Succession Planning Effect on Enterprise value

Real  Value of Family Businesses

Have you ever stopped to think about the real value of your family business? The issue is that it might not be as valuable as you might think it is. The reason being, that no real tests would have been made to test the validity of your figures if you are not around tomorrow.

Through our experiences and contacts with family businesses we have come across instances where the company on paper looks financially sound with a seemingly robust organisation. The siblings seem to be in control of the day to day operations and the company is healthy. But when we analyse deeper, we find that if the owners had a major illness or died suddenly, their organisations would fall apart. The reason being, that they had not put in place any real succession plan.

Long standing well organised business owners would inform us how successful their children or their teams are in running the company while they are away on business or holidays. How well they have prepared for their succession plan through estate and wealth planning. How his wife and children would be well taken care of through the various life and insurance policies that have been set up and how satisfied he is with his advisors.

Who makes Decisions in the Absence of the Family Business Owner

In such scenarios our question would be to ask the owner/s how many times during their absence from the office they themselves or their children or key managers had phoned concerning decisions relating to ongoing business let alone on major business decisions. In these instances, how would the company look like if they left for two or three months without them being able to lend their learned decisions?

In many cases the reaction would be that of having blank faces staring back at us. As this starts to sink in, their faces start to show signs of sudden panic. The issue being that although the children and /or managers could run the company in their absence they could not make any major decisions.

Restraining Decision Making by Next Generation Family Owners

What we normally find are scenarios where the current owner would have donated a percentage of his shares to his children at the same time retaining controlling ownership. The objective would be that of reducing the taxable share of his estate but not of handing actual ownership of the business to the next generation. On the other hand the children would state that they feel retrained and cannot take the business forward, but since their father holds control of all the major decisions they doubted whether their employees, customers, suppliers and their bankers would take them seriously.

A comprehensive family business succession process involves much more that simply establishing plans for your estate, creating ownership and share transfer agreements and/or purchasing various financial products. These are all very necessary and part of the succession planning process but are only part of the components of the succession jigsaw that we have to navigate.

Preparing the Family to be Fit and Proper Owners and Managers

The main component which has been left out of this succession process is the family itself. What about preparing the family for being fit and proper owners of the business? The current scenario is that the current owner has total control and can take the decisions on his own, but what about the future scenario where there will be a group of owners, some working in the business and possibly others not.

How will the next generation be able to handle the various and differing interests that the new ownership structure will be creating? Family members who are owners and working in the business will have different objectives, perceptions and perspectives from those family owners who do not work in the business. They will have differing expectations of how they should be benefitting from the family business proceeds. Next generation family members who are not owners might have future aspirations for when they join the family business.

Roles of Family Members in the Family Business

What are the roles of spouses and in-laws? These and other family centric issues are key factors that at one point or another will have a bearing on the families’ relations. Such factors will directly affect the family business performance but unfortunately very rarely if anything is done about them.

Through our contact with family businesses and the plans we are sometimes presented with, we can easily spot the solutions that were developed by advisors who never experienced a family dispute or family business failure after the current owner/s has passed away and the conflicts that arise due to the lack of family structures and preparation of the family in how it will interact for the benefit of the family business.

Parallel Planning Process in Family Businesses

What is clear is that we have to plan both for the business and for the family. This process is referred too as the parallel planning process whereby in parallel with the planning that goes on in the business side of the family business, planning is also done for the family in developing the necessary agreements and structures of how the family will manage itself and its relations to the newly acquired wealth.

The objective here is that of not only protecting the acquired wealth but also of being in a position that the family is actually a catalyst for expansion of the family assets.

As such we have to start focusing not only on establish proper business governance procedures but we also have to develop the governance structure for the family and this is achieved through the development of family agreements and/or a family constitutions or creed and a family assembly or council according to the needs of the specific family. Only in having in place proper governance structures for the business and the family can we increase our chances of survival through the generations.

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