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Family Business Course - Succession Planning in Family Businesses - Session 6.pptx

Family Business Training - Session No.6

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Succession Planning in Family Businesses
Silvan Mifsud, Chairperson Family Business Committee
THE MALTA CHAMBER
OF COMMERCE, ENTERPRISE
AND INDUSTRY
Succession needs hard work…..
Many family business owners seem
to have this “idealistic & romantic”
idea in mind, as they consider
exercising their right to transfer their
ownership to the next generation,
similar to the transfer of Power to
Simba in the epic animation film “The
Lion King”.
The idea is that one clear successor
will head the business, and the family
and other stakeholders will defer
unquestionably to the heir; and
respect across the generations and
family branches will be freely given.
It rarely if every works that way –
Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
Succession is a journey…..
……that needs a lot of work and commitment to give solid answers to the following
complex and difficult questions:-
- What do you want to do with the assets and business you worked so hard to
build?
- How do you plan to REALLY let go?
- What roles should the next generation play now and in the future?
- How should you develop the members of the next generation into those roles?
- Are the relationships between yourself and the next generation and the
relationships amongst the next generation, strong enough to work through
succession related decisions together?
So as I said Succession PLANNING is a journey….it is hardly a journey or hardly any planning
has been done if succession is tackled when the family business leader is on his way out.
Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
Transferringthe Business….WhatOptions?
In general there are three options for transferring the family business : sell the business, divide it, or
transition it as a whole to the next generation. The importance of this decision continues well beyond
the founder. Actions taken by each generation shape the family and business for decades.
Putting your home in order - Helping family businesses reach new heights:
Sell to an outsider
You may have good reasons to sell. Perhaps your firm’s
competitive position makes the future look bleak as a
stand-alone business. You may have received a once-in-a-
lifetime offer that’s too good to refuse. You may have too
much conflict in the owner group. Your next generation
may have no interest in owning the business together.
One word of advice. Some sale transfers fail to happen. So
in the process you should continue running the business as
if you will always own it. Keep your sales discussions
restricted to the Owner and Board Rooms and don’t
distract the management team unnecessarily. You want the
business to stay healthy in the process of a sale, especially
if it ends up falling through.
Be ready to live with whatever the buyer does with the
business or transforms it in.
Divide among next-generation members
The second form of transfer is to divide the business
itself among the members of the next generation.
There are many ways to do this. But however you
do it, dividing ownership among your children
ensures that there is no shared family business to
pass down. Instead, each branch charts its own
course.
Partitioning a business can be a good way to
minimise conflict, but it is not without downsides.
For one, the effort and resources expended to split
the business could otherwise be used to grow the
company. Additionally, this approach is hard to
replicate when ownership changes.
Transferringthe Business….WhatOptions?
In general there are three options for transferring the family business : sell the business, divide it, or
transition it as a whole to the next generation. The importance of this decision continues well beyond
the founder. Actions taken by each generation shape the family and business for decades.
Putting your home in order - Helping family businesses reach new heights:
Transfer the entire business
The last option is to transfer the entire business down to the next generation.
As the present family business owner you need to plan and decide to make this transition
as a matter of course, but the decision should be deliberate, taking the alternatives into
account. As an owner, you control not only the decision whether to transfer (and to
whom) but also the process. Most obviously, you choose where the assets go, what
vehicles are used (trusts etc), and when they are passed down. Ownership also brings with
it the power to select the leadership of the Four Rooms (directly or indirectly), you also can
shape how various roles are handed off.
Common Problems with Transferringa Business
There are certain approaches to succession planning and transferring of a business that are likely to
fail. Here are some examples.
Putting your home in order - Helping family businesses reach new heights:
A Present Leader that can’t let GO!
Family Business leaders that can’t let go,
that rule all aspects of their family business
with an iron fist. Their micromanagement
and tough behaviour, which led to family
business so far, is applied to the next
generation, which finds it impossible to
thrive under an iron-fisted senior leader.
Because of this oppressive behaviour, the
members of the next generation are
incapable of leading the business or are so
hurt by their previous experiences that they
have no interest in continuing the business.
Often, after a domineering family business
leadership – the next generation are likely
to they sell the family business.
No flexibility!
While Governance, structures, roles and
processes are important, it does not mean that if
these worked worked brilliantly well in one
generation, they cannot be modified for the next
generation.
With no level of flexibility, even when this is so
with good intentions, the senior generation can
set the younger generation up for failure by
maintaining rigid leadership roles without
allowing the younger group to consider their
own approach to leadership. Each generation
brings different interests and skills to
leadership—and the business itself may need
different leadership skills. It’s a mistake to
assume that what worked for one generation

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Family Business Course - Succession Planning in Family Businesses - Session 6.pptx

  • 1. Succession Planning in Family Businesses Silvan Mifsud, Chairperson Family Business Committee THE MALTA CHAMBER OF COMMERCE, ENTERPRISE AND INDUSTRY
  • 2. Succession needs hard work….. Many family business owners seem to have this “idealistic & romantic” idea in mind, as they consider exercising their right to transfer their ownership to the next generation, similar to the transfer of Power to Simba in the epic animation film “The Lion King”. The idea is that one clear successor will head the business, and the family and other stakeholders will defer unquestionably to the heir; and respect across the generations and family branches will be freely given. It rarely if every works that way – Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
  • 3. Succession is a journey….. ……that needs a lot of work and commitment to give solid answers to the following complex and difficult questions:- - What do you want to do with the assets and business you worked so hard to build? - How do you plan to REALLY let go? - What roles should the next generation play now and in the future? - How should you develop the members of the next generation into those roles? - Are the relationships between yourself and the next generation and the relationships amongst the next generation, strong enough to work through succession related decisions together? So as I said Succession PLANNING is a journey….it is hardly a journey or hardly any planning has been done if succession is tackled when the family business leader is on his way out. Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights:
  • 4. Transferringthe Business….WhatOptions? In general there are three options for transferring the family business : sell the business, divide it, or transition it as a whole to the next generation. The importance of this decision continues well beyond the founder. Actions taken by each generation shape the family and business for decades. Putting your home in order - Helping family businesses reach new heights: Sell to an outsider You may have good reasons to sell. Perhaps your firm’s competitive position makes the future look bleak as a stand-alone business. You may have received a once-in-a- lifetime offer that’s too good to refuse. You may have too much conflict in the owner group. Your next generation may have no interest in owning the business together. One word of advice. Some sale transfers fail to happen. So in the process you should continue running the business as if you will always own it. Keep your sales discussions restricted to the Owner and Board Rooms and don’t distract the management team unnecessarily. You want the business to stay healthy in the process of a sale, especially if it ends up falling through. Be ready to live with whatever the buyer does with the business or transforms it in. Divide among next-generation members The second form of transfer is to divide the business itself among the members of the next generation. There are many ways to do this. But however you do it, dividing ownership among your children ensures that there is no shared family business to pass down. Instead, each branch charts its own course. Partitioning a business can be a good way to minimise conflict, but it is not without downsides. For one, the effort and resources expended to split the business could otherwise be used to grow the company. Additionally, this approach is hard to replicate when ownership changes.
  • 5. Transferringthe Business….WhatOptions? In general there are three options for transferring the family business : sell the business, divide it, or transition it as a whole to the next generation. The importance of this decision continues well beyond the founder. Actions taken by each generation shape the family and business for decades. Putting your home in order - Helping family businesses reach new heights: Transfer the entire business The last option is to transfer the entire business down to the next generation. As the present family business owner you need to plan and decide to make this transition as a matter of course, but the decision should be deliberate, taking the alternatives into account. As an owner, you control not only the decision whether to transfer (and to whom) but also the process. Most obviously, you choose where the assets go, what vehicles are used (trusts etc), and when they are passed down. Ownership also brings with it the power to select the leadership of the Four Rooms (directly or indirectly), you also can shape how various roles are handed off.
  • 6. Common Problems with Transferringa Business There are certain approaches to succession planning and transferring of a business that are likely to fail. Here are some examples. Putting your home in order - Helping family businesses reach new heights: A Present Leader that can’t let GO! Family Business leaders that can’t let go, that rule all aspects of their family business with an iron fist. Their micromanagement and tough behaviour, which led to family business so far, is applied to the next generation, which finds it impossible to thrive under an iron-fisted senior leader. Because of this oppressive behaviour, the members of the next generation are incapable of leading the business or are so hurt by their previous experiences that they have no interest in continuing the business. Often, after a domineering family business leadership – the next generation are likely to they sell the family business. No flexibility! While Governance, structures, roles and processes are important, it does not mean that if these worked worked brilliantly well in one generation, they cannot be modified for the next generation. With no level of flexibility, even when this is so with good intentions, the senior generation can set the younger generation up for failure by maintaining rigid leadership roles without allowing the younger group to consider their own approach to leadership. Each generation brings different interests and skills to leadership—and the business itself may need different leadership skills. It’s a mistake to assume that what worked for one generation
  • 7. When things get Stuck……… A family business and the eventual transfer of its ownership can become stuck when owners disagree and therefore can’t prepare for a generational transition. A stuck family business becomes like a perpetual tug-of-war with equal strength on both sides of the rope—nothing moves. When a family business seems set or stuck, the only really way forward is to shift it with the agreement of all owners. You need to find common ground through conversations. Putting your home in order - Helping family businesses reach new heights:
  • 8. Successful transfer of Business…..Aligning Interests Owners can divide up their assets among their children according to the recipients’ degree of interest in the business, with some children inheriting shares and others receiving outside assets. The same approach can be applied to the business ownership: you can base how you divide ownership of the company on the different interests of the next generation. Putting your home in order - Helping family businesses reach new heights: Many owners want to maintain power until late in life, but there are benefits to distributing the economic value of your assets before you formally hand over the reins. You might start this distribution to begin engaging the next generation in ownership. One way to initiate this distribution is to pass down economic interests to the next generation while still retaining voting control. Some family businesses split their ownership into voting and nonvoting shares, then pass down to the next generation more of the financial benefits of ownership (via nonvoting shares) while keeping control in the current Others take the opposite approach. When the current owners are ready to pass the risk and equity appreciation down to the next generation but want to maintain a source of income to fund retirement, ensure a spouse is taken care of, or donate to charity, you can adopt a “cash up, equity down,” approach. The current owners structure the transfer so that they receive money over time while passing down ownership. The transfer is accomplished in a variety of ways, such as pulling out the real estate from the company, arranging directors’ fees for being on the board, or having preferred shares behave
  • 9. Tax Planning……… The details of tax planning lie outside the scope of these training sessions. However for a successful transfer of assets, you will need to understand the full suite of transfer tools and Tax implications of each. Taxes are, of course, a significant issue for all businesses, but the role that taxes play in a transfer cannot be under estimated. Putting your home in order - Helping family businesses reach new heights:
  • 10. Core Ingredients of a SuccessfulSuccession Plan…… A good succession is often described as the passing of the baton in a relay race. This helpful metaphor points to three aspects of the process—preparing the person currently holding the baton, selecting who will take it and planning the handoff. Putting your home in order - Helping family businesses reach new heights: Preparing the current leader Gracefully shifting your powerful roles is a profound act of leadership, but the transition isn’t easy. As a current-generation leader, you may know that the transition to the next generation is the right thing to do, but you just can’t seem to let go. You wonder how to let go and how your identity is (too) closely tied to the business. You may be feeling pushed by an impatient younger generation. But you can handle a transition with grace if it’s thoughtfully planned and supported. Well-prepared leaders create a glide path, a five- to ten-year plan to move away from the business. Don’t expect to execute your glide path on your own. This is a major life change. You will need the support of peers such as an advisory board, a single trusted adviser, or a coach. Your spouse’s involvement and encouragement are essential.
  • 11. Core Ingredients of a SuccessfulSuccession Plan…… Putting your home in order - Helping family businesses reach new heights: Selecting the Successor/s One of the most challenging, and potentially contentious, aspects of a leadership transition is deciding who is most qualified to take the reins. Choosing your successor—without damaging the family—may be even more difficult than planning your own transition. •Make them earn it. •Establish a clear and transparent process. •Ensure alignment with your Owner Strategy. •Avoid the temptation to clone. •Consider outside board and business leadership if no family member is qualified.
  • 12. Core Ingredients of a SuccessfulSuccession Plan…… Putting your home in order - Helping family businesses reach new heights: Train & Build Capabilities of the Successor/s Shape the next generation of leadership with an early effort to engage them and prepare them for their future roles in all Four Rooms. • Get them trained in: Business ownership skills and concepts (e.g., financial statements, legal structures), Family business principles and practices (e.g., Governance), Knowledge of the family assets (e.g., shareholder agreements, key managers, business strategy, industry dynamics), Family history and values (e.g., family constitution), Personal leadership competencies (e.g., conflict management, team management). • Teach them to Collaborate: In addition to building their skills as individuals, members of the next generation need to develop their ability to work with each other. These im-portant relationships should not be left to chance. Create spaces where they practice making decisions together early on and with lower stakes.
  • 13. …and finally thecommon pitfall….leaving Succession planning alwayson the back burner… Putting your home in order - Helping family businesses reach new heights: • Realise that this is not just about the current ownership. You need buy-in from the next generation. • Put it on the agenda with a deadline. Discussions about continuity planning will usually get delayed unless they have dedicated time. • Consider working backward to overcome the initial stumbling blocks. Many current owners are comfortable with the existing setup and are resistant to change. If that’s the case, it could be valuable to avoid making immediate changes. Instead, start by asking members of the next generation to define how they will work together when it’s their turn. That way, they are preparing themselves to work together without immediately changing (or threatening) the status quo. They should discuss how will they make decisions, structure the business, define success, and so on. If nothing else, doing so creates clarity for what will happen in the future. In parallel, ask the senior generation how they envision the future, say, fifteen years out, when they have stepped back. Then work backward to think through what needs to happen to get there. This approach can make the transition seem less threatening than would
  • 14. Succession is a process not an event….. No succession works in a linear way. There will be good days and bad days. Days you will you have moved 2 steps forward and days you feel you moved 1 step back. As the plan unfolds, you should look for concrete markers of progress, such as a revised shareholder agreement or a new governance structure and adapt to the changes around you. A healthy transition is much more comprehensive than a Simba succession plan. It takes a lot of work to make a thoughtful and successful Putting yourhomeinorder- Helpingfamilybusinessesreachnewheights: