Strategies to secure a smooth succession plan

Many of the world’s leading firms started out as small family businesses many years ago.

Some of these companies are over 200 years old and have lasted through many generations.

What sets these businesses apart is that there’s continuity which is ensured through very well executed strategies.

These strategies cover issues such as conflict management, succession and exit planning, change management, corporate governance issues and dispute resolution.

Family businesses are unique in that the relationship between the partners is permanent and very personal.

For example, how do you effectively manage a business owned by a husband and a wife if they decide to divorce?

The two greatest threats to continuity in a family business are poor conflict management and succession.

In Kenya many large manufacturing outfits and factories owned by Asians were started in pre-colonial times by a single entrepreneur.

The succession strategy for such a business was fairly simple, the closest relatives of the entrepreneur were trained to carry out the same business and then took over management of the day-to-day affairs of the company.

The second generation managers handed down the running of the business to the third generation and the cycle would continue.

Most of these businesses are currently at their fourth generation.

Some of the simplest tasks in succession planning include transfer of shareholding in companies to beneficiaries who are also family members and nominations into partnership.

However, how does the transfer ensure that the business is run according to set values and procedures?

Training is one of the ways to ensure that the standard is maintained. Another way is to ensure that there is good governance at all times.

Some family businesses hire external managers to run them while the family retains ownership.

For example where a family has invested heavily in real estate it may hire a general manager to run the affairs of the business rather than have family members participate in the day to day running of the business.

The advantage of this is the fact that there is a clear separation of roles between the shareholders/business owners and the management.

The owner of the business must also have a solid plan of how to deal with family outsiders who are also part of the business.

For example where a family outsider sits on the board, steps should be taken to ensure that at no time does the outsider gain majority shareholding in the company.

Any family member wishing to leave the business must sell his shares first to the other family members through the exercise of their pre-emptive rights.

The family members can also sign binding shareholder agreements to commit to a set of rules and regulations regarding management of the company.

Another more complex way of transferring ownership of a company to named heirs who are also in management, is through management buy-outs.

With this the management buys the company from the shareholders.

Since the management of this company is clearly separated from its shareholding, then a management buy-out would be one of the best methods to hand over the ownership of the company.

For larger buy-outs, private equity financiers, who finance the purchase can be used.

If a company is not listed, then a buy-out usually converts the company into a private company.

The scenario is different where the company is listed.

A management buy-out that cedes control to the management is regulated by the Capital Markets Authority Takeovers and Mergers Regulations.

However in a case such as this one, perhaps no third party financier is required to finance the buy out.

The advantage of a good succession strategy is that confidentiality is maintained, as competitors are not privy to confidential information such as trade secrets.

Management buy-outs are used to ensure continuity of a business in the case of family businesses, by ensuring succession of the company is to named heirs.

In emerging economies most of the enterprises are family owned.

Management buy-outs in emerging economies are common to ensure continuity in business and to lock out competitors.

A management buy-out is just one of the more complex ways in which succession in a family business is carried out.

Other simpler methods like transfer of shareholding and nomination into partnership occur frequently.