Succession Planning for a Family Business – Who Is Next In Line?

As a business owner you have built up a good business and have been assuming that your children (when old enough) will eventually take over and continue to grow the business.  But the penny will drop that your children will not be doing this for a variety of reasons, including some great reasons such as they want to follow a different passion or career. So succession planning often happens too late.

Combine this with research from the USA that has shown that –

  • 88% of current owner manager and family businesses believe the same family will control their companies in five years, but succession statistics undermine this belief.
  • Only  30% of family and businesses survive into the second generation
  • 12% are still viable into the third generation
  • only 3% of all family businesses operate into the fourth generation or beyond.

This research indicates that family business failures can be traced to one factor: a lack of family business succession planning.

Lack of Family Business Succession Planning

This problem is encountered far too frequently and points out how vital it is for a family business and owner manager companies to have open and honest conversations about what will happen with the company when the founder or current generation eventually retires.

Unfortunately too many business owners put off succession planning discussions far too long.  Subconsciously they know that their children are not prepared to succeed them or they have no interest in doing so.  Sadly, too many don’t want to admit this because the family business is more than simply a company, it has been a major part of their life for so long.

Factors all family businesses should consider

Based on our experiences and discussions with owner manager and family business owners about succession planning there are a few things you should start thinking about now.

  • Do not assume that your children will be as good or as committed as you are in running your company.
  • Entrepreneurial skills are not inherited by children, and you need to assess this during your exit or succession planning.
  • Passion or necessity has often driven an owner manager to start and build successful companies.  If your children are not passionate about wanting to take on your family business and will be doing it out of a sense of obligation, then your business will almost certainly not continue to prosper once you pass on the reins of the family business.
  • Do not assume that your current long term employees will be happy with your children taking over as the new owner manager. Quite often these employees are more qualified and knowledgeable in the management of your business than your children may be. The dynamics of current employees versus family members in succession planning for a family business is a serious concern and needs to be handled correctly.
  • And finally (for now at least) do not assume that the future monies, dividends or payments you are planning to receive from the business to fund your retirement will automatically be there when needed. Experience will have taught you that businesses go through ups and downs and earnings are not always guaranteed. This is blatantly true if you turn your company over to a family member who is not fully prepared to be the new owner manager and all that entails.

These factors and more are critical to consider as you begin to think about leaving your business to family members.  If you have not spent years preparing and grooming your children to take your place, and if they don’t have the skills necessary, and if they don’t have the passion for your business – you could be heading for trouble.

CMC has put a guide together to help business owners with succession planning and think about their exit strategy, download it from here

If you want to discuss your personal objectives and how to prepare for your future exit or business sale, call 01844 319286 or alternatively contact us via this form.

Client Video – Supporting the business growth of Connect Systems

 

Listen to the managing director of Connect Systems talk about the huge benefits CMC Partner, Derek Allen has provided on the growth of their business.

Derek Allen has helped this business to develop a management structure, plan business growth and think about the owners exit strategy.

 

Business: IT Support and Services

Number of employees: 30

 

We have a relaxed relationships with Derek. We feel he can get involved in any part of the business. He brings a multitude of skills and corporate knowledge that we don’t have ourselves. We really feel he is part of the team Dave McCarthy, MD of Connect Systems

Derek has delivered value for money by guiding us to develop a management structure, see beyond the next month and helped us think about the future and succession with our business  Dave McCarthy, MD of Connect Systems

I would definitely recommend Derek –  down to earth business approach and value for money  Dave McCarthy, MD of Connect Systems

Book your FREE confidential meeting with your local CMC Partner to help your business grow to the next level. 

Client Video: Mentoring Business Owner of Pippa’s Guardian’s

Listen to the managing director of Pippa’s Guardian’s talking about the mentoring benefits that Bob Brown has provided with supporting the growth of his business.

 

Business: Guardianship Service for Students

Number of employees: 8

 

Without Bob, I would have not been able to manage the growth. Now, I have a clear direction of where we are going and have clear management structure with everyone knowing their role and what Pippa’s Guardian’s is trying to achieve‘. Ben Hughes, MD

Bob is hugely accessible outside of our meetings via phone calls and emails‘ Ben Hughes, MD

We have a good friendly relationship. We have mutual trust and I have a lot of respect for him. He doesn’t tell me what I want to hear, he challenges me and makes me think differently‘. Ben Hughes, MD

I would absolutely recommend Bob. A mentor for a business can have a huge impact and I have already recommended him to a few people‘. Ben Hughes, MD

If you are a business owner looking for mentoring and small business advice, contact us here for your FREE confidential meeting. 

Client Video: Business Growth of Manufacturer of Aluminum Tubes, JDR Products Ltd

Listen to this honest interview with Managing Director and the Factory Manager of JDR Products Ltd on how CMC Partner, Bob Brown works with them to grow the business.

Bob Brown mentor’s this client to grow their core business, develop their additional product lines and establish a proper structure to support the business growth.

Business: Manufacturer and Supplier of Aluminium Tubes

Number of employees: 4

I don’t know how to do everything, so I knew in order to grow our turnover more, we would need someone to hold my hand David Wharrad, MD

To hear from someone who has been there, done it and experienced the pitfalls is extremely useful’ David Wharrad, MD

Bobs name always crops up. When having meetings about new products or dealing with tricky situations we always say ‘what would Bob suggest’ and we give him a call. He is part of the business’. David Wharrad, MD

We can ask Bob anything. He gives his honest opinion, he doesn’t take it personally if we don’t take his advice and he doesn’t hold back. He does it professional and supports us with everything we do’. Daniel Liddicott, Factory Manager

We wouldn’t have got to where we are now without Bobs help’ David Wharrad, MD

If you would help with your small business growth, contact us for a FREE confidential meeting.

Why do a contingency plan?

Business gurus always say that every business requires a contingency plan that anticipates all life’s little uncertainties. All too often, the listener nods sagely…

But if such advice is being properly followed by most, how come so many businesses fall by the wayside when the going gets tough?

The answer, sadly, is that many business owners DO NOT really know how to implement contingency plans that will not only save a business from disaster but shorten the ensuing recovery.

Here are a few questions to help make the point:

A Business Owner Q&A about Contingency Plans

Question 1: What is a Contingency Plan?

Wrong answer: ‘It’s when you batten down all hatches when things go wrong’.

Right answer: ‘It details how you can stabilise the business when the unexpected happens AND to do so in a way that will not hamper future expansion’.

 

Question 2: Why do I need a Contingency Plan?

Wrong answer: ‘I’ve already told you, stupid. It’s to survive, pure and simple’.

Right answer: ‘Any business with a well-defined, profit-focused business plan should have worked out how to get back on course via carefully considered economies that enable a healthy recovery.

 

Question 3: Is it difficult to prepare a Contingency Plan?

Wrong answer: ‘Nah, piece of cake. All you have to do is sit down with your finance guy, run through all the budgets and cut them. Sorted – you’ll soon be right as rain’

Right answer: ‘Provided you have a business plan and your management team has ownership of it, you should be OK, but you need to apply financial restraint with great sensitivity so that the eventual recovery will be quick and hopefully restore your original equilibrium.’

Take a look at an example contingency plan here 

 

Question 4: But what if I don’t have a Business Plan?

Wrong answer: ‘You don’t need one, mate! Just do what I said before and cut your budgets hard until the figures look right’.

Right answer: In the short-term, that could be a problem. But what you can do is work out a financial forecast based on reasonable working assumptions. Estimate how far off those targets you have drifted. You can then work out with your senior management team what must be done and agree a timescale for implementation.

Once things are more settled, you can prepare a detailed Business Plan. Don’t get caught out again’.

 

Question 5: Do all Contingency Plan changes have to be immediate?

Wrong answer: ‘Of course they do! Sooner the better! Just get on with it!

Right answer: A well-conceived Contingency Plan will work out what you must do and when. You may opt to hold back some of the more drastic cuts until it is clear that circumstances demand it.

For example, large-scale redundancies: why reduce your important skill centres without considering alternatives or before you know the full extent of the bad news? You should phase the Contingency Plan and work out everything in advance so that each phase can be implemented professionally.

Another example: what would be the point of slashing your marketing budget just when you are about to launch a new product that could speed recovery? And what would be the sense of cutting your sales and customer services teams who will be focal to the success of that new product?

 

Conclusion:

You should always look to identify non-essential costs and take them out quickly. It would be bordering reckless to rush into cutting activities essential for long-term success.

The only way you can know what they are is to develop a comprehensive strategic Business Plan.

Such a plan should carry a ‘Sensitivity Analysis’ showing the impact of certain negative developments. Then you can prepare a recovery programme.

Just as you should review your  Business Plan regularly, the same goes for your Contingency Plan.

Growth options – not all growth is equal

Most small companies have plans to grow their business and increase sales and profits. However, there are several growth options that could be followed. The method a company uses to expand its business is largely driven by its financial situation, the competition and even government regulation. Some common growth strategies in business include market penetration, market expansion, product expansion, diversification and acquisition.

Don’t make the mistake of attempting to grow too soon but wait until you have a period of successful trading behind you to provide evidence that your business model works.

With this in mind I have focussed my comments on the growth options that are best suited to small established firms.

Growth options

Most businesses opt for gradual, organic growth that is more manageable and involves less risk. There are a number of well-established strategies:

Market Expansion

Are there new markets into which you can sell your current products? This is often best considered when current sales have plateaued, it involves little or no product development resources.

At this point, you will have tested one or more products and found out how they performed. At least one will have been an existing product which has already performed in other markets. You can use the feedback and data you’ve gained from successful markets to build messaging in new ones.

Any market expansion strategy should include a marketing component. This should focus on engaging your new customers. It should reflect both the channels through which you will engage with customers. It should also include the value proposition you plan to deliver to them.

Product Expansion

Within your existing customer base or market are there additional products you could develop and sell?

You may plan to invest in new product development as part of your growth options. This opens new revenue opportunities that can drive businesses to success. Your goal is to develop your new product from concept to market introduction. First, identify a need in your target market that your product will fulfil.

When small companies employ a product expansion strategy, also known as product development, they continue selling within the existing market. A product expansion growth strategy often works well when technology starts to change. You may also be forced to add new products as older ones become outmoded.

From tiny acorns…

Growth involves risk and commitment; but, well-managed, it should be achievable for most businesses. It will not necessarily happen fast or enable you to retire next year; but every large business started somewhere.

 

 

 

The white-knuckle ride of controlling rapid growth

When a small business goes through a period of rapid growth, it can be feel like it is out of control and unless handled well can lead to serious problems.  It can deter you from taking your business to the next level.

The five cornerstones to manage when growing your business are:

Money

Financing the rapid growth of a business can be very challenging.  It is vital to draw a distinction between cash and profit.  It is also important to ensure that there is enough cash to cover the costs of rapid growth.  The management of the cash flow will help you to work to the limit as it is easy to assume that owed money will come in.  However, you need to manage the debtors, as delayed payments can empty your cash position which can be terminal.  Finally, do not forget to account for HMRC (e.g. VAT) and put a provision in place so that the bills (e.g. quarterly VAT) is planned for and not seen as a shock.

Staff

At times of rapid growth it can be tempting to over recruit or recruit too quickly.  Staff are one of the most expensive aspects of your business especially if you recruit the wrong person.   It is important to identify the exact requirement in terms of skills, competencies and aptitude and not just recruit a friend or a fried of a friend.  Do not manipulate the job to the person because it is easy to do, ensure you recruit the best candidate to match the job.

Operations

Moving from a small team of dedicated individuals, who have typically managed through word of mouth, to a larger team quickly will exacerbate inefficiencies, short cuts and short comings in the way things are done.  It is important to get organised with simple, written processes and procedures which everyone can understand and refer to.

Management

The owners of the business during time of rapid growth will typically get sucked back into the day-to-day operational side of the business (which naturally get more complex as the company grows).  Their micro-management can mean that control is lost and the ‘bigger picture’ is made up ‘on the hoof’.  However, be careful not to stand too far back as this can also result in issues as you have no control at all.

Customers

Manage your customers and do not take them for granted.  At times of rapid growth keeping up with high demand is difficult, especially when catering for the flood of customer demands.  It is tempting to cut corners on quality.  This will only exacerbate the problems in the long run because of increase in complaints, failure and returns; thereby inherrantly increasing costs.

 

 

There are other aspects of the business which will need attention during periods of rapid growth but the priority has to be these five cornerstones (specifically Money – cash flow) which if not managed properly will limit your ability to reach your potential; or worse still can cost you your business.

 

10 Common Mistakes Most Business Owners Make

Every owner manager has to find ways to improve how work is done and at the same time look for ways to improve the employee and customer experience but they often make the same common mistakes.  Successful businesses understand that happy customers and employees have a direct impact on the bottom line.

Since most owner managers take on many roles they are prone to make mistakes, which can threaten the business’ long-term survival. Here are 10 of the most common mistakes we have put together.

  1. Unclear Purpose and No Plan

Every owner manger of a business needs to understand the reason for a business’ existence, which is the basis for most business decision making. There is an old saying, “if you fail to plan, you plan to fail.” Every business (large or small) needs a plan, so a business owner must devote time, at least once a year, to review the strategy and goals of the business to ensure it is moving in the planned direction.

  1. No Written or Shared Goals

Goals are how businesses achieve objectives; the business should develop the goals by writing them down and assigning accountability to someone for achieving them. Without taking these steps, it’s difficult to achieve objectives.

  1. No Budget

It’s not uncommon for organisations to operate without a budget; often the owner does not create a budget because of the time investment in the process. There are many successful organisations that don’t operate with a budget, but businesses that do have budgets can allocate money to those things that will ultimately improve and grow the business.

  1. No Employee Accountability

Owner managers who fail to hold employees accountable for job responsibilities and goal achievement are guilty of mismanaging these key resources. Employees who are paid wages without meeting job responsibilities are providing poor value to that organisation

  1. Not Anticipating Market Changes

The market changes quickly in every industry making it important to keep an eye on shifting trends in areas such as technology or customer requirements, and tracking these changes.

  1. Not Understanding Customers

Customers pay the bills, and therefore large and small businesses need to take the time to learn how customers use their products and services and to create systems and processes to meet those needs.  Many businesses develop products or services based on what they think the customer wants – BUT it is vitally important to learn about the real customer experience – by simply asking them. Customer expectations are a moving target so keeping a finger on the pulse of changing needs is critical to maintaining and growing a solid customer base.

  1. Not Considering Employees (and Partners) the Most Important Customers

Employees are the business’ eyes, hands and feet and are usually the first contact customers have with the business.  Employees need to have clear job expectations and the training to perform job responsibilities.  Also they need to be monitored for completing job tasks and rewarded for doing a good job.  Happy employees have a direct impact on a positive customer experience.

  1. Lack of Communication

Poor communication is a problem in most organisations. Successful businesses create processes to manage how information is shared with both employees and customers, using face to face and other communications approaches. This creates a business environment that employees enjoy and customers are attracted to.

  1. Not Always Looking for Ways to Improve

Continuous improvement is must for businesses to develop and enhance products and services by constantly looking for ways to improve how and what they do. The owner manager should always review the internal processes of developing and delivering products and services in an effort to identify improvement opportunities.

  1. Not Celebrating Successes

Celebrating success along the way helps to build strong teams and strengthen employee engagement.  Forgetting to recognise this success diminishes the people involved and reduces the importance of success.

If anything in this blog strikes a nerve or resonates with your own experience, feel free to make a comment below or call Phil on 07720 397040 or email him or fill in the form below