Picture this: your business, not just surviving but thriving through the hands of your successors, like a well-written saga. Succession isn’t just a buzzword for the elite or the stuff of TV dramas; it’s a pivotal journey of seamlessly transitioning your business, all while unlocking its maximum capital potential, and ensuring prosperity for generations to come.
The downfall of generational succession often hinges on the lack of formalization until a pivotal moment or retirement forces the issue. The notion of ‘legacy’ alone is insufficient. True success lies in the proactive management of governance, family guidelines, alignment of values, dispute resolution, succession planning, and estate management, all long before discontent creeps in.
So, what are the issues that need to be dealt with to successfully hand over your business?
Capability and willingness of the next generation – A realistic assessment is crucial for a successful business transition. Generational succession is pursued to maintain family ownership, preserve legacy, and ensure business stability, but it only succeeds when there’s capability, willingness, and clear communication of expectations.
Capital transfer – When planning a generational transition in a business, it’s essential to consider the capital requirements of the existing generation. Extracting a significant amount of capital during the transition can put pressure on the business and its equity stakeholders. Often, the incoming generation may lack the funds to buy out the existing generation, leading to the need for continued investment from the sellers or increased business debt. The sustainability of these scenarios should be carefully assessed at both the business and shareholder levels. In some cases, existing owners may transition their ownership gradually over an agreed timeframe.
Managing remuneration – In many small and medium-sized businesses, owners often adjust their pay based on personal needs rather than reasonable compensation for their roles. This can lead to either excessive or inadequate payments. During generational succession, it’s crucial to establish a more formal and structured approach to compensation. Salaries should align with specific roles, and if performance incentives are in place, they should have clear and well-defined structures.
Who has operational management and control? – Transitioning control in a business is sensitive, requiring advanced agreement on how operational and management control will be handled. This is vital for both generational stakeholders and the business itself, as uncertainty can lead to problems. Tensions often arise because the incoming generation desires decision-making freedom, while the existing generation values their experience and continued involvement. Agreement on control transition ahead of time, with a clear timeframe, can help alleviate these tensions.
Transition timeframes and expectations – Generational succession is usually a gradual process that requires active management to align expectations and prevent frustration. It doesn’t necessarily entail a complete withdrawal of the established generation. Extended transitions are common and can help the business manage change and financial needs effectively.
The need for greater formality and management structure – In many SMEs, the lines between the Board, shareholders, and management roles can become blurred, which becomes more pronounced during generational succession. It’s crucial to establish formal structures with clear role definitions and expectations. This might involve creating a family constitution or engaging an external advisory group to provide independent expertise. Successfully managing generational change is a process we can assist with.
Contact the Walker Hill Finance team to discuss how we can help structure an effective transition plan.
