Heirs not always apparent

01:58, Jul 10 2012

I recently advised two family-run businesses that had been through succession. In each case, a father was passing his son a company that had operated since the 1940s and had a strong market reputation.

Each company was making similar profits. When the son took over company X it went from strength to strength while company Y has been run into the ground. What are the lessons for success when the next generation takes over the family business?

Know your successor

Does the successor have the skills and experience to run the business successfully? Many family business owners seem to think passing on the business simply means passing on the running of the company. This doesn't have to be the case. Succession can simply mean handing over ownership. Ownership and management are two very distinct roles - they can be combined, but they don't need to be.

Company X and company Y put their sons in management positions. It was a wise choice for X, as the son had the right skills and experience. He was business minded, open to learn and could lead and inspire staff.

However, the son in company Y had poor leadership skills and no management experience. He had worked with tools his whole life and was good at his job. The ownership should have been passed to the son and people with strong management skills should have been hired to run the business.

Listen to advisors

The father and son in company Y continually rejected advice, while the successor in X was as aware of his weaknesses and actively sought counsel.

Grant Thornton advised X about three years before the succession to ensure the process ran smoothly and advise on areas the successor wasn't specialised in. Since the transfer, he has built a strong business advisory team and meets this team once a month with weekly phone discussions. The business's profits have doubled in two years.

Don't rush

When a family business is being passed from one generation to the next, there should be a well planned and considered hand over period. Start planning well before the transfer date and continue your strategy long afterwards.

The father of company X knew years in advance one of his sons was right for the role and started training him from a young age. The son had full access to accounts and was almost managing the whole business before the transfer of ownership. This gave the current management team the chance to mentor and guide him. It also pays for the old management to stick around for a while to manage any teething problems.

After the father in company Y sold the business, he couldn't get back to the tools fast enough. He assumed his management role was complete. To make matters worse, the son didn't have any interaction with management before he became owner. He had no idea of the state of the company he was buying. Without training from the previous management, he had an impossible task.

Keep on changing

A family business is often held back by the current management's lack of appetite for change.

The father and son in company Y did things the way they had always been done. The business had survived on the back of its strong trading name, but the world had changed dramatically in the 70 years it had been in business. The son didn't closely monitor market changes or competitor activity and was unwilling to adapt to changes in technology and accounting processes. The business is like a page out of a 1950s book - nothing has moved forward, including the profits.

The son taking over company X had a very different attitude: he wanted to take the business to the next level. He monitored competition closely and made changes to keep pace. He hired more staff and one new employee was so good the son gave company shares. This would never have happened under the father's management.

Each succession is unique and this isn't a guaranteed recipe for success. Remember family transition is just one of many succession options - from trade sales, mergers and introducing private equity to a mangement buyout or a float. When making decisions about succession of family business ownership, get an outsider's perspective and follow advice.

- Eugene Sparrow is a partner at Grant Thornton