With over 4.8 million family businesses across the UK employing approximately 13.4 million people, their importance to the continued economic recovery and the UK’s long term growth prospects should not be underestimated. With this in mind, it’s concerning that over 60% have no plans for succession, and that for a large proportion of those intending to pass ownership to the next generation there is no formal strategy for how to achieve this.
Naturally, entrepreneurs put the lion’s share of their effort into building up their business, while a negligible amount goes into planning for succession. One of the sad consequences of this is that the failure to plan can very often lead to a loss of family control. This is demonstrated by recent statistics showing that only 30% of family businesses make it to a second generation, 10% to a third and as little as 3% to a fourth generation and beyond.
For family entrepreneurs willing to plan for the long term, there are a number of options available. Succession to a family member is the natural choice for many but aside from the practical challenges of ensuring a successor has the right skills to take control, there is also a question of receiving adequate value for the business. By seeking external funding and support, it is possible for a founder to pass on the business to the next generation whilst extracting value in a tax efficient manner utilising entrepreneur’s relief. External support will also ensure that the next generation remains focused and continues to develop the business in the best interests of all. Of course that successor has to be the ‘the best for the job’ regardless of their surname.
A second option is to develop a second tier management team, perhaps with a blend of family and external management, who have the skills to drive the business forward. When the time is right, allowing them the opportunity to complete a management buy-out allows an entrepreneur to extract value from the business and incentivises the management team to keep pushing the business forward. There is of course still the third option of a trade sale and while value may be maximised the family legacy is lost.
At Springboard we understand the complexities of succession planning in family businesses. The earlier entrepreneurs start to give consideration to this issue the better. By building a long term plan, this will help to secure a positive outcome for all and for the family fundamentally give the best chance of a sustainable and growing business.