Family businesses and succession

Ownership and management succession are the key characteristics of the family business. They occur perhaps once in a generation. They are major management challenges. Related to them are various issues. They require a variety of skills and knowledge to achieve smoothly.

Each family business is unique and so the challenge will be unique. They will have a specific effect on the business, the stakeholders and the local business scene. The business has socioeconomic value for the family so the new goals of the incoming leadership may evoke worry and concern from the departing leadership. This makes family succession an emotive topic.

There are multiple ways to manage succession in family businesses. It need not involve ownership and management transferring simultaneously, however this sometimes happens without much thought of the alternative options. The succession could involve external investment at the ownership and finance level. It could involve incoming non-family managers at the management level. It could involve an element of both. Purely family succession could involve wider family ownership and more focused family management by a few key family members. The family might transfer ownership within the family but appoint professional, external management.

The dynamics of the business, its market and the institutional environment will shape the succession solution. A larger business may require wider family succession to be able to finance the transition, assuming it is not done by inheritance. It may warrant a flotation (retaining a sizeable family portion of equity) or sale of some equity to an outside party, or to the workforce or selected management. An unprofitable business is much less attractive for the successor. Trade sale, management buyout, management buy in, private equity purchase or liquidation are options if the family success backs out.

A liquidation is not necessarily the failure it would seem to be. An orderly winding up to get the best price on assets is better than a forced cessation of trading with the management of the process being at the control of creditors at a later date. For instance, farming enterprises are often wound up with dispersal sales that may be well attended events including if other farmers seek to buy highly regarded pedigree breeding stock from a long established and admired farmer.

The outgoing family member may wish to keep a minority stake or assist finance the younger family member to ensure the business is in the right hands in future. If banks are being generous with lending at that time, there may be more external buyer interest as well as external finance options for funding a family succession. Furthermore, outside investment or total transfer to outsiders means payment to the family, but at a loss of a sense of socioeconomic wealth: identity, position and lifestyle are lost by family members following the transaction to varying degrees. Lucrative sale proceeds therefore have a secondary price for the seller.

As businesses develop, succession plans may alter to reflect the contemporary environment. With size may come more consideration of the role and possible part ownership by non-family managers. Finance needs may result in part ownership by outside investors. Over time and with growing size, financial issues tend to begin to be more important than socioeconomic ones with family members who – perhaps being just shareholders – may be more emotionally distant from the business.

The state of the economy and other career opportunities will influence the thinking of family successors. In a recession the family business may be a safer bet than job seeking elsewhere. There are also long-term trends that create challenges for family succession. Decreasing average family size means there are more instances of fewer direct heirs being available to succeed. Indirect heirs in the broader family can be considered, with suitable planning and family support. Primogeniture is no longer the norm, meaning more female successors. Births out of wedlock, divorces and remarriage mix the family picture making it more complex, yet perhaps providing successor candidates.

Society has become more individualist with individual independence valued more. The UK internationally scores highly for individualism in any event. A surf of the website of Geert Hofstede provides interesting and useful comparisons of nationalities across 6 dimensions including individualism which is useful for considering cultural differences in international business (see www.geerthofstede.com). In any event, this individualism creates a weaker sense of obligation to succeed in a family business.

Longer life expectancies mean succession may not be implemented by family business leaders until later than their forebears would have done. This retains experience in the business, but it is open as to whether the loss of energy and creativity is compensated by the retention of experience within management. This is particularly so in sectors undergoing faster changing business environments.

What all this means is that purely family successions continue within family businesses, but alongside composite ones in other family businesses. The composite ones may reinject life into the family businesses via capital, expertise or access to markets thereby raising the chance of a successful family succession to the next generation in the future. Such composite successions, if well designed and led, join the benefits of efficient allocation of labour and capital in the wider, open market with the strengths of the ethos of the family business.

Succession is a major family business issue. It needs to be designed to fit the particular business concerned. Fortunately, there are many ways to devise a successful transition, including with non-family management and part ownership by outside parties. It is important to consider that ownership and management changes can be staggered for the mutual benefit of owners and managers. The contemporary economic environment and cultural values will influence the viability of different options at the time. This includes organized liquidation which may be a respectable option to take. Any outside involvement, particularly in ownership, comes with a socioeconomic price for the business family. It is sensible for succession plans to evolve alongside the business and the family. The key thing is to have such a plan reflecting the fact the family has considered these issues. My colleagues and I at Nexa can discuss your business succession issues with you and how they can be prepared for.

For more information please contact Henry Clarke using henry.clarke@nexa.law