Family-based succession is a natural consideration for business owners who want their legacy to continue long past the point of their exit. If you’re looking to hand your business over to the next generation in your family, who can you envision stepping into your shoes, and what do you need to consider first?
In this series we cover the fundamentals of the exit planning process. Following on from Antony Sassen’s article on finding the right route, Sophie Kwiatkowski discusses considerations for family-based succession planning.
Passing your business on to those in your family might feel like an obvious choice. After all, you know them better than any external buyer, and with family there often comes a great deal of trust.
But this exit route is not without its challenges. It can be an emotional affair to hand your business over, and it can be hard to step away from the organisation which you’ve poured so much time and effort into. Passing it to someone closer to home can make it even more difficult to cut those ties.
To execute your plans successfully, it’s crucial to strike the balance between sentiment and practicality. So, what do you need to consider if you are working towards family-based succession plan?
Why are you passing your business on to the next generation?
Family-based succession is a common route, especially for those whose business has been in the family for generations. But aside from that, there are many other reasons why opting for family succession could be right for you:
- If you want to maintain your legacy - Family succession is a great option if you’re looking to continue your legacy (and your predecessor’s) post exit. An example of this would be maintaining strong working relationships, which are crucial to brand reputation. Whether it be your team, your suppliers, your customers or your local community, if your family is already involved with the business they may have established relationships already.
- If you want to continue brand consistency – If your family have been exposed to the day-to-day running of your business, they should be able to pick up from where you left off leading to a smoother transition. When it comes to building trust with your clients and customers, consistency is key. Your family may also understand more about how you would like to see the business continue and therefore keep things in with a similar feel.
- If you want a smooth exit and transition – Family succession could make for a smoother sales process. Negotiations will be kept in the family, and there'll be no pressure to find a buyer.
Are your family ready to step into your shoes?
If any of the above are your main priorities ahead of your exit, you will need to be realistic about your family's capabilities and leave emotion to the side. Assessing technical skills, commercial awareness, management capabilities and leadership skills is essential. Being pragmatic will allow you to put plans in place ahead of time to increase skillsets and mentor where needed.
There is also the question as to whether your family actually wants to take over. It can be easy to overlook this and make presumptions. Remember that this is your legacy that they are taking over. You need someone committed to the role for business success. It's important to note that ties may fray throughout generations. This means that your business could be sold later down the line to a third party.
What are the potential pitfalls of family succession?
There are of course challenges that come with this exit route which you will need to consider;
- The emotional implications – The exit process is fuelled with emotions. Be mindful not to let the process create friction within your family, or to create obstacles within your strategy.
- Limited business experience -If your family only has experience in your company alone, this could be a disadvantage. Your business could lack wider-sector experience and a fresh perspective when competing within the marketplace.
- No lump-sum payment - Typically, an external buyer or private equity backing will pay more for your business than family succession. If you receive your remuneration in increments, you won’t receive a lump-sum payment and your payment could depend on the family business's success after you leave if it's agreed to be paid over time. This could have an impact on your plans. So, if you want to reap higher financial rewards upon your exit, it might be worth considering a third-party buyer instead.
Supporting you with your exit planning
An exit plan requires years of planning and deep consideration. To make sure you're doing the best for yourself, your family, and your employees, planning earlier rather than later is advised. Our qualified accountants and business advisors can act as a sounding board in your decisions. We can guide you through the exit planning process and all it entails.