Sooner or later, most entrepreneurs must consider the future sustainability of the enterprises they have built. Eventually the business will have to be handed over to someone with the skills needed to usher the company into a new era.
Ensuring that this happens in a planned and effective manner requires the development of a realistic succession plan that anticipates the realities facing the business owner.
Diale Mokgojwa, Senior Manager, Enterprise Development at Standard Bank says the type of succession plan depends on the owner’s circumstances. However, in South Africa, the succession issues that most often have to be addressed in smaller businesses are whether a family member will take over, or if an ‘outsider’ is a more practical choice.
Likewise, attention needs to be paid to the options of selling a portion of the business and including loyal employees in the equation. Finally, the potential of structuring the succession plan to cater for Black Economic Empowerment (BEE) interests also has to be put on the table.
“These options can have far-reaching consequences on the business and thus require that the owner makes the decisions as unemotionally and practically as possible.”
Unfortunately, when it comes to family-owned businesses, ideals and reality do not always intersect where they should, says Mokgojwa.
“It is not uncommon for someone who has spent his life building a business to have misgivings regarding the next generation’s commercial capability.”
The trouble with keeping it in the family
Typically, issues that can complicate keeping a business in the family include:
- Family disputes. These vary, but often centre on disagreements involving the present owner’s successor.
- Complications arise when the present owner disagrees with the direction in which the new generation wants to take the business.
- Inheritance issues. If the business can only support a few members of the owner’s immediate family, the others may feel aggrieved and expect compensation through a passive shareholding scheme.
“It takes courage and conviction to address these matters openly,” says Mokgojwa. “However, it must be done and all issues must be resolved to avoid future conflict and to focus on the skills needed for the company’s survival.”
The succession plan
If a succession plan demands strategies to be put in place that do not include the family, several other alternatives remain to be considered, says Mokgojwa. These include:
- Identifying a potential partner or partners to invest in the business. This will enable the owner to ensure that the skills required to develop the business are brought onboard, and sustainability is ensured as the people concerned will have a stake in the business.
- Considering a BEE partner who has the skills and who will also increase the future viability of the business by opening up markets in key sectors, particularly government.
- Evaluating the skills and commitment of key staff members and offering them shares in the business with the promise that when the time comes for the owner to depart, they can use a management buyout to buy the majority, or all, of the owner’s shares.
- Offering staff the buyout option, but stipulating that the process will be accomplished through their purchase of shares on an ongoing basis that could take several years to accomplish. This enables the owner to withdraw over a long period, or even retain a small equity holding in the business that can be used to generate annuity income, or be kept in a trust for family members.
“Although any of the above solutions will ensure that the business remains sustainable and well-managed into the future, it is wise to remember that relationships have to be firmly based if potential conflicts are to be avoided,” says Mokgojwa.
“Mutual compatibility is the most important requirement when selecting a successor; having a common background, shared value system and enthusiasm for business all make it possible for a trusting, mutually beneficial relationship to develop and grow, making sure the future of the business is in good hands.”
What to include in the plan
When preparing a succession plan, care should be taken to identify:
- A person who shares your values, entrepreneurial temperament and vision.
- Partners who bring specific skills and experience to the business.
- Someone who can bring capital, a business network and connections to the business.
- A person who has high personal standards and business ethics.
- Someone who you respect on a professional level, as you will then value their inputs.
“Developing a succession plan is vital; the sooner a need for a plan is recognised and the sooner it is accomplished, the easier it will be to concentrate on developing the value of the business, as you can rest assured that the business will remain intact in the future,” concludes Mokgojwa.