Preparing your business for succession

For the first episode of season 2, Natalie is joined by Alan Frost, Partner in our Consulting division and the third and final generation of his own family business. They discuss how essential it is to involve both family and non-family members in designing a general business plan, so the business can thrive.

Show Notes

Defining the aims, value, and mission will lead to more open conversations around succession planning and will help determine who the future owners, leaders, and managers of the business will be, accepting that these roles are not synonymous.

By aligning your business plan and succession plan you will ensure that the business has the best chance of long-term continuity and success, and when the time comes you will be ready to hand over the keys.

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If you would like to find out more about how we can help you as a family business, please do not hesitate to get in touch by clicking the button below and Natalie or a member of the team will contact you.

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Transcript

Natalie Wright: You are listening to the Exploring Family Business podcast brought to you by Mazars. I'm your host, Natalie Wright, Head of Family Business at Mazars UK. And having worked extensively with family businesses for a number of years, I'm keen to support this valuable sector of our society.

Natalie Wright: At Mazars, we believe there is nothing more personal than a family business. Every family and every business is unique. So, we look forward to sharing knowledge, insights, and practical tips for those navigating the unique issues that arise from being in business with family. Now on with this week's show.

Natalie Wright: Hello and welcome to the second season of Exploring Family Business with Mazars. Following the success and feedback of season one, we've decided to specifically focus this season on the important subject of succession planning. We'll be delving into issues around ownership, culture, managing family dynamics, engaging future leaders, as well as preserving personal and family wealth. And succession planning can be a very complex subject. It's got many moving parts, but if we strip it back, we're essentially talking about the process of transition in the leadership, the management, and the ownership of a business.

Natalie Wright: But we know family businesses are different because of that family component. So, the transition to the next generation has an added [inaudible 00:01:27] to think about. And a successful succession plan will have a determinant effect, not only on the business but on those family relationships. Today's episode will have more of a focus on how to prepare the business for succession, and next week we'll be moving on to looking at how to prepare the family.

Natalie Wright: So, I'm delighted to be joined today by Alan Frost, a Business Consulting Partner at Mazars. Alan grew up in a family business and now advises others in similar positions as they implement change, formulate growth strategies, and transition to the next generation, Alan, for anyone who didn't tune into last season, can you introduce yourself and tell our listeners a bit about how you support family businesses?

Alan Frost: Hi, Natalie. Sure thing. My name is Alan Frost, then as Natalie mentioned, I'm a partner in the Consulting Division of Mazars, having joined the firm back in 2007. And I'm also a former family business owner as the third and final generation of that organization. Hopefully, I can add some personal experiences to my professional experience as a result.

Alan Frost: In the consulting function of Mazars, our team supports organizations in creating value in their business and achieving their goals, their business goals, or personal goals. And for many of our family business clients, this can often mean aspects other than just financial gain too, which is really great to work on and support clients with as it's very rewarding.

Natalie Wright: Thanks for that, Alan. I think it's always useful to actually get insights from someone who's experienced what it can be like on the other side, as well as actually acting in that advisory capacity. So, it's going to be good going through it with you today.

Natalie Wright: So, I think if we start off with something that was highlighted in our 2020 survey. And we often see these numbers are thrown around, which is that it suggests that less than 50% of family businesses in the UK actually have succession planning in place. Let's start with why do you think that is?

Alan Frost: Well, that statistic actually doesn't surprise me, partly because there can often just be an expectation that the next generation will take on the business, in whatever condition it is when the time comes. And I've seen that firsthand myself. There wasn't a feeling that there needed to be a succession plan because the succession plan was the next generation.

Alan Frost: For multi-generation businesses, I just think it's an unwritten belief that your role is just to keep that business going for the next generation, and probably to survive sometimes rather than thrive. I'm generalizing here, and I know that there'll be listeners out there that don't see that as being the case. But I think for all those listeners that don't feel that they will be able to compare perhaps to a family business they know whereby it's very much a case of keeping the lights on, keep it going.

Alan Frost: Succession in a family business is also a very emotive topic. We know that families tend to live and breathe their businesses, both in the business, but also at home as well. Consuming thoughts and conversations, even outside of working hours. Therefore, to talk about passing that business onto the next generation means to actually talk about letting something go. And in reality, talking about some of the greatest changes that we can all go through in our lives, which may mean the passing of family members, for example.

Alan Frost: And finally, I would say that family businesses carry an attachment like any of the businesses. And so, it's not only a motive from a changed perspective but also the idea that the next generation may be having very different ideas on where to take the business than yourself or where your parents took it, for example. And that can be hard to listen to and discuss as a family.

Natalie Wright: Yeah, I think you're correct on all points there. And actually, not just the emotive side, but actually practically there's a lot to think about. And having those discussions can often be very difficult.

Natalie Wright: So, if we were starting at a basic level, and obviously without completely oversimplifying something that can be incredibly complex and that is an ongoing process. If the business doesn't have a succession plan in place, or at least if it's not formalized in any way or it's not currently fit for purpose, what questions would you say need to be asked to help out that initial framework, and to get the family really communicating in the right way?

Alan Frost: Well, given the emotive nature of a succession plan, I think we tend to find that the best way to start thinking about it is actually to discuss a more general business plan. And that way the succession aspect just becomes an element of your business plan, rather than the succession plan, having a business plan attached to it as well.

Alan Frost: So, by bringing all key family and potentially non-family members into the discussion on where the business is heading, what's its aims, its value, its mission statements, et cetera, is what it stands for. It can be a perfect way to make that conversation around succession planning much more straightforward and natural as it becomes a plan to ensure that the business is achieving its goals, more so than the plan to hand over the keys to somebody else. And it ensures that actually, we're aligning everybody's interests around the business, not so much around the family surname.

Alan Frost: It also allows those outgoing generations to pass on their knowledge and thoughts, but in a safe environment around the business, being at the heart of the conversation. So, the succession plan, which needs to consider share structures, board governance, et cetera, then becomes less around blood links and surnames and relationships in that respect. And it's more around the wider business environment, both macro and micro level.

Natalie Wright: It's interesting actually in picking up on a point you mentioned there about looking at the business plan. So, we see all these figures around X number of businesses or X percentage don't have a succession plan. I wonder actually what the percentage is that don't have a formal business plan and where that interacts as well. Because we assume every business must have a business plan and they may have done it at outset, but have they maintained that.

Natalie Wright: So, thinking about ownership then, and clearly that brings a lot of responsibility. It's possibly not for everyone because you've got the heritage legacy to think about, especially if the family names above the door or actually on the product. So, if you suddenly find yourself in charge of a large workforce, you may have different views on the future direction of the business, or you might just feel that it's been something that's bestowed upon you, rather than something you want to take forward.

Natalie Wright: So how do you ensure that the succession plan caters to the fact that you may have different individuals who are comfortable being shareholders, but not managers and vice versa?

Alan Frost: It's a good point. And succession in a family business I would say is harder than anywhere else. You're dealing with potentially grief at the same time as dealing with significant changes across a business too. There are not many businesses whereby, or any other businesses, whereby the succession may involve you still seeing the person whose desk that you're now occupying as a result on a daily basis or a weekly basis for lunch in a social environment.

Alan Frost: So, it's a change that all your employees and even customers and suppliers are going to feel too. So, preparing for it as thoroughly as possible not only allows the business to continue in the best possible vein but also allows you time to react to that change properly too, which is important. We said at the start, there isn't a one-size-fits-all approach for the fact that younger generation shareholders effectively will be happy to reap the rewards of business, but may not want to participate in the same degree as parents or older generations.

Alan Frost: And dealing with all of this sooner rather than later is essential. And there are solutions out there that can work for all stakeholders, be it through a different dividend or bonus arrangements, due to voting rights or seats on the board. But ultimately what this all comes down to is how essential and important it is for family stakeholders to be really honest and frank with each other about what is important to them in life. And then the contribution that they're either able or willing to give to that family business as a result.

Alan Frost: I can guarantee that there will be instances out there whereby there are family members who want to offer as much as possible and as much as their relatives have previously to the business, but they just don't know how best to contribute. And they feel frustrated by that as a result, but perhaps unable to voice it as a concern.

Alan Frost: The other end of the spectrum is that there'll be those who have family connections and therefore feel that they're owed a living and a seat at the table by the business, but without offering as much in terms of the contribution. To have those conversations and understanding where everybody is in that spectrum, I think is absolutely essential.

Natalie Wright: Absolutely. And so, moving on to the actual process of succession then, and you did pick up on it just there naturally, Alan. When we see that change of ownership or perhaps even just leadership if the two haven't coincided, how important is it to manage how it's perceived externally from an early stage and to show that you have buy-in from the wider team, from other stakeholders, and so that you're no longer viewed as the bosses’ children, let's say?

Alan Frost: Yeah, and I was in this exact position. And when I look back, I think maybe I didn't leverage that to the greatest of potential really. And everybody has the time, and more importantly the scale, to make their own legacy in their business. And I see many people trying to create their own role and their own name and their own story much earlier than they really need to. I have massive sympathy and I understand that because lots of people don't want to be seen as their mother or father's child, they want to be seen for who they are, I get that.

Alan Frost: But I would say don't be afraid to ride on your previous generations’ coattails for a period of time. Remember the importance and the value that people place on the family business. And I can be quite confident in saying that everybody for me, that the wider team or outside, but where your employees or your customers, suppliers, or the stakeholders, will probably be thrilled to see that family business continues to another generation.

Alan Frost: So, you will have their full support and they'll want you to do well. Don't feel that that pressure to change the business model fundamentally on day one, I suppose. Let suppliers and customers remind you how fantastic your relatives were in the business, et cetera. But be true to your own values and the company's values, or the values that you've agreed as a family that should represent that business. Just because your parents gave a customer extra leniency on their credit terms, it doesn't mean that you now have to. But it also doesn't mean that you need to bring in a new receivables policy that brings everybody's credit terms down by 30 days. Examples such as this will allow you to naturally lose the tag of being the boss's son or daughter, and allow you to be recognized as a leader, which is most important.

Natalie Wright: I think that's a really interesting point that you made regarding using your leverage and actually don't be afraid to use that and then take time to make your mark. I think that's really valid point. Coming back to what you mentioned about values as well. So, we know that businesses thrive when there are clear and shared objectives. And family businesses in particular are known for embedding the values throughout the business with their employees. They're often part of the extended family.

Natalie Wright: But how do you ensure that the business can stay true to its founding values, let's say, whilst also encompassing that vision and objectives of the next generation and potential changes that might be on the horizon? And how can it be tackled when you're also implementing your succession plan at the same time?

Alan Frost: Well, I think the earlier succession planning starts, then the more achievable it becomes. You mentioned growing upon the foundations and almost the values that the business has always had. Well, people have new ideas and younger generations we see it have got different values as a cohort, even forgetting the family nature. So, there's nothing wrong with values changing, as long as there are agreements as to what they are and the rationale as to why they need to change.

Alan Frost: So, the aim should be that succession happens over time, not overnight. And that it's delivered through your own agenda, rather than being forced due to an event that causes a dramatic change to be made. I think this allows for smaller changes to be implemented into a business and for culture to be maintained or nurtured in a way that suits the vision of the incoming generation but doesn't move the outgoing generation aside.

Alan Frost: In order to be able to achieve that, because it's quite easy for me to stand there and say that, it's another thing different in practice, you need real clarity around roles, responsibilities, and how these plans have changed over time. And that can be anything from shadowing more experienced members of staff, working on the shop floor before appearing in a boardroom. All of this helps, you create those shared objectives and really show that you're not just in the role because you've got the right surname you really understand the business and you warrant that position.

Natalie Wright: Can I just ask you something on the culture point, it just springs to mind obviously, given everything that's happened over the last year? Culture and the culture of a business have to be at the forefront now. Are you seeing discussions around culture come in more to the top of the planning when it comes to discussions around succession, who'll lead the business? Maybe it's been expected that culture will be intrinsic in the business in the past, but you now need to almost demonstrate it, particularly if you're wanting to create that sustainable business, attracting the right employees for the long-term.

Alan Frost: I think we're seeing it less in family businesses than others, in all honesty. Because I think family business has always been ahead of the curve in terms of having that culture. We see it so, so often that you walk around and people do feel part of an extended family, in a way that larger corporates or public sector clients, for example, don't have that. So, it's much more prevalent in those types of organizations than it is in family businesses because it seems to come a lot more naturally in terms of that culture.

Alan Frost: But we have had conversations around how do we actually maintain ... Because family businesses have such a strong culture, as we've gone through the pandemic and perhaps organizations have worked less due to people being furloughed, or they've worked more remotely and not have the same physical contact that they have previously. Conversations around how do we maintain that culture, that strong team spirit and family spirit that we've generated and garnered over years and years and years, that we feel over the last 12 months has been hard to maintain. Again, every business is different in that respect, and there have been different ideas of how you do that, but it's tough, yeah.

Natalie Wright: But to hear that family businesses are leading the way on that again though, so that's good news. And accepting that this is a huge subject to explore quite clearly. We've touched the surface of things there, and there are nuances for each family, each business. If there were three practical things that the listeners could go away and action, or at least add to the agenda for the next board meeting, could you give us three specific points?

Alan Frost: It's really tough because like I said, this isn't something that you can create overnight. And trying to distill all the things that we've talked about at quite a high level into three points is hard, but let me give it a go.

Alan Frost: I'd say number one would be starting to have some clear and open communication. Start having those conversations that are, perhaps, have been unspoken previously, and really ask yourself if you're sure of what your family members want, both from life and also from business, and therefore what they're able or willing to offer. Don't assume that everybody wants the part for them that you've got in mind, because it might not be the case. Then don't be too hard on yourself and appreciate that it's an ongoing process.

Alan Frost: Don't create a succession plan and then put it in a drawer, tick it off the list and say, "Well, it's done and we can refer to it when we need to." Your business is constantly changing. Life is constantly changing and you need to plan ahead for the future to future-proof that success, I suppose. Succession planning is an element of the business plan, rather than the other way around. That takes away a lot of the emotion we’ll remember.

Alan Frost: And I suppose thirdly, and finally, and associated with that, it would be then to start to draw out that future structure. The process brings real clarity, and it can remove some of those emotional aspects of succession and lead to better action too. You won't complete a succession plan in an afternoon, even away from the business. But begin to set out some time frames in order to hold yourself and the family accountable. Outline what needs to happen by when, when people need to discuss things with further family members and come back. And start understanding what everybody wants out of the business, but what everyone's prepared to put in too.

Natalie Wright: Thanks for that, Alan. I know it wasn't easy, just coming up with three points, but really appreciate you sharing your insights with us today. And I'll be sure to leave your details in the show notes, along with a few useful links around succession planning that you've shared with me today.

Natalie Wright: So that brings the first episode of the Exploring Family Business podcast, season two, to a close. If you enjoyed today's show, please subscribe to the series and leave a review on iTunes. It will help us to extend our reach to the family business community. Join me next week when I'll be speaking with Russ Haworth, a Family Business Consultant from the Family Business Partnership, and host of the well-known Family Business Podcast. We'll be discussing the more emotive and personal side of succession, preparing the family. I look forward to sharing more with you then, but for now, thank you for listening.

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