Succession and continuity planning is essential for entrepreneurial families looking to safeguard their family businesses and the financial security of the next generation, says Nic Horn.
Succession and continuity planning is an essential endeavour for high-net-worth entrepreneurial families looking to safeguard their family businesses and the financial security of the next generation. This complex process must be navigated effectively to ensure that families who run businesses can continue to thrive even if their circumstances change.
Get realistic about succession
At the outset, it is important to understand the long-term intention behind the family business. If there is no natural family successor, the business will need to be set up to look beyond the current patriarch or matriarch, or be set up to sell.
Either way, important steps need to be taken while the head of the business is still alive to ensure that the full value is extracted from the business for the family, that the death of this person doesn’t destroy the business and that a situation with a potential for huge family conflict does not become that. Business strife can destroy a family and the wealth that has been so hard-earned.
Start with a comprehensive will
A comprehensive will is the cornerstone of any effective succession plan. Everything starts with the will that aligns with the broader succession strategy for the family business.
The will should clearly outline how the shares in the business and the business assets will be distributed among family members to prevent any potential disputes. For example, if the business shares are left to a spouse or child who is not involved in the business, this could create vulnerabilities, operational challenges, and value destruction.
If there is business assurance that allows the business to buy the shares from the surviving spouse, then this risk can be mitigated for the family.
Create a family constitution
A family constitution can provide a structured framework for decision-making and conflict resolution. This document should outline the roles and responsibilities of each family member involved in the business. While family constitutions are not yet widespread, they are becoming more common in South Africa and are worth exploring in consultation with an expert.
A well-drafted family constitution ensures that all family members are aware of the family’s succession plan, and everyone understands their roles and responsibilities and agrees on these, thereby reducing the chances of disputes when family leaders pass on. The tough conversation has thus been had and no one is out of the loop. And hopefully, conflict is averted.
Corporatise the business
Moving from a small family business model to a more formal corporate structure is critical for growing family businesses that want to ensure their continued survival. Corporatisation involves setting up formal shareholding agreements, which can include buy and sell agreements to facilitate the transfer of ownership.
You can fund the buyout of the business by the remaining family members. It is also often a wise decision to appoint a chief executive officer (CEO) or managing director (MD) who is not a family member, and who can provide an impartial perspective and professional management, to ensure continuity and the lasting success of the business, especially if the spouse or the children of the founder have no interest in taking over the business or want to play more peripheral roles. An independent CEO or MD might hold a minority share but would not own the business.
Families also need to appoint independent auditors and professionals in key financial positions for the sake of transparency, accountability and continuity. Establishing external mechanisms for continuity is especially important in cases where the next generation either would not be capable or has little to no interest in taking over the family business.
This would be the case, for instance, if the children have chosen different career paths, have emigrated or work abroad, or if they simply do not possess the right skills, interests or personality to run the family business.
Address inequalities proactively
Inequity among heirs can lead to significant family disputes. Situations where one child works in the business while others do not can create tension in the event of death or succession.
It’s important here to distinguish between shareholding and employment. Those family members working in the business will earn salaries and bonuses. But all family members could be shareholders. Families could then consider distributing dividends equally among all heirs, while the salary for the child involved in the business reflects their operational role and level of responsibility.
This approach helps maintain fairness and acknowledges the contributions of all family members.
Build wealth outside the business
Covid-19 showed us that a single, unanticipated event can destroy businesses and careers in a heartbeat. It is critical that over time, wealth is continually extracted from the business and placed in a diversified investment portfolio that will not be impacted by one single event.
Importantly, South African businesses are just that, South African, and this means that the family’s wealth is potentially all housed here. It therefore makes sense from a diversification point of view that a portion of these extracted assets are externalised.
This is not a statement against South Africa at all. Much of what happens to the rand and our markets is the result of external factors. South Africa is less than 1% of the world economy so it makes no sense to house all one’s family assets here. Offshore markets allow access to many more industries and ideas than are available in South Africa. This diversification builds robustness in the family’s wealth structure and ensures that one single event cannot lead to wealth destruction.
Embrace digital transformation
Gone are the days of family businesses running on hard-to-decipher paper systems. Digitising the family business and keeping secure digital records are increasingly important for maintaining efficient operations, accurate records and overall business management.
This also ensures that family businesses can be effectively co-managed by external professionals and that there is a smooth handover to the next generation of leaders. Also, no one wants to buy a business where the financial track record is not consistent, audited and verified because you cannot necessarily trust the valuations.
Conclusion
Succession planning is a multifaceted process that requires careful consideration and proactive measures. The key takeout is that families should bring in professional assistance and effective mechanisms for transparency, to help ensure a seamless and equitable transition, if and when the family’s circumstances change.
Nic Horn is Citadel director and regional head for KwaZulu-Natal.
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