FRI 22ND JUN 2018

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Bringing the family business community together

Managing The Emotions Of Succession Planning

25th March 2018 Justin Urquhart Stewart, Co-Founder 7IM

A conversation at The Great British Family Business conference prompted me to put pen to paper…well, tap out a few thoughts on the keyboard…to share some experience about succession planning and the responsibilities involved.

It’s a conversation that gets raised by a lot of our clients and has come to the fore in my own family’s affairs. And it can easily be a thorny subject to both raise and conclude given the differing views that have to be accepted and the inevitable compromises.

For me, the nub of the complexity is that there are two equally important perspectives here and they can be poles apart even if you’re close as a family. The generation that built the business has to start to plan its next phase, which can itself be difficult. Meanwhile, the next generation may or may not be taking up the reins, or even want to. What I want to emphasise here, however, is that the more protracted these conversations become (or just get put off), the more difficult they can turn out to be – each party’s perspective of the issues to hand tends to become more and more entrenched.

Each generation does try to appreciate the other’s point of view, but it’s not always that simple. For me, that’s because the matter boils down to emotions.

A feeling of being overwhelmed, for example, can be keenly felt by the next generation. Are they going to be able to live up to expectations? How much do they have to understand and how soon? What happens if they don’t ‘get’ the important financial stuff, let alone produce a balance sheet or a profit and loss account that will stand up to scrutiny?

Another prevalent emotion is uncertainty. This can be felt by both generations. Both can be conscious of potential parent-child dynamics and be unsure how this will play out. Both can feel that their roles and responsibilities are becoming confused. And both can see ambiguity regarding timelines and what milestones could be achieved by when.

For the older generation, there is also a consciousness – particularly for the bigger family businesses – that there is an undercurrent of entitlement surfacing. Other members of staff may feel aggrieved that a family member can take up a particular role in a business – even if the family members are not actually presenting any sense of entitlement at all.

It’s of no surprise, therefore, when these very valid and highly emotive topics simply lead to people putting their head in the sand, and procrastinating rather than sorting out the situation. So what can you do? I have three suggestions to start you off:

1.Talk to your children about the business

You will hopefully have decided as a business owner whether you’re going to sell up as you retire and live off the proceeds, donate everything to charity as you don’t believe in inheritance, or oversee a guided handover of your business to the next generation.

Once you have thought things through, it’s a good idea to have a conversation and agree everything with your spouse – even if they aren’t involved in the business. They, after all, know everyone involved very well and can probably help you set up that next conversation.

Then please start talking to your children – and the sooner the better. So start when they’re small, and if you have left it until they are not small, start soon! There is an awful lot that needs to be prepared ahead of any sort of an exit strategy. If you’re planning to sell, for example, then you should really be laying out a five year roadmap as to how that will happen given you’ll need a solid three year history of profits to get any business sold on.

It’s also worth remembering that actions tend to speak louder than words so if you won’t involve them in helping out with anything that’s connected to the business, but tell them that everything will be theirs one day, this can cause confusion.

Of course, whatever decision you come to, you will need to be prepared to compromise. Life has a habit of throwing up a few hurdles that will need to be overcome. You may have your heart set on one course of action, but may need to change tack when you realise that your family have very different aspirations. Perhaps sitting down and discussing a future plan is a way of realising what those are, and achieve that conclusion.

2.How much is enough (and when)?

Warren Buffett, the famous billionaire investor, offers up some advice here based on what he was planning to give his children, which is “enough money so they would feel they can do anything but not so much that they could do nothing.” But what does that actually mean?

The answer, unfortunately, is that it’s entirely subjective because it is so personal. And here’s where forums such as the Family Business United are excellent as you can compare and contrast your approach to that of your peer set and respond accordingly.

Also see if you can get your own next generation involved in events where they meet others who are next generation. What you may be advocating may be the most sensible and successful way forward, but their emotions may mean that they find the state of play easier to accept if a third party has set out the rationale.

Meanwhile, wealth managers can often help provide guidance based on their experience with other clients as to how they handed on financial assets. They will have examples as to how other family businesses have approached their financial goals and aspirations for the individuals involved, as well as balancing the need for investment in the business.

Key to acceptance here, of course, could again mean compromise. And as with any financial matters, testing the waters rather than jumping in at the deep end may lead to the best outcome.

3.How do you protect them?

Again, starting early has its advantages. Stranger Danger and the perils linked to accepting gifts from brand new ‘friends’ are lessons that can extend well into adulthood. My experience of business is that there always seems to be someone that offers to wave a magic wand and fix all of your business’s issues for an attendant (and probably exorbitant) fee. And this is where your experience can help with a guiding hand.

However you intervene, what’s important is that they retain a sense that you trust them to be able to live up to the responsibilities that you’ve extended to them. Otherwise uncertainty can creep back in and frustrations rise to the fore.

Meanwhile, there will inevitably be scenarios when the medicine is a remedy that has (and probably most painfully) to be self-administered. Hopefully though they’ll have also contracted some natural resistance to some of the issues that plague succession, whether that’s about the finances, operations or just common sense in general.

Last, but definitely not least, do remember that what’s most important is that you’re part of the same family and whatever happens in the business is just that – business! It matters so much because family businesses are often very personal.

Success is often the result of a far larger number of sacrifices than any employment contract yields, but that’s not to say that the next generation won’t feel the same even though it’s sometimes easy to think when things get tough that they’re having everything handed to them on a platter. That’s almost certainly never the case and that next generation will have their own challenges to overcome – just because they’re different to those you faced does not make them any less daunting. Oh…and good luck!

Find out more at www.7im.co.uk

Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.

 

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