Succession planning: Delaying could cost you
 

Succession planning: Delaying could cost you

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A clear succession plan is essential, especially in an uncertain market. And the sooner you share those plans with your family members and other key stakeholders, the more likely it is that your ...

A clear succession plan is essential, especially in an uncertain market. And the sooner you share those plans with your family members and other key stakeholders, the more likely it is that your business and its value will survive the transition from one generation to the next.

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Succession planning: Delaying could cost you Succession planning: Delaying could cost you Document Transcript

  • gyb Growing your business TM Volume 64 2012 Succession planning Delaying could cost you
  • Succession planning: Delaying could cost you A clearly communicated succession plan signals that the business is here to stay. Lack of a plan, on the other hand, may suggest an uncertain future for the business in an already uncertain economy. Early planning can nip that concern in the bud. Family businesses in the United States tend to be in it for the long haul. Nearly half of them have been around for three or more generations, with nearly two-thirds in operation for over 50 years.1 While the majority of these businesses say they want to carry on the tradition of keeping things in the family,2 many may ultimately pursue a different course — some willingly, some not. These reasons often transpire late in the game — for instance, when the owner of the business falls ill or announces near-term retirement plans — and generally in the absence of a succession plan. Indeed, 40% of US participants in PwC’s Family Business Survey say they have no succession plan. Among those that do, it may be little more than a broad outline. There are various reasons for this. Heirs may be reluctant, unprepared, or unable to take the reins. There may be discord among family members about the appointed successor, as well as insufficient support from other stakeholders. The owner may receive an offer too good to refuse from a private equity firm. Or it may turn out that keeping things in the family simply isn’t feasible (i.e., there isn’t enough liquidity to support a family buyout from the previous generation).3 “In some cases, leaders of family businesses have articulated their hopes for the future but haven’t worked out a step-by-step plan,” explains Mark Nash, a partner in PwC’s Personal Financial Services practice. Those that do have a plan often keep the details to themselves, to avoid family squabbles. That’s a mistake, says Nash: “It’s essential that there be extensive family dialogue about the future ownership and leadership of the company, since that is the only sure way the family owner can win acceptance and support of the plan.” 1 Family Business Survey 2010/2011    US Perspective: Choosing Your Next Big Bet, PwC —A 2 Ibid 3 Ibid    early 40% of family business owners we surveyed say they don’t have sufficient funds to divide their —N assets fairly among their heirs. Growing your business
  • It’s never too early to plan for what will happen to the business down the line. 2
  • There are parties outside the family to consider as well. Customers, suppliers, employees, and independent board members are among those with an interest in who will own and run the business down the line. Lack of information about this can create uneasiness among those parties, potentially compromising the company’s health and longevity, whereas a well-communicated succession plan provides assurance that the company has charted a clear course forward. When should succession planning begin? “There is simply no time that’s too early to plan for what will happen to the business if the owner unexpectedly dies or becomes ill,” says Karl Weger, a partner in PwC’s Personal Financial Services practice. At first, the plan may be no more than a will, but as the busi‑ ness grows, provisions must be made for an orderly transfer of ownership. A good succession plan should evolve as circumstances change. In other words, it’s not an item to cross off your checklist once you’ve put the details on paper. Instead, you should revisit your succession plan routinely and modify it as needed. Keeping it in the family Steps every business leader should take When the goal is to keep the business owned and run by the family, the following steps are critical to success: —— Confirm the feasibility of holding onto the business. This should be the first step in the succession-planning process, and one taken well before the current leader intends to step down. Factors that go into determining feasibility range from taxation to family harmony. In close consultation with advisors, family members and senior management should carefully consider the implications of keeping the business in the family versus taking other courses of action. Growing your business “In some cases, transferring the business to the next generation may be difficult, both financially and logistically,” says Nash. “The sooner that business owners recognize and address those difficulties, the better. Which isn’t to say that a late start means you’re out of luck, but you’ll certainly improve your odds of keeping the business in the family if you start succession planning early.” ——Identify and engage the successor. If a likely heir has emerged, years of thought and effort should go into grooming that individual for the leadership role. The successor may be a family member or an executive hired to run the company while the family retains control. In either case, the family and other key stakeholders must support the move. If a family member is the designated successor, he or she must be committed to the company before venturing too far down a separate career path. Although outside work experience can be quite valuable (and, indeed, many family businesses require future leaders to have such experience), it is important that the chosen successor be committed to eventually taking the helm. An acknowledgment of this commitment well before the current leader steps down will allow sufficient time for the successor to balance outside work experience with adequate on-the-job training in the family business.
  • Apprenticeship as audition At some point, the owner must make the difficult decision about whether the chosen heir has the right stuff. While the appointed successor may share the owner’s passion for and commitment to the business, that’s not enough. The knowledge, skills, and tactics that went into creating and building a com‑ pany are often quite different from those required to lead a larger, growing enterprise into the future. Once the apprenticeship is well underway, the owner should determine whether the company’s main stakeholders think the chosen successor is indeed up to the task: Do they accept the person as someone who can lead the company? “If family members, employees, and customers don’t see the heir as a worthy successor, the transition is unlikely to work,” emphasizes PwC’s Karl Weger. For the family business to thrive in the 21st century, the successor will need to breathe new life into the company, adapting its products/services so that they remain relevant and appealing in an increasingly competitive (and global) market. This requires entrepreneurial instincts and a knack for innovation — something the founder(s) of the business no doubt had plenty of and, if still around, could help cultivate in the successor. In that event, the owner might want to consider hiring an outside person to eventually lead the company — a move that’s not uncommon: Of the US family businesses PwC surveyed, nearly 40% said that top senior management roles would not be assumed by family members after the current people in them vacate their spots.* While it may take less time to train someone from the outside, the training period should be long enough for key stakeholders to judge the person’s performance and determine whether they think he or she is the right person to lead the company into the future. *Family Business Survey 2010/2011 —  A US Perspective: Choosing Your Next Big Bet, PwC 4
  • —— Develop a formal, written succession plan. The plan should grow out of recommendations from advisors and through discussions held in family meetings. Some very difficult matters may need to be addressed in the plan, such as compensation and earnings distribution policies. Tackling them head on will remove uncertainty among family members, as well as among employees, customers, and other stakeholders. Inattention to these matters, on the other hand, could lead to anxiety or misunderstanding, which in turn could be detrimental to both the business and the family. People who’ve been included in a dialogue about the company’s future are more likely to understand and ultimately support the final decision about the next leader, even if they don’t agree with it at first. Family members charged with helping the business grow will have a clearer understanding of their future responsibilities. And individuals who are passed over for key positions will be more apt to pursue other career paths if they are not kept in the dark. Such individuals might otherwise forfeit potentially rewarding job opportunities outside the family business in hopes that they’ll one day assume a leadership position in the company — a misperception that could lead to resentment down the line. ——Train the successor. A family member designated as the future leader should undergo a long apprenticeship. “It’s not enough for the person to hang around the business for a few years,” says Weger. “The designated heir should be involved in the company for at least a decade.” The objective here is not only for the individual to learn the business inside and out, but also for the heir to establish his or her credentials among key stakeholders. A good and thorough apprenticeship involves rotating through a variety of upper-management positions in different business units across the company, with the chosen successor being at the table whenever important decisions are made. Ideally, that person will also have the opportunity to work outside the family business, attaining new knowledge, skills, and perspectives that will benefit the company. Life cycle of a family business* 79% Family-run for two or more generations 28% Ownership change anticipated within approximately five years Contemplated form of ownership change Pass the business on to the next generation 55% Sell to the management team 25% Sell to a private equity investor 15% Sell to another company Initial public offering 15% 5% *Multiple responses allowed Source: Family Business Survey 2010/2011    US Perspective: Choosing Your Next Big Bet, PwC —A Growing your business
  • The successor will also need to obtain adequate higher education, including a sound understanding of macroeconomics. Such an understanding should help the successor connect the dots between the business and the various outside forces affecting it — e.g., spot industry trends, better anticipate potential market shifts. Future family business leaders will also benefit from schooling in scenario plan‑ ning, which can help them respond quickly and decisively in the event of a crisis or other abrupt change in circumstance. —— Rationalize compensation and distribution policies. In their eagerness to make all family members feel as though they are being treated fairly, business owners often compensate them equally. While this is a fair way to share an apple pie, it’s generally considered an unfair way to compensate those who make the greatest contributions to a company. A best practice is to compensate key-contributor family members at prevailing market rates. If the owner wishes to reward other family members who are not actively engaged in the business, he or she may want to consider assigning them equity stakes and paying dividends or profits accordingly. It may also be necessary to recruit new managers who have specialized skills essential to growing the business. This can prove difficult for some family businesses. Of those we surveyed, over half ranked recruitment of skilled staff among their top three internal challenges (people adept at information technology, human resources, web development, and sales and marketing are in especially high demand).4 One way for family businesses to attract top talent is to present their company as a place where prospective employees can grow as managers and individuals. Business owners may also want to consider reconstituting the board so that it includes non-family employees, key executives, and outside members, with the owner serving as board chairperson. Diversification of the board will bring new expertise, alternative perspectives, and objectivity to the company’s decisionmaking process. When the business owner hands the reins to the new leader, the former may choose to retain the majority of the company’s voting shares, enabling him or her to step back into management mode if a crisis occurs, but for the most part serving as mentor to the new leader. ——Delegate leadership and authority. Among all the changes a succession plan demands of a business owner, this one may be the most difficult, since he or she may instinctively make all the decisions and oversee every detail. Yet future growth depends on developing not just a single leader, but a team of leaders. It’s important, therefore, that the owner develop and empower people who hold (or will hold) senior management positions in the company, delegating authority and decision-making to them. 4 Family Business Survey 2010/2011    US Perspective: Choosing Your Next Big Bet, PwC —A 6
  • Don’t forget Plan B Because holding onto the company is a dream that won’t come true for all family businesses, other options need to be considered. “A business owner should always have an exit strategy,” stresses Nash. The potential transfer of ownership outside the family should be part of the owner’s thinking and planning from the start. Business owners often discover that there are more potential buyers for a good company than they initially thought. The rise of private equity firms has created a more active market for family companies, and many owners choose this as the most appealing exit strategy. Other options include selling the business to non-family shareholders, the management team, or another company. And of course there is always the alternative of going public through a stock offering, although such a move should be approached cautiously, as it brings many additional responsibilities and entails accountability to a broader group of stakeholders. If a sale is consummated, it will probably be the most complex and important transaction in the life of the founder and his or her family. As with succession planning, thorough and careful preparation will be essential to ensuring that the sale of the business delivers maximum benefit to the family. Growing your business Conclusion The dream of founding a family business that will live for generations may be difficult to realize, but it can be done. There are many such companies operating successfully today: Fully 79% of the US companies in PwC’s Family Business Survey have been family run for two or more generations. These accomplishments are the result of family unity, careful planning, and willingness on the part of the owners to accept and encourage change as they make way for a new generation of leaders. The time to get started? Today.
  • More information Want to learn more about succession planning? Please contact someone on the PwC team, including: Mark Nash Partner Personal Financial Services (214) 999-1424 mark.t.nash@us.pwc.com Karl Weger Partner Personal Financial Services (267) 330-2496 karl.weger@us.pwc.com 8
  • www.pwc.com/gyb This document is provided by PricewaterhouseCoopers LLP for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice under Circular 230 or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult with a professional advisor who has been provided with all pertinent facts relevant to your particular situation. The information is provided ‘as is’ with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties or performance, merchantability and fitness for a particular purpose. Moving beyond tomorrow’s uncertainty and growing your business matters to you, and to us. Experience what it is like to work with professionals dedicated to serving private companies and their owners. Working with you on both day-to-day and more-complex issues such as compliance, controls, cash flow, expansion, succession, and personal f inancial matters — this is PwC’s Private Company Services. You talk, we listen and share insight. We are proud to serve as advisors to more than 60% of America’s Largest Private Companies,1 collaborating to help you achieve long-term success. Experience the difference. Visit us online at pwc.com/us/pcs, email us at pcs@us.pwc.com, or call us at 800-844-4PCS to start the conversation. © 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 1 2011 Forbes America’s Largest Private Companies List