The importance of succession planning for family businesses and SMEs

By Jeremy Jones - November 14, 2019

People all over the world recently sat on the edge of their couch waiting to see which of the four Roy children in HBO’s dramedy Succession would inherit their father’s media conglomerate. While made with dramatic effect, the show serves as a timely reminder for family business owners and SMEs to start thinking about their business succession plans.

Succession planning is often an afterthought

Owning a business can be tough with a lot of your time and energy focused on establishing and running your business. Quite often, as business becomes busy, an effective succession plan is not considered a priority, or overlooked altogether. Further, some business owners procrastinate or assume a written will or verbal discussion will suffice, unaware of the potential implications when their circumstances change. And, when the situation arises where parents and children work together successfully as colleagues, but the parents’ exit strategy doesn’t include the children taking over the family business, the assumed clear waters quickly become muddied.

How do family business and SME owners exit their business?

There are several ways you can exit your family business or SME, depending on your end goal. This can come in the form of selling the business, transitioning ownership and operations to other family members or maintaining a partial stake in the enterprise.

While approximately 67 per cent of SME business owners will rely on selling their business to fund their retirement, fewer than 1 in 5 business owners have an exit plan in place. This can happen for several reasons, but a common challenge amongst family business owners is grappling with whether to keep the business in the family.

Determining the right exit strategy is crucial

Every business has its unique challenges, so exit strategies need to be determined on a case-by-case basis. For advisors working with family businesses and SMEs, this happens over time as the business owner’s priorities and end goals become clearer. For families that have built up a significant amount of value over time, parents are often forced to review who is best placed to run the business into the future, and this is when it can become clear that their children aren’t interested or just not up to the task. This scenario becomes particularly relevant if parents have the option to sell a portion of their business to a third party and keep a vested financial interest in the business.

A trusted advisor can help with a smooth succession

If family business owners realise that their exit strategy does not include their children taking control of the business, emotions can, understandably, run high. This is where having a trusted advisor in the fold can help. A trusted business advisor can attend family and business meetings to explain the financial complexities and benefits of what their clients have decided to do. Importantly, the advisor can explain these decisions, providing an independent perspective.

The best advisors are those who will place the long term needs of the business owners first. A good accountant and business advisor should guide their client towards the best strategic outcome relevant to them. For example, some clients may seek outcomes to support generational wealth creation and support, whereas, other business owners will be focused on realising the entire value of the business when exiting. Each scenario has its unique benefits and challenges, and requires a specific strategy.

Effective succession planning can be the difference between a smooth transition to retirement or a world of headaches. If you have questions about succession planning for your family business or SME, contact your Pitcher Partners specialist.

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