Succession planning in family owned companies

Succession planning in family owned companies is a long-term process that takes time. It is important to devise an exit strategy that will allow the owners to leave the business with minimal interruptions.

Some of the questions that will need answers are in the succession process are:

  • Will I continue to work all my life in this business?
  • Who will take over when I retire?
  • How will such a succession take place?
  • Will I be able to realise a maximum return on my investment?

Unfortunately many business owners fail to consider these issues soon enough to enable them to develp and execute an exit plan. Planning and determination is not only required to create a successful business, it is also required to exiting a business successfully. Not having an adequate exit strategy can lead not only to family conflicts but to business failure itself.

Three succession routes

A majority of businesses in Malta are small and family owned. The shareholders and directors are often the same people. In such businesses the most common consideration would be to simply allow family members who are interested in the business to continue to run it. But there are three routes that all should be considered in order to ensure that value can be preserved and the business continues to grow:

   1. Retain ownership and management within the family
   2. Retain ownership within the family but allow outside management
   3. Sell the business

Retain ownership and management within the family

Training relatives in running the business and eventually sell, donate or let them inherit the business may seem as the easiest way to ensure that the business moves on and that relatives will continue to enjoy the value generated from the operations. However this can be tricky if there are divergent interests between relatives, when not everyone is interested in the business or most importantly when there is a lack of management and business experience. Having an understanding of the capabilities and interests of the different relatives would minimize the risk of family disputes and operational problems.

Bringing in outside management

If relatives are not interested or competent to manage the business the family can retain ownership but bring in outside directors. This requires a distinction between the roles and responsibilities of owners and directors, in other words a proper corporate governance structure. The company will need to establish rules, policies and processes by which to manage and administer to ensure that the interests of the shareholders are protected. If properly implemented the business can be managed by outside directors while the owners enjoy the dividends. Corporate governance is commonly associated with large listed companies, however this can and should be applied also to small undertakings.

Selling the business

Selling the business can be another viable alternative. Analysing the political, economical, social and technological situation can reveal that the current owners may maximize their monetary value by selling their business today and investing the money elsewhere. There are many routes and strategies when selling. One, often overlooked alternative, is to allow  employees to manage and eventually buy the business by using share options. Other interested parties could be friends, clients or even competitors. Having processes in place that makes everyone work towards value creation will make it simpler and more profitable when selling.

For more information on Succession Planning contact Clive Farrugia