Understanding the Importance of Succession Planning
“Every unhappy family is unhappy in its own way; happy families are all alike.” In the first sentence of Anna Karenina, Tolstoy neglected to explain that succession planning is also unique to each family company. Succession planning is different for every firm and family, whether it means the founder moving from CEO to Chair or maybe imposing additional duties on next-generation family members in order to reduce risk.
Backstabbing, litigation, declining company performance, and animosity and rifts within the family are just a few of the disastrous outcomes that may result from inadequate or nonexistent succession planning at family companies, as you may already be aware if you watch television or read the business pages.
Defining Roles, Responsibilities, and Timelines
According to the 10th Family Business Survey by PwC, 30% of first-generation American family firms anticipate that during the next five years, the following generation will own the majority of the company’s shares. According to the report, 20% of all American family firms are giving priority to including more next-generation members in decision-making. This increased urgency around succession may be a reaction to the COVID-19 epidemic and worldwide uncertainty, and it definitely correlates with the recent surge of succession-related inquiries that PwC has received.
First of all, succession is a process rather than a singular occurrence. It’s more about a planned, regulated transfer that happens over a number of years than it is about leaving one Friday afternoon and never returning. Precisely, wealth transfer planning should be handled carefully.
In order to upskill future executives, share intellectual property, and facilitate a seamless transfer, some firms may need the founding generation to assume a mentorship role. Or, for a certain amount of time, the founders may continue to have authority over recruiting C-suite executives while delegating hiring authority for other employees. Or they may continue to be in charge of buying assets that are worth more than a certain amount. There are several factors to take into account.First of all, succession is a process rather than a singular occurrence. It’s more about a planned, regulated transfer that happens over a number of years than it is about leaving one Friday afternoon and never returning.
In order to upskill future executives, share intellectual property, and facilitate a seamless transfer, some firms may need the founding generation to assume a mentorship role. Or, for a certain amount of time, the founders may continue to have authority over recruiting C-suite executives while delegating hiring authority for other employees. Or they may continue to be in charge of buying assets that are worth more than a certain amount. There are several factors to take into account.
Honesty is essential to succession planning success. Naturally, it pays to get started early; the best time to begin preparing is right now, but being honest is more crucial. Since we already know that the discussions will be emotionally charged, be honest about your feelings.
In all honesty, describe your desires, potential fears, and things you want to and don’t want to do. Furthermore, let everyone else follow suit. It’s not always simple to create a secure, open environment for candid conversations. As an alternative, you might engage a third party to facilitate discussions. By putting honesty at the center of your succession planning, you can make sure that everyone is happy with the path you choose and maybe even improve relationships.
Navigating Family Dynamics and Communication
Although succession planning is subject to the “Anna Karenina Principle,” which states that there are several ways to fail, there are also strategies to increase your chances of succeeding. These four principles of effective succession are what we at ES.CPA advise:
1. Communication
According to Preparing Heirs, Williams, and Preisser, a breakdown in family trust and communication accounts for 60% of unsuccessful asset transfers. However, according to the ES.CPA Family Business Survey, just 25% of American family companies have a strong succession plan that is well-documented and shared.
Clear communication is essential whether you’re taking over as the company’s founder, taking over your parents’ role as a next-generation leader, or even selling the company in a management buyout or trade sale.
This might include using an impartial third party as a sounding board or mediator. Founders have often requested us to take on the role of an impartial third party and interview each member of the next generation to see how well they grasp the organization’s succession plans. It’s amazing how diverse people’s responses may sometimes be.
We advise developing a clear succession plan and then making it known to all parties involved in order to prevent misunderstandings. This may assist guarantee that family members are still communicating around Christmas, in addition to providing suppliers and workers with peace of mind.
2. Governance
According to ES.CPA’s study, less than a third (28%) of studied family firms have a constitution or procedure in place, despite the fact that a startling 70% of company and wealth transfers fail across family generations (Preparing Heirs, Williams, and Preisser).
This governance vacuum is a needless danger. We advise creating a family charter and a family strategy based on a shared vision and set of principles. For the original generation, this may sometimes be a confronting practice, particularly if they established the company with no formality or structure. Although the first generation may not have required much structure, later generations will.
Don’t forget to include a thorough conflict resolution process. Although familial ties may be stronger than bonds, disagreements may nonetheless arise from time to time. Furthermore, when there isn’t a disagreement, it is ideal to decide on a conflict settlement procedure!
3. Flexibility
Establishing a succession process requires flexibility. Because families are dynamic, your government has to be (relatively) adaptable. For example, we advise families to periodically review governance models as their long-term goals may evolve along with the family. Ownership arrangements may change as a result of individuals getting married and new generations joining the company.
However, although governance has to be adaptable, it should also be somewhat hard to alter. Well-designed governance structures should be difficult for anybody to update, and any modifications must adhere to a defined procedure. Stakeholders will feel somewhat stable as a result, and family members may relax knowing that one relative won’t suddenly start making changes without first asking everyone.
4. Values
Your family’s values should also serve as the foundation for succession planning. Local impact is a priority for many, as seen by the fact that over half (57%) of American family companies give back to their communities, according to our poll. To ensure that your family and the family company can unite for a shared goal and that your purpose is maintained for a long time to come, these kinds of values should be clearly stated. In addition to giving the family and the company continuity, this may also provide community stakeholders who depend on the company’s support and generosity for comfort of mind.
Collaborating with Professional Advisors (Including Local Specialists)
Succession planning is a process that requires thoughtful deliberation and candid communication among stakeholders rather than just a transactional event. Families may manage the emotional complications and guarantee a seamless transfer for future generations by discussing succession early on and creating an atmosphere of openness and honesty.
A well-designed succession plan affects the whole company ecosystem, including stakeholders, suppliers, and workers, in addition to giving family members confidence. Businesses may reduce risks and promote a culture of cooperation and trust by including all relevant stakeholders and keeping them updated at every stage of the process.
At ES.CPA, we provide our knowledge to help you navigate the succession planning process since we recognize the special difficulties experienced by family companies. You can confidently handle the challenges of succession planning with our skilled team at your side, guaranteeing a smooth transfer and assuring your company’s survival for future generations.
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