The singular rule to adhere to is planning, planning and again - planning for succession of a family business. Leanne Hegarty, Partner in Private Enterprise at KPMG, who specialises in advice to family businesses, says without adequate planning, the important decision of succession can come with a critical event.
“It’s wrong! The last thing you want is an important decision like this to be determined by an event,” she said.
She describes succession planning as ‘good corporate governance’ because exit strategies require careful consideration long in advance, to ensure the continued success of the family as well as harmony within the family.
Leanne says once the decisions are made, they can lead to improved business performance and greater harmony in family relationships. Conversely, failing to make these decisions can lead to stress, as well be a financial and human resource drain on the business.
Options available to family businesses are to sell privately, exit through via an initial public offering (IPO), effect a management buyout by current employees, sell a portion through a private equity firm or prepare the next generation of the family to take over the business.
“Many businesses don’t realise that it takes three to five years to plan for succession. This is a fair time frame to prepare the business for the next level or a sell off,” said Leanne.
Businesses need to be realistic when preparing for the succession process in any business, but particularly in a family business because of the emotional connection and the family ties to the asset.
“Exit strategies often fail because parties fail to plan properly. Also, many businesses don’t know what they need to do and how to take the necessary steps for the next stage.
“Often these business don’t engage the right experts to help them through the process,” says Leanne.
In some cases, she explains, families have achieved great success by building valuable relationships with key clients. However when it comes to selling the businesses are essentially “family-proofed” thereby impacting on the attractiveness of the business to potential buyers.
“People create such loyalty with their customers that it could have a detrimental effect because people only want to deal with the family member. It essentially lessens the value of the business when it comes to selling it.”
She says the most successful family business sales are those that have a good family culture and are professionally run with all of the appropriate systems and processes in place.
“Family businesses often have a founding member who has put in an immense amount of physical and emotional effort into the business.
“Therefore it is important for family businesses to seek independent parties to prepare the business for exit.”
Leanne says a good plan should be strong enough to respond to the climate of the time, and also be prepared to take advantage of opportunities along the way.
“This type of planning and preparation is an ongoing process. It also makes the business better, brings greater understanding within the family and it makes the family happier. Therefore it is important to plan well,” she said.
