The troubled family of Logan Roy in Succession provides a telling insight into why it is not always advisable to mix family and business. However, the travails of everyone’s favourite toxic media empire has not deterred the majority of family business owners from passing their cherished businesses on to their nearest and dearest.
Family business surveys regularly find that around two-thirds of family businesses with succession plans envisage a transition to a family member. It’s easy to see why: family members will often have a long-standing involvement in the business, a belief in its values and structures, and a depth of understanding that may be hard to replicate for an outsider. Passing the business on within a family also creates a sense of continuity for clients and employees, and a sense of shared purpose for the family.
For the incoming family member, there are also plenty of advantages. It is a ready-made business – someone else has already grafted through the difficult early years. There is an established brand, customers, and a business model. Most of the risks have already been taken, leaving them with the more straightforward task of managing and expanding the business.
However, there are also complications. Families are often political and prone to squabbles with personal roots, and there can be ongoing issues around who is really running the business. Ownership structures can be opaque and lines of responsibility unclear. So before taking on a family business, there are a number of questions that an incoming family member should ask.
The fact that it is a family business should not deter you from conducting proper due diligence.
Is it a good business?
The fact that it is a family business should not deter you from conducting proper due diligence. While it is tempting to take certain things on trust, you need accurate information to make the right long-term decisions. If there are existing problems, you need to be able to judge whether they are ones you are able and willing to address.
For any family business, you should be able to look at three to five years’ worth of accounts. The existing management team should recognise why you need them and be ready and willing to provide them. They should also be able to answer your many of your questions and provide an honest view of the business’s prospects for the future.
Do you believe in its values and vision?
One of the most important aspects of passing on a family business is that values are being transmitted from one generation to another. If you don’t share those values, or envisage a fundamentally different business, it may not be the right option to take charge.
However, all businesses need to evolve over time, and to adapt to different market environments. While an incoming owner may benefit from a grace period, in the longer term they will need to develop a vision for the business. This may be different from the existing one and will need to accommodate shifts in the business environment, such as the pervasiveness of digitalisation and the growth of online commerce. You will need to be able to build on the company’s current values with your own vision.
You will need to be able to build on the company’s current values with your own vision.
Will you be allowed the space to develop it as you wish?
If your family has built the business from scratch, there may be emotional attachments that are tough to break. If you have a critical eye peering over your shoulder, it may be oppressive. It is worth asking whether you are confident that your family can let you make your own decisions.
However, the ongoing involvement and experience of founders and other family members can be valuable. Any successor taking up the reins will need to strike the right balance. Assigning specific areas – such as business development – according to the wishes and skills of the outgoing company head, along with ensuring structures exist for feedback and consultation, can help manage the relationship between generations.
What will the ownership structure look like?
Responsibility without control is an uncomfortable position. If other family members retain a controlling stake, this may restrain your ability to build the business as you wish. However, it is also unrealistic to expect them to give up all their ownership rights just because you are taking over day-to-day management.
The key is to find a balance that works for everybody involved, and to set parameters for the future involvement of other owners. They must be able to hold you to account if they believe you are making mistakes, but you also need to be able to push back against excessive interference.
It is important to understand the ownership structure that family members envisage and decide whether you can work within those parameters before any final agreement is made. At the same time, if there are plans to transfer ownership later on, you need a clear timeline in order to be able to plan for any tax implications.
Are there any employee issues to consider?
You need to be sure that the existing team is comfortable with you taking over. There may be issues if long-term employees with ties of loyalty to the previous management resent a change at the top. This can be magnified for a family member taking over if there is concern about nepotism. They may have to go further to demonstrate that they have received their position on merit.
In reality, many of the problems faced in taking over a family business are the same as when taking charge at any other business. The central issue is about ensuring there are clear lines of responsibility and accountability, and clear pathways for decision-making.
Involving an independent third party can help smooth this process and may be a useful early step. A trusted and well-qualified professional adviser can take the sting out of changes to the decision-making process and help set clear, rational parameters for management and ownership structures, as well as also explaining the tax and legal implications of each business decision. They may also help refine your views on how to develop the business in the future.
Families are often political and prone to personal squabbles, and there can be ongoing issues around who is really running the business, while ownership structures may be opaque and lines of responsibility unclear.