Succession
in companies
Family planning for small businesses
(Ajitha Perera, Manager, ACCA Sri Lanka,
examines the necessity for succession planning for small businesses)
Many entrepreneurs hope that their business is something they will
be able to pass on to their children. All too often though the family's
"rags to riches" story turns full circle and ends up at
"rags" again.
A combination
of poor planning, tax problems and family conflicts can conspire
to prevent the original founder's heirs ultimately seeing the full
value of the business.
In Sri Lanka today many successful small businesses, which are family
concerns, have grown to be successful enterprises. However, most
of these companies still remain within the domain of the family.
For these companies to continue to grow further there are many aspects
they should be looking at - one of them being Succession.
Succession problems
can come in a number of forms, but most involve a failure to plan
ahead and an inability to communicate, even between members of the
same family. One of the most common is simply leaving it too late.
Many entrepreneurs are reluctant to share command until they are
ready to retire. As a result, the next generation may not be sufficiently
prepared to take over.
Parents running
a family business frequently make assumptions about what their children
want, but, by the time succession becomes an issue, they may have
very different career plans. There is a tendency for fathers to
underestimate the contribution that daughters might be able to make,
and it is also easy to overlook the fact that key employees, not
family members, may be better equipped to manage the business.
Tax presents
a number of pitfalls and this is only one issue that a good succession
plan should cover. Keeping it in the family, a booklet produced
by ACCA for family-owned businesses and their advisers, recommends
starting by asking about the "philosophy" of the business.
Must it stay as a family enterprise or is it more important to realise
the maximum value from the business?
The plan must
be based on a sound knowledge of the business, and it should spell
out, among other things: the criteria for selecting the next chief
executive; how business practices, contacts and procedures are to
be passed on smoothly to the next generation; when the changeover
will take place; and how the retiring family members' aspirations
are to be met once they have retired.
Conflicts over
the succession plan can be resolved or prevented through setting
up a "family council", a forum in which all those involved
can talk over the issues in a neutral setting. That can counter
the tendency of many business owners to act without reference to
anybody else.
To preserve
the value of the business, the plan must cover the handover of management
responsibility as well as the transfer of ownership. The two will
not always be the same. Also, a business, which is seen as a "one
man band", will not keep its value when the founder leaves.
It is important to build up the skills, contacts and knowledge of
its future managers and to look at ways to use its brand name as
an asset.
Arguably, planning
for an exit is something entrepreneurs should be doing from the
outset. If you invest in someone else's business, a major factor
is how you get out. Few people ask themselves the same question
in relation to their own business.
In countries such as the European Commission (EC) there are estimates
that around 1.5 million small businesses in Europe run the risk
of failure thanks to succession problems.
In the UK, more
than 75 percent of businesses, are owned and controlled by families.
More than 90 percent have no documented plan for succession.
Hence if family businesses wish to see their legacies grow, they
should start thinking today for the future.
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