Succession and Continuity Planning - Overview

A major part of a family business, or any business for that matter, is planning for the future. Succession and continuity planning is an ongoing activity involved in managing any family business. It is therefore an essential part of governance, as each member of the 3 circle model plays a part in succession and continuity planning.

Vision and Values

Before a family business begins the continuity planning, it is important that the owners, with input from the key management members, think very carefully about fundamental questions regarding the future of the company. These questions most likely include:

  • Does the family want to continue the business into the next generation?
  • If so, in what ways might the ownership of the business evolve?
  • What do the family members want the business to achieve?
  • Can the business be perpetuated with non-family leaders?

These questions will help establish a shared vision among the family members and the management team. This vision will then act as an overarching principle for the future of both the family and the business. It is important that the vision be agreed upon so the entire family can benefit.

A vision is based on a shared set of values. The vision sets the long term goals for the company, while the values will help people within the organization make day-to-day decisions. The values are developed so that decisions made within the business are consistent with the vision of both the family and the business.

Ownership Continuity

An ownership continuity plan addresses three main questions:

  • Who will own this business in the future?
  • How will ownership be transferred?
  • When will ownership be transferred?

Ownership continuity is a tricky issue to address. Often, a clear line is not drawn between ownership and leadership succession. Thus, an effective ownership succession plan addresses the fundamental issues relating to when and how ownership will be transferred.

A valuable tool for effective planning is a Shareholder Agreement. This document will help to lay out the specifics for a variety of shareholder issues, and can answer the main questions stated above.

Beyond this, it is important to ensure that future owners are prepared for the role. This includes writing out an owner’s roles and responsibilities, choosing the proper people for the proper role, ensuring they are properly educated, and much more. These processes are all designed to ensure that owners understand what ownership means and what their role is all about.

Overall, ownership continuity should be approached in a manner that meets the needs of current owners, and ensures that they build a plan they can all be satisfied with. And of course, it is important that this plan is in line with the vision and values discussed above.

Leadership Continuity

Once you have developed your family's vision and values, and established clear parameters for ownership, the next step is leadership continuity. Leadership is vital to ensuring that the business can survive and grow. It places the proper people in the proper roles to allow the business to succeed.

As with ownership, planning in this area must be done in accordance with the established vision and values. The important part is that the leadership strategy allows you to fulfill your business’s vision with the proper people. Whether or not this involves more family members in leadership positions is something that will have to be decided and agreed upon.

A great leadership plan matches opportunities with capabilities. It should assess the future challenges and opportunities of the business, and identify the particular skill sets that will be necessary to face these obstacles. Finally, special care should be given to finding the people who possess these leadership skills and training them so they are qualified to lead when the time comes.

Liquidity and Intergenerational Transfer of Ownership

It is a good idea with multi-generational families to plan or provide for liquidity from one generation to the next. This is because some family members may wish to sell some of their shares and having funds available to do so is essential. It is considered a desirable strategy for business families to have this ability to “prune the family-tree”, in particular as the number of family members expands from one generation to the next.

In order to undertake any share purchases there must be liquidity in the system. This will come from using internal cash reserves or through the use of life insurance.

Next Steps

Effective business governance should involve a great continuity plan. In order to see how a business should combine these two overarching strategies, see linking succession and governance.