25 May 2016

I Want To Run The Family Business – But Dad Won’t Retire!

There might be a good reason why you’re having to wait.

Family-owned businesses comprise a large segment of Australia’s business landscape – from local small businesses right through to international corporations. And while parents often hope that their children will ‘follow in their footsteps’ and keep the family business going and growing, children often look to expand their horizons away from the family enterprise – to their parents’ disappointment. But what about the other end of the spectrum, where the younger generation looks for a leadership role in the business but the older generation shows no urgent desire to hand over the reins?

The key to a smooth transition – in a timely manner – is to have a well-defined and carefully thought-out succession plan in place.

For many businesses, particularly small businesses, succession planning is a forgotten aspect of the business cycle, and this is true whether the aim is to hand over to the next generation or sell to the highest bidder. As a result, the focus tends to be on short-term goals like making more money, growing into new markets or increasing market share in existing markets. These are all vital elements of business success, but like any pursuit, if you don’t have a clearly defined goal in mind, how can you achieve ultimate success. If you are currently frustrated because the previous generation is unwilling to let go of the family business, here are two simple questions that need answering (plus a few suggestions) to keep everyone happy and create a seamless transition for the family business.

Are you ready, willing and able to run the company?

Perhaps you already run the company, just without the title, in which case you have already proven yourself capable. But perhaps you dream of the title without fully appreciating the time and effort required to keep a business running smoothly – in which case your parents probably see what you don’t, which could explain their reluctance. Before you start discussing a succession plan, you may need to address your current role and attitude towards the company, and to show that you are fully committed to the business’ success. Alternatively, a little introspection may lead you to seek new opportunities elsewhere. Either way, you will be moving forward.

Is everyone going to be happy with the plan?

You want control of the company and are getting frustrated, but have you considered your parents’ point of view? You may think ownership is your birthright, but a major goal of running your own business is to create enough wealth to retire comfortably – either through annual profits or business sale. Have you considered what your parents are getting in return for handing the business over? A good way to approach this question is to consider what they would get in an external sale, because if they could sell for hundreds of thousands, or even millions, to a third party, and you expect them to simply hand over the reins, there’s no wonder they are reluctant to do so.

So what can you do to ensure a successful succession plan?

  • Have an open discussion with your parents about both your and their goals in order to get a clear picture of everyone’s expectations.
  • Be willing to pay what the company is worth. Whether it’s directly out of your pocket, through profit sharing or retained shares, you need to be prepared to compensate your parents as if they were selling to a third party. If the business isn’t generating enough cash flow to justify the price, you might want to look long and hard at the financials to consider the company’s future.
  • Set a clear timeline. Once you have agreed to a succession plan, you should put a clear timeline in place, and work hard to ensure it is followed.
  • Get everything in writing. As with any business transaction, you should have a written record of the agreement to avoid any issues in the future.

By following these suggestions, you should be able to get a clear picture of everyone’s expectations, and create a well-defined plan to ensure that those expectations are met.