Why family SMEs need succession planning now

Are you serious about keeping your business in the family, but concerned your business won’t thrive without you? Then it’s time to start thinking about succession planning. A good succession plan means your family business will have every chance of surviving when you hand over the reins.

According to ICAS (The Institute of Chartered Accountants of Scotland) only about 20 per cent of family-owned businesses in the UK make it to the third generation. Also, only 49 per cent of small businesses in the UK have a succession plan. Family businesses make up two-thirds of the UK economy, and the ICAS stats mean that over half of them don’t have a succession plan.

Although succession planning isn’t a guarantee your business will stay in the family for generations, it is a way to make sure there’s a smooth transition to other family members when you choose to step down. That gives your business more chance of survival in the future.

Handing over a family business to the next generation is the dream of many family business leaders, but failing to put an adequate plan in place could be jeopardising the business’s future. Succession planning is a lengthy process and shouldn’t be left until the last minute. The whole process is riddled with challenges.

ICAS recommend five succession-planning tips:

  • Stewardship
  • Building a professional board
  • A written succession plan
  • Inspiring the next generation
  • Branding the family business and agreeing core values

There are many predictable family events and scenarios that need to be addressed as the business grows. Keeping your financial business affairs in order is imperative, and seeking outside help is a really wise idea with succession planning. Business decisions should be made from a point of logic, not emotion, and a neutral third party offering a business advisory service can help to do that. Numeric Accounting, who were consulted for the information in this piece are just one of the highly recommended Chartered Certified Accountants that have great experience in providing this kind of service, and you can see more of their information available on this resource page.

Why you may be avoiding succession planning

Emotional attachment to your business may prevent you from thinking too far into the future. You perhaps can’t envisage anyone else taking over, be it a family member or not. You may even have concerns about difficulties between potential successors. Perhaps you have a family member, partner or close friend in mind to take over, but know your preference will cause friction in the family. Or perhaps you are putting off the inevitable because you don’t like the idea of change.

These are all normal concerns. But, avoiding difficult decisions about the future of your family business altogether will jeopardise its future.

Family SMEs aren’t under the same legal governance rules as large companies listed on the stock market, and so they rarely adopt corporate governance codes and principles. Even those that do can find family emotions influence strategic decision making, especially around the subject of succession. For a multitude of reasons, succession planning is often a formality that is put off.

Conflict and outside help

There are many scenarios within a family business that can cause underlying tension or conflict, both within the family and the business. These types of distractions can impact on business success.

Heather Matthews of Little Chauffeurs has recently experienced first-hand the complexities of succession planning when taken over her father’s chauffeuring business. She advises, “for a succession plan to work effectively, everything needs to be put on the table, no matter how uncomfortable for those involved.” Matthews’ advice to anyone passing on or taking over a family business is to get external help.

Why you need to start succession planning now

  1. Succession is a lengthy process
  2. Your successor will need mentoring
  3. Careful planning presents an opportunity to move with the changing times
  4. Get to grips with tax relief and tax efficiency
  5. Avoid disputes
  6. Maximise opportunities

Why plan so far ahead?

Planning under calm and harmonious conditions makes the process smoother. Sufficient time is essential for making difficult decisions. If succession planning is left until the last minute, rash decisions may not be the best ones and could have a negative impact on the business.

Common difficulties faced in succession planning

  • Reluctance to let go is one of the most significant factors in the failure of family business succession planning. This can be due to a fear of retirement, a feeling of losing control, the impending lack of power, or loss of status. While many family businesses try to manage this by giving a consultancy role to the family member standing down, this can have a detrimental effect on the business if perceived as a lack of trust. The presence of a former leader can also influence the decisions made by those who have taken on responsibility for the business. People are more likely to make mistakes when they are living in someone else’s shadow.
  • The willingness of a successor to take over is crucial for the future success of the business. If a family member is forced to take on the business, the chances of failure are much higher.
  • When commitment is viewed as more desirable than competency. Just because a particular family member is keen to take over the business, it doesn’t necessarily mean they are the right one for the job.
  • The generation gap between the current leader and their chosen successor can lead to all sorts of disagreements.
  • Nepotism and sibling rivalry are the most common forms of failure when it comes to succession planning. Creating a shared vision amongst the family is essential, and will help to keep the family together when the current leader steps down. Clarity about share distribution, roles and authority will also help to prevent conflict. Fostering trust and open communication is imperative.

Benjamin Franklin’s famous quote is relevant to the issue of succession planning, ‘By failing to prepare, you are preparing to fail.’ Take heed from wise words.