When it comes to selecting the next CEO in a company, it is critical to find the right fit. This is one of the most significant decisions to make in an organisation’s life and in the case of a family-owned business, the ‘fit’ factor can be more consequential. This is because the success and sustainability of the family’s main asset and source of income rests primarily in the hands of the selected CEO individual within the family and is more complicated than it seems.

Deciding on what will happen to the business, who will take over and how ownership will be transferred is tricky and statistics show that more than 70% of family-run businesses do not survive the transition from founder to second generation with the ‘killer’ being related to taxes or family discord. Therefore, succession planning in a family-owned business should be made a priority. Important ‘first steps’ to follow to start the Succession process are:

  1. Deciding on the Structure of your Family Business
    The assets of a sole proprietor or partnership are seen as indistinguishable from the personal assets of the owner and thus cannot be willed or passed on. Only the assets of the business can be transferred. If you wish to have one or more successors to continue the business, your best option is to form a corporation which is able to continue to operate after it is sold or upon the death of the owner.
  2. Management, Ownership, Taxes
    Once the structure of the business is sorted, you will need to focus on the roles in the business that must be fulfilled. Management and ownership are not necessarily the same as you may decide to transfer management to just one of your children but transfer equal shares of the business to all children. The tax component looks at how they can be minimalised upon death. This may involve various strategies such as freezing the value of your interest in the company while you transfer ownership to your children. Finding a reliable attorney and accountant who specialise in business succession planning will greatly assist with this and offer invaluable advice.

Now that the structure and levels of management have been outlined, here are some tips on how to get all your family business ducks in a row.

  1. Start your Business Succession planning early
    The ideal time to start would be as soon as possible but 5 years in advance is considered good. It is also not a bad idea to build an exit strategy into your business plan to ensure a smooth transition process. Collect information; this would include current business governing documents, related party contracts and estate planning documents that might affect governance, ownership or succession of the business. Good planning prevents unwanted disruptions further down the business line.
  2. Involve the Family in Business Succession Planning discussions
    Maintaining an open dialogue among family members pertaining to the proposed business plan prevents potential family discord. This is a time to develop a collective vision for the business and decide on the roles that each member will play for its continued success. This planning should also involve a valuation of the family’s primary business entities and other important business assets. This will help to reveal information about the strengths and weaknesses of the business which can be used to improve operations and profitability.
  3. Establish a Business Continuation Plan
    If key family members are going to be particularly important to the operations of the family business, then it’s advised to seek the necessary attorneys or counsel to assist in establishing mechanisms of control. These mechanisms will fall into place should there be any disruptions caused by a sudden death or incapacity of one of the key family members. This could include ensuring that there is a plan to replace a chief executive if he/she unexpectedly exits the business. These can be temporary measures that are replaced or supplemented by more permanent structures as progress is made on the succession plan.
  4. Plan the Senior Generation’s Retirement and Lifetime Transfers
    It is also important for the outgoing CEO to take time to plan scenarios for their life after running the business. Before the senior-generation owner transfers control and equity interests to the junior generation, they should work together with the necessary attorneys and advisors to ensure sufficient economic means to support their retirement. Ideally, the senior-generation owner will be able to oversee the transition of leadership and ownership of the family business to the next generation through lifetime transfers. They should seek assistance in using a combination of diverse approaches to plan their estate tax in a way that gives them time to implement the family succession plan at a pace that makes business sense, and which is likely to meet the long-term economic needs of the senior-generation owners and their successors.

Family business succession planning is complicated. It requires difficult decision making and requires strong family relationships. That is why early planning is key. Through open family discussion, establishing a realistic business structure and management levels, strategy planning, having legal backup measures in place and seeking reliable counsel, the process of business succession will run smoothly and ensure continued success and profitable growth.

Contact our consultants at Diga on info@diga.co.za, if you need further assistance in this matter.