Plans for transitions within family-owned businesses are imperative to avoiding outcomes worthy of the hit HBO series ‘Succession’, writes Russell Prior, the Regional Head of Family Governance, Family Enterprise Succession & Philanthropy, EMEA at HSBC Private Banking
If family businesses were all sunshine and roses, then fans of Succession would not be impatiently awaiting every new episode of the addictive HBO television drama week by week.
Few family businesses, however, are home to the highly-charged sibling rivalry that surrounds Succession’s ailing but devious tycoon, Logan Roy – entertaining as it is. But that does not mean decisions about the future of a family-owned business can’t become divisive or pit generations against each other.
That is why when change is in the air, meticulous planning and open dialogue are key to a successful outcome.
In any family business, change and transitions are inevitable. Even those that have endured for generations will need to adapt in order to secure prosperity amid changing circumstances.
Whether it’s a family deciding to sell their business or a family member departing, having a plan at the outset for these sorts of transitions – and managing them well through good governance mechanisms – can be a valuable process that helps solidify the foundations of the family business and support the longevity of family wealth.
Selling the family business can be a positive experience: an opportunity to embark on the next phase of an enterprise, generate liquidity or take a step in a new direction. It can also be an emotional time; when a business has been built up through generations of the same family, letting go can be especially challenging.
Any way it goes, exiting requires preparation and planning from a business perspective and a personal one. Taking a step back and reflecting on what matters most to you and your family will allow you to put in place the necessary steps to realise your plan.
You need to get the basics in place, such as knowing the value of the business and what you would sell it for.
Being clear on why an exit is happening and what the family wants to gain from it is vital. There will often be things in family businesses that can muddy the waters, such as whether it’s a clean exit, what happens to employees, if your name is on the family business and so on. All of these can lead to confusion if you’re not clear as to why you’re doing it.
Any transition should include all the generations and family branches that might be affected. While some families are open to including the younger generation in these discussions, others can be more reluctant.
That is why early communication and planning are so important. It took one family in the Philippines almost 10 years to agree on the valuation of assets attributable to various family branches. In contrast, a family in Hong Kong took less than a year to realise their shares to support an emigration plan, because agreed rules and objectives were in place.
There are post-exit contingencies to plan for too, including exit procedures and managing share sale proceeds. For instance, deals can be structured to permit family members to stay involved in the business, such as by remaining on the board.
Separate from a sale, family businesses may encounter a different sort of exit – one in which a family member or family branch departs the family business to go out on their own or because of a disagreement.
There are a number of governance mechanisms available to families that can ensure these transitions are smooth.
For example, a buy-sell agreement can be used to set the terms, rights, and duties of the different parties when one or more business owners want to exit.
A family agreement or constitution can provide similar details for family businesses. So, if a family branch wants to exit the business, other branches will have first right of refusal to buy the asset.
There might even be mechanisms to account for situations when a younger generation family member chooses to pursue opportunities separately from the family business, and then return.
Nevertheless, the formula for keeping happy families remains: talk early, keep an open mind and plan meticulously.