clear picture of what qualities the ideal candidate will have and the objectivity to identify the right person.

Laying out a clear succession process

The purpose of this step is to discuss the future of both the business and the family, and then draft a solid plan that can help guide the company forward.

Many companies leave this too late – waiting until they need someone in the role immediately rather than planning ahead to find the right candidate. Those that do start this process early are likely to find the process runs much more smoothly.

Achieving this requires long-term thinking, which is something an increasing number of entities are now considering. Research from Credit Suisse found that a long-term management perspective that crosses generations is the biggest concern for family organisations.

One of the major shifts I’ve seen personally is away from people training the next generation solely in business matters.

Not so long ago, the succession process in a family business was seen largely as a corporate venture and the core purpose of this plan was to have the successor trained in the organisation. That meant educating the new leader to read the broader economy a company is working in so they can detect new trends, as well as understanding the specifics of an enterprise.

Now, more and more people are realising that a successful succession also requires knowing how to manage the family side of the company. Irrespective of who the new leader is, this plan needs to equip them with the skills to manage their relatives.

Equipping the next leader with these two sets of skills – to manage the business and manage the family – has now become the core purpose of a succession plan and is something many enterprises are now working towards.

Knowing when to step back

For the older generation who are planning to step back from the business, it’s important to have an honest conversation with their chosen successor about when they will step back from the company.

Many people struggle to identify that moment and it can certainly be hard to know when to step back and give the next generation an opportunity to assume a leadership role.

Again, this comes back to having that conversation about succession – the retiring generation needs to be clear about their own desire to let go and the younger generations need to be clear about their expectations. Only by aligning these two interests is it possible to find the right time to step back from the organisation.

It also takes a high degree of trust from the person handing over the business to know the future of the company is in the right hands. Being able to trust the new manager, while also being around to help where necessary, is something many owners struggle with.

Succession just one part of a strong family business

While planning to hand over the company to the next generation is an important part of any family business, it is just one part of a much bigger picture.

Having an honest conversation with every member of the family about the company’s future isn’t just good for choosing a new leader – it’s also an effective practice for every stage of the business’s growth. Likewise, being clear about the qualities the next leader of an enterprise will have is ultimately about the culture the organisation is trying to sustain.

The more time and energy business leaders invest in this conversation with their family, the better the chances are that a company’s succession efforts will be successful and the organisation will achieve strong long-term growth.