Article by entrepreneurmag.co.za
For any successful business, safeguarding its future through careful succession planning should be an important focus. This applies whether you’re running a large listed business, a family owned business, or a small to medium sized unlisted business. There are interesting parallels to heading a successful family and preserving long term family wealth.
This was borne out in our latest survey of over 150 ultra-high net worth individuals, many of whom run or have run successful businesses, often across jurisdictions and generations. Over two thirds of the respondents identified succession planning as their current primary concern in preparing financially for the future. This represents a shift from our 2017 report which identified capital preservation as the primary concern.
What is driving this change? According to our findings, the answer is the rapidly changing and uncertain socio-political and economic environments. Against this background, our respondents said they see a certain urgency in preparing the next generation of leaders to respond to future challenges and opportunities. This means a more sophisticated, better structured and increasingly democratic approach to leadership, greater emphasis on training and development of young people, and better communication and renewed emphasis on long-term planning. The risk of failing to prepare the next generation is now seen as the highest priority for long-term sustainability.
In the family business scenario, and given the rate of technological, social and political change, intergenerational relationships are also transforming. Nearly all respondents agree that the impact of societal change on a family business must be reflected in the way they prepare for the future. Traditional, informal approaches are thus being challenged as families look to more sophisticated governance and communication.
For many of our clients, a successful business is the principal source of wealth and frequently represents a substantial proportion of their assets. Below are some practical, actionable insights from the report that came out of the survey, Four Pillars of Capital: Practical Wisdom and Leadership for Changing Times.
Concern #1: Succession Planning
As mentioned, the survey showed a shift in the primary concern by respondents from capital preservation to succession planning. We found that 69% of respondents identified succession planning as one of their top three concerns for future financial planning, followed by capital preservation (62%) and tax planning (48%).
Our Recommendation: Planning for the long-term is crucial in any business. Discuss strategic planning for future ownership with your Board, your mentor, your family and or key business stakeholders, which could include raising external finance or planning for an exit. Develop a purpose or planned vision for your business.
Partner with an independent professional to help advise and implement suitable and practical strategies to support governance and succession.
Concern #2: Leadership Selection
We asked families how they selected their leaders and how this should change in the future. One of the most interesting results of the survey is that 28% of families interviewed still currently operate on the basis of primogeniture (the right of succession belonging to the first-born child). When asked about their intentions for the future, however, the figure is now around a third of that at 10%. There is a growing preference for wider consultation for the selection of new leaders, possibly including a formal process. Currently only 13% use a committee to select the leader, however at least a third (33%) expect leadership to be selected this way in future.
Our Recommendation: Our experience tells us that having a clear leadership structure and process will provide the best chance of managing unforeseen risks – both internal and external – pursuing opportunities and ensuring that the business prospers. Most business owners need to employ leaders who can keep pace with the modern world and are able to adapt to a fast-changing environment. This means more broadly-based preparation than in the past.
The counterweight is that there is greater need for leadership responsibilities to be shared with others who have both the knowledge and stature to debate the key areas of risk and ensure the interests of all stakeholders are properly protected. Having an experienced mentor to help think through ideas and handle challenging relationships is invaluable.
Concern #3: Failure to prepare the Next Generation
Respondents identified that the top risks to long-term family wealth relate to family disputes (68%) and lack of planning (67%) as well as the failure to appropriately engage or train the next generation. This happens in businesses too, whether or not they are family businesses. Partners in a business can fall out, leaving the business and its employees to an uncertain future and often resulting in detrimental impact to the value of the business.
Our Recommendation: Increasingly, we suggest that families and business owners should engage in ongoing, regular and transparent communication with all company stakeholders, regardless of their responsibility or position within the firm. Employees should be given an opportunity to contribute towards defining the company’s core values and owners should invest in continuous development training programmes for their younger, more inexperienced employees.
Article by entrepreneurmag.co.za