The recent news that Rupert Murdoch, the CEO of 21st Century Fox, is stepping down and handing over the reins of his media empire to his two sons, Lachlan and James, illustrates the issues that will inevitably arise when the older generation is succeeded by the younger. In the case of Murdoch, many are speculating about the corporation coming into the hands of what Murdoch’s Fox News would no doubt castigate for being a liberal environmentalist, Murdoch’s son James. It set the scene for some real confrontations between James Murdoch and the ultra-conservative head of Fox News, Roger Ailes.
For private companies and foundations, the issues are closer to home and often more personal, and, as indicated by the news about Murdoch’s empire, will continue to grow in frequency.With the older and wealthier segment of the world’s population reaching retirement, it is more than likely that the management and control of the majority of family-owned businesses will be transferred to the next generation.
The diversity of possible family relationships ensures that there is no such thing as a simple blueprint on how to choose a suitable successor. However, to add an element of objectivity to the process, it is wise to formulate the succession by adhering to certain road-tested principles and thereby increase the chances for success.
According to the Conway Center for Family Business, more than 30% family-owned businesses make it to the second generation, only 12% are passed on to the third, and very few (3%) last until the fourth generation. Recognizing the steep drop-off in survival over generations, as soon as a business has proven itself to be successful enough to have a future, it is advisable that the owners start thinking about developing a plan for who will succeed those in control of the day-to-day operations in order to secure and preserve the future of the business. Plan early. The transition process can be especially difficult for small or mid-sized businesses, due to the fact that succession involves both management and ownership of the business. Furthermore, ownership is usually in the hands of one person, a partnership, or a family—the members of which may not see eye to eye.
Instead of transferring the family business to the next generation, one could also elect to avoid the problems inherent with the succession by selling off the business. However, experience shows that keeping a successful business within the family more often than not will yield more wealth and benefits for the future generations than any investments to be purchased with the proceeds from the sale of the business.
One should always start with an assessment of the critical management positions, for whom or for what positions in the business a succession plan is required, taking into consideration such issues as skills, experience, commitment, and key functions. Even if the family remains as the controlling owners of a business, the successor selected to manage the firm does not necessarily have to be a member of the family; it may be the case that one or more family members do not possess sufficient knowledge, skills, or interest to take the helm. The ultimate goal is to develop a succession plan in order to keep operations running as smoothly as possible when that unavoidable transfer occurs or in case the unexpected demise of the owner occurs.
A well-balanced succession plan is usually comprised of four documents that should include the following components:
1. A strategic business plan in which an analysis is presented of the current business situation, considering such issues as the competitive landscape and product or service life cycle, followed by an outline of investments and other activities required to secure the future of the business.
2. A family mission statement that lays out the policies and procedures with regard to the role of the various family members in the business. This will ease any possible differences of opinion and disputes, as family members could have different visions about what would be the best course of action to secure the future of the business. Herein as well issues such as whether the ownership and management of the business will be passed along to the heirs or whether the family members will retain ownership but will not be involved in management are covered.
3. An owner’s estate plan is an analysis of the home country tax laws of the various family members, with the aim to minimize their tax burdens related to the transfer of the business to the next generation. The aim of a good estate plan is to adhere to the tax laws of all nations while taking advantage of any tax regulations in those countries that can minimize the amount of tax family members must pay. A succession plan is a clear and complete outline of how succession will be carried out, what duties and authorities will be passed on to which successors and when, as well as how gaps in experience or knowledge will be filled where needed.
In short, the best plan is the best-prepared plan. When one recognizes one has to transfer a business to the next generation, a person needs to have a plan already established well before it is needed, a plan that both the older and younger generations have been involved in developing, and one that is acceptable to everyone involved. We at Sadekya understand very well that it is not easy for the founder of a business to let go and hand over the control and leadership of the business but a carefully thought-out and well-developed succession plan simplifies that process and makes it less painful and more successful for all concerned.
