Sunday, February 25

Succession Planning in Family Businesses

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Small to medium sized enterprises of Pakistan are often characterised by one key element – the ownership and running of the business often involves the family. In fact at times several generations are involved in the business and there is always a desire on the part of the older generations to hand the business over to the next generation.

Sadly, due to a lack of planning, communication break downs, and insufficient preparation for succession, family businesses more often than not run into problems at some stage. The biggest issues arise when it is time for a generational change. This rarely takes place in an organised manner or as part of a well thought out succession plan.

As a result, all over Pakistan, we see families torn apart over business issues. What is interesting is that all the concerned parties feel emotionally hurt and are so convinced that they were in the right, that eventually family relationships along with the business relationships end up collapsing. The sad part is that a lot of these problems could be prevented through planning ahead. How often is the CEO changed in a large organisation, without even a slight hiccup in the company’s performance? Smaller organisations need to learn from the bigger ones and plan ahead for succession.

Unfortunately, in family businesses these issues are not given the importance that they deserve until it is too late, and when the unexpected happens such as the severe illness or the death of the Business Leader, there is total confusion about what happens next.

Developing a succession plan is not something you can do in a hurry. You need to allow plenty of time to develop the strategy, train the successor and make sure he or she is upto the task, before you can ever hope to make an orderly transition form one generation to another.

Family businesses are different from other organisations, often the business leader is not only the controlling shareholder but the CEO as well. So when the time for transition comes, it is both an ownership and management succession. This makes it twice as challenging.

If your ultimate aim is to hand over the business to the next generation, you need to invest time and effort in successor development. In addition to the educational qualifications, the potential successors need to know the business inside out. They need to have a thorough understanding of all functional areas and a good knowledge of the industry. In some family businesses, they adopt a practice of sending the younger generation to work in other companies first and learning the ropes that way. Given the Sahib culture in Pakistan, they feel that the children may receive preferential treatment in their own businesses and their learning compromised as result.

If you own a family business which employs your sons or daughters, consider these questions:

When will you hand the business over to the kids? Who will be the CEO?

  • What will your role be once you retire?
  • Is this the best exit strategy for you? Are there any other options?

How will you know if it is the right time?

Will your children be up to the challenge?

Is this what they want or are they simply going along with your wishes?

Will you be able to stand back and let them make their own mistakes?

What will the terms of this transaction be? Will you just hand over the business or will they be buying it?

What will happen to the business, if you have unexpected health issues – who will run it?

What would you want to happen in the event of your untimely death?

  • How do you want the shareholding to be passed to the next generation?
  • Will any member of the business not wanting to actively work in the business still be able to hold shares?
  • Do you want the transfer of shares to be in accordance with the inheritance laws?

These are just some of the questions that need to be thought about. There are a lot more to issues to consider as well.

If family members are involved in the business it is important that these issues are dealt with in a business-like manner – do not hesitate to get specialist advice and help. These are sensitive and emotional issues and getting outside help can make them a lot less painful to deal with. Professional help in this instance could come from your accountant, lawyer or even a psychologist – or perhaps all of the above.

Another key point to remember is that you must be realistic about your expectations of your children. Everyone is different – as much as you may want them to be just like you, the chances are that they too will have their own way of dealing with things or running the business.

To successfully develop and then implement a Succession Plan, there needs to be a clear understanding about who is responsible for which areas. Once the roles and responsibilities are agreed upon, it is important to communicate them to the other members of the family and your key employees. In summary, you need to:

  • DISCUSS
  •  AGREE
  •  DOCUMENT
  •  COMMUNICATE

Many well established businesses go to the extent of developing a family constitution which documents everything. It is an excellent idea to do so, as it ensures that families do not end up splitting and hating each other over business issues. That is too high a price, I am sure you will agree.
This article was first published on our strategic partner’s website: www.amerq.com

 

 

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abdurab@digitacker.com'

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