The Path to a Successful Transition

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 “Someone’s sitting in the shade today because someone planted a tree a long time ago.” 

 – Warren Buffett

Any succession discourse must begin by confronting one sobering statistic: fewer than one in ten family enterprises make it to the fourth generation. The inescapable truth, however uncomfortable, is that if you want your hard work to benefit your great-grandchildren, the odds are stacked against you. In this article, Paul Pratt, Director of PKF Funds and Family Office, highlights the obstacles on the path to successful succession.

What are the Main Obstacles?

Obvious questions first: what’s the problem? How hard can it be? Yet, somewhere between the first and fourth generation, something often goes awry. Issues we repeatedly encounter include:

  • Conflict – Family members have differing perceptions, perspectives and priorities. All too often, family members fixate on their differences, forgetting what they share.
  • Equity – In many cases, parents give their children equal shares when it comes to ownership, but this can cause problems when next-generation family members aren’t involved in the business to the same degree.
  • Longevity – With average life expectancy increasing, some owners aren’t relinquishing the reins until it’s too late. Younger generations are becoming frustrated, while their elders attempt to preserve income and maintain control.

Identifying the pitfalls isn’t quite enough to avoid them. How can you come to a conclusion that works for all stakeholders?

Where do You Want to Go?

Clearly defining goals is a good starting point; however, the “conclusion” may not be as obvious as it might initially appear.

What is it you’re trying to achieve and why?

What do you wish your legacy to be?

What values define you, your family and your business?

What is it you are attempting to transfer? Is it legacy? Ownership of the business? Management?

Is it a question of effectively leveraging what you’ve built to empower those coming after to do something completely different?

Are you looking to pass on a business, executive responsibility or simply money?

Clearly defining what you want to leave improves the likelihood of success.

Who Do You Take with You?

Succession is a complicated business, with practicalities, emotions and ethical convictions – entangled such that maintaining objectivity becomes difficult. The myriad of questions above indicates a succession truism: the process demands a considerable amount of rumination and planning for it to work.

Furthermore, the process must involve all stakeholders. One of the most important success factors is inclusivity. Yes, it’s about owners. However, there are two sides to the succession story.

Bringing in the Next Generation

Defining family vision is a collaborative effort. The earlier the “other side” is engaged, the more likely a successful outcome – one which works for both sides.

The following are useful techniques to aid this process:

  • Communicate – Share your thoughts and actively seek others’; involve everyone and keep an open mind. Only informed involvement can bring consensus, and consensus is integral to an outcome that works for everyone.
  • Arbitrate – Conflict and disagreement are inevitable. Work through them by listening, learning, understanding, redefining and revisiting. There’s nothing inherently wrong with conflict as long as it doesn’t get out of hand.
  • Align – Agree on as much as possible. Ensure all parties elaborate their feelings and attempt to understand each other’s sentiments. The resolution must take all of these factors into account. Identify shared values as embodied by the enterprise: this ethical core is the foundation for the future.

Get Help

External facilitation is effective in many cases. Non-family member arbitrators can help find resolution to conflict. A third-party professional can not only help establish and maintain an atmosphere of cooperation, but their experience means they can also anticipate and defuse potentially explosive situations before they occur.

External advisors can help with:

  • Governance and planning – What needs to happen and when? A clear governance model keeps a family’s hand on the enterprise tiller. Governance models must fit the preferred succession plan. For example, if yours is a pure-ownership model, with no family members working in the business, you’ll need to create a shareholder council with representation on the board acting as the family’s voice in the business.
  • Process review – Over time, situations, perspectives and objectives can change. Reassess regularly to ensure planning remains relevant for all stakeholders at all times.
  • Execution – Set out with a planned and orderly transition and think about how to sustain success with the designated framework. Keep on course but don’t be phased if things need to change – agility is crucial.

What Are the Next Steps?

Successful transitions take many shapes. In our experience, however, there are some commonalities:

  • Start early
  • Align
  • Create a realistic plan with effective governance
  • Review the plan regularly
  • Ensure the plan stays relevant
  • Revise the plan when needed and maintain engagement

Perhaps most importantly of all, make sure the process is driven by an agreed-upon purpose and value system. These factors brought success in the first place; they are the foundations of a successful transition as well.

Paul Pratt, Director of PKF Funds and Family Office, has extensive experience working with Ultra High Net Worth Families, their offices and their advisers. He has an intrinsic understanding of the challenges they face as he is a G2 family member of a successful family-owned construction company.


The Path to a Successful Transition
Image courtesy of Paul Pratt