Thinking of a future without you in it is not an easy thing to do. However, just as sound planning for future wealth protection of family members is essential in life, so it is in business.
Succession planning is a vital part of growing a healthy business, but many family-run SMEs are falling at this important hurdle, as Christiane Hutchinson, CEO of Biramis Management Partners points out.
“A Legal & General survey has indicated that only 42% of SMEs that are family-run have any succession plans in place. The highest risk they identified was the death or critical illness of the business owner.”
Succession planning is not just about readiness for critical events, however. It also forms the solid foundations for building value in a business.
“Too often, family-run businesses are tied to subjective notions and specific personalities, when the reality is they must become much more objective about structuring themselves.”
The Trouble With Families
“Family businesses are important to the country’s economy, but many appear to be unprepared for any transfer of ownership. Their perspective is too narrow, and this risks them failing to add the necessary value to their businesses.”
While a business undoubtedly has value to those working in it, and who own it, this may not translate to a third party, if there are certain structural weaknesses in it.
“People like to describe businesses as family-run because this evokes a sense of organic growth and mutual trust but, in fact, it may also indicate that the business’ value lies mainly in the personalities involved in it”
If you take the personalities out, is there a sufficiently strong management structure for a new owner to work with?
“Is the business’s day to day working heavily dependent on the owner’s input, to the extent that it could grind to a halt without them?”
“Family-run businesses can be a labour of love, and this passion is what characterises the business. But it does not necessarily add the right kind of value that will make it attractive to a buyer.”
Why Does Succession Planning Matter?
“A family-run business should be an asset. Without building sufficient value in it, the risk is that it becomes a weight to bear. If this happens, the tendency will be to try and offload it, and failing to realise its true value in the process.”
Diligent succession planning should, therefore, involve clear strategies to build value well in advance of exit.
“You must start to think of your business as something distinct from yourself and your family which means having the right managerial structure, and meaningful relationships with customers and suppliers that are proportionately distributed.”
“Any potential buyer wants proof that a business is stable and scalable, but also that it has value in itself, not just in its owner”
Building value is also an extremely effective exercise in helping businesses improve whether they transfer ownership or not.
“The issues concerned with building value for exit are issues that impact on a business’ long-term health regardless,” Christiane concludes. “If you build value in your family business, you make it stronger and more resilient, and a better business altogether.”