Why succession planning should not be deferred
Never believing the next generation will be ready. Not making choices. Not communicating. Playing off people. Putting the weight of expectations on just one person. Delaying again and again. Waiting to have perfect information.
Many families tick the Estate Planning box early but are significantly behind on the people side of family business succession.
Getting succession planning right and handing over the reins smoothly from one generation to the next is a multi-year process. However, many families get caught out and find themselves rushing, feeling short of options and struggling to navigate the process while maintaining family unity.
In this perspective, we explore why it is critical to plan early, outline strategies to avoid common mistakes and suggest recommendations to accelerate the process and ‘catch-up’ on lost time.
Why delaying succession planning hurts family businesses
Leadership succession is one of the most critical processes faced by multi-generational business-owning families. Getting it wrong can be traumatic for the family and have a prolonged, negative impact on the owner group’s ability to convene, discuss and decide on the big strategic questions facing their business. Inevitably, indecision and delay impact business performance.
When left with no alternative but to rush their succession planning, families often work “top-down”. The current generation of leaders dictates a solution to the next generation, often without waiting for feedback on what the next gen actually wants to do – “fitting round pegs into square holes”. Similarly, without time to think through and adjust family governance, the next generation finds itself struggling with decision-making structures designed for the previous generation.
When is the best time to start succession planning?
Succession planning can rarely start too early. Some families believe that nothing really changes during a succession process, but our client work has illustrated the pitfalls of making this assumption. We see succession as a change process – and often a transformational one that takes time and is hard to rush.
Twenty years would be ideal to plan for and manage a transition. It may feel an intimidatingly long period over which to engage with the key questions of succession, but this is the minimum horizon over which families who have survived the test of time plan for the transition of control. If your family didn’t start the process that long ago, all is not lost.
How to accelerate succession
Above all else, we recommend prioritising engagement with (and buy-in from) all of the next generation of owners. They will be the ones taking the business forward. However - they will be thinking differently to you, have different skills, different levels of involvement, and different expectations.
We would typically suggest to clients that they work through the following:
Create an Owner Council : You’ve taken the decisions; it’s time to bring others into the process and understand your thinking
Align around a fresh vision: What excites you, may not inspire them.
Reset your goals: You may have reinvested; they might want liquidity.
Reset risk profiles: You may concentrate risk; they might want to diversify.
Evolve the governance: It worked for you but rarely survives a generation.
Rethink skills: Your unique contributions to your business may not be their strengths of the next generation
Perpetuate your values and culture: To you it’s a reflex; to them it may just be words
Factors including poor governance, unconvincing vision, divergent goals, ill-prepared people, leadership vacuum, or weakening of your family values could be sufficient to destabilise the business.
It takes time to work all this out and to then feel ready to step away and pass on leadership to the next generation.
Involve the next generation
It’s key for the next generation to be involved. A wise client once spoke in front of his cousins: “It’s no longer about us. The future needs to inspire the next generation - we just need to accept that”. There was silence around the room as the reality of what succession actually means sunk in, followed by alignment that the ‘outgoing’ generation would strive to run best-possible process on the family’s behalf.
One of the hard parts is to think through the governance changes necessary for a new generation to be able to make good quality decisions. Start at the top: how can the two generations start to work together?
We recommend creating an Owners’ Council above the business boards, focusing on the big, slow-cadence decision rights of owners. In our experience, this is an excellent venue for the next generation to get involved, and it can be the fastest and most compelling change to make. From here, you can rethink together multiple questions about the long-term future of the family.
Seek clarity of purpose
When seeking clarity of purpose, ask again the fundamental questions of the next generation: “Do you want to own the assets together and if yes, why?”
Ask them to be clear – ideally, they should articulate what good would like for them, and what they would like to achieve together. This becomes their own version of a purpose and vision for a future together as owners.
Discuss financial goals
Compared to the current ownership group, the next generation may be larger, less involved, more risk averse, looking for new challenges, or a combination of these factors.
We would encourage explicit articulation of the most strategic trade-offs, such as growth versus dividends, diversification versus focus, risk tolerance, portfolio structure shape and other key guardrails.
It is important that the discussions lead to quantifiable goals for the next generation wherever possible. This makes the discussions real and allows the next generation to find where the potential flash points between them might lie.
Prepare for future board roles
What skills will be required on the boards given future business challenges and performance expectations? How should the next generation contribute? Where are there gaps? How can you close them? How to do that, often, in a short period of time?
Building the skills to sit on a board is a long process. Board development programmes can significantly accelerate the process. We’ve created committees formed of senior executives who know the family well and are good people-people. They listen to the next generation, help them understand their gaps, make better career choices, invest in themselves, and seek feedback. We’ve seen clients achieve significant professional development in periods as short as 3-to 5-years.
Rethink board composition
As they move to the next generation, we encourage clients to have a deliberate conversation about the make-up of the boards. Sometimes, it’s necessary to supplement the skills of family members, sourcing talent from outside the family, the firm and the client’s network. When selecting new board members, soft skills are just as important to consider as hard skills, and new members should be brought in gradually.
Create overlapping generations
One of the hardest elements of achieving continuity in leadership during a succession process is establishing how to pass on those key values, behaviours, and elements of the culture that make your family firm special.
We see successful firms consciously combining generations on boards for at least a decade before the elder generation steps off.
“How would our Mother/Uncle/Grandfather have dealt with this?” is a common question. Values come to the front when decisions are at their toughest. Being in the room together is the best way to pass them on.
Conclusion
Succession planning for family businesses takes a lot of work. Vision and purpose must align across generations. Governance may change. Skills need to be developed. Strategies around capital allocation and risk need to be planned. Profound transformation may be necessary.
Not every family is in a position to have started their succession planning a generation ago. We believe you can accelerate the process by involving the next generation now – involve them in an owners’ forum, be deliberate about vision and targets, set up a development programme and include them in decision-making while you are still around to guide them.
