Dec 5, 2009

Peter, who is 55 years old, is married to Mary for 26 years and they have two children. Peter is a good friend of Paul who is 32 years old and is married recently. Peter and Paul are business partners and run a successful machine parts business called Precision Tools. Paul specializes in sales while Peter takes care of the technical requirements. Together, they are a competitive combination. Through 7 years of hard work, dedication and combined efforts the business is now worth Rs.1 crore.

Tragically, recently Peter suffered a severe stroke and is paralyzed, thereby unable to continue with his work. Months pass and the business starts losing money as deliveries are not happening on schedule due to Peter’s absence. Paul can’t afford to hire someone else to replace Peter, as Peter is still drawing his regular salary. Paul wants to buy out Peter’s interest in the business but Peter and Paul can’t agree on a valuation for their business. Also, Paul is not sure on how to fund the purchase as all of his personal property is already mortgaged with the bank to secure their current business debt.

Later that month Peter dies leaving all his assets (including his interest in Precision Tools) to his wife, Mary as per his will. Even before Peter’s funeral arrangements are completed, Paul is in serious trouble with the bank on his business debt.

Precision Tools had borrowed Rs. 25 Lakhs to purchase a warehouse. In addition, the bank overdraft is currently running at Rs. 12 Lakhs. Both debts are guaranteed personally by Peter and Paul. The bank is after these debts as Peter’s death has triggered an automatic default of both these debts. The bank manager needs payment or to renegotiate the loan: "Will Mary guarantee the loan?"

The firm has lost one of its biggest assets - Peter’s technical knowledge. Paul must immediately find someone who can fill that role.

Mary can’t help run Precision Tools - She does not have the technical expertise of Peter and has to take care of two growing children. Mary’s once good relationship with Paul is souring over the dispute as to what is going to happen to the business and Peter’s usual salary.

Paul is eventually able to re-finance the two loans at a higher interest rate. He manages to employ Tony, who has the necessary technical knowledge. Paul has to pay Tony Rs. 5 Lakhs a year. Errors made before Tony started result in the loss of the firm’s best client.

Paul is forced to take on further debt to keep the business afloat. In desperation, Paul tries to sell his share of the business. The offers are only a fraction of what the business was worth before Peter suffered the stroke. Grimly, Paul decides to struggle on.

Precision Tools folds less than 12 months later. Paul is bankrupt and loses his family home.

The business, for Peter and Paul, was not only their job but their life and financial security. The business was to provide for their retirement. Now it won’t even provide their family with a roof over their head.

Most of us, family business owners are either Peter or Paul and are well aware of the implications of this story.  Unfortunately, very rarely do we discuss and plan business succession with our families. Less than 30% of business owners aged 51 to 60 have a written Business Succession Plan, and more than 70% have no plan at all.

Sooner or later, everyone wants to retire. But if you own a family business, retirement isn't just a matter of deciding not to go into the office any more. Besides ensuring that you have enough money to retire on, the whole question of what happens to the business becomes paramount. Who's going to manage the business when you no longer work? How will ownership be transferred? Will your business even carry on after you? These are valid questions that come to our mind at these times.

Business succession planning seeks to manage these issues, setting up a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs with other members of the family.

Perhaps this is why more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. Only a third of family businesses continue into the second generation, and less than a sixth survive to the third generation.

As an entrepreneur, you had the ability, vision, and guts to build your business from nothing. Do you have the courage to face the challenges of the future? If not, your lawyer and accountant will do it for you (probably start the process on the way back from your funeral).

In most cases, the "killer" is family discord; an issue that a good family business succession plans must cover. Think of business succession planning as broken into two clear dependencies i.e. management and ownership. It's important to realize that management and ownership are not necessarily one and the same. You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they're actively involved in operating the business or not.

Have you been putting off succession planning as you do not know where and how to start? Use these tips to get the succession planning process underway and ensure a smoother transition from one generation to another.

1) Plan well in Advance.

Start your business succession planning well in advance - Five to ten years before you plan to retire. In fact, many business advisors tell budding entrepreneurs to build an exit strategy right into their business plan. The point is, the longer you get to spend on family business succession planning; the smoother the transition process is likely to be.

2) Involve your family in these discussions.

If you plan your succession on your own and then announce it to them, you are likely to sow family discord.  Involve your family right from beginning, ask for their views, ambitions and goals and see how you can match them in your succession plan.

3) Have realistic expectation from your family members.

You must be realistic on the skills of each of your family members.  You may want your eldest son to run the business, but does he have the business skills or even the interest to do it? Perhaps there's another family member who is more capable. It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it. Examine the strengths of all possible successors as objectively as possible and think about what's best for the business.

4) Business succession is not about Equality.

Do not think that you have to split your business equally among your siblings.  While this is a nice idea in theory, it may not be in the best interests of your business. Remember that management and ownership are separate business succession planning issues. It may be fairer for the successor you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.

5) Train your successor and work with them.

How can you expect your successor to take over and run your business successfully if you haven't spent any time training him or her? Your family business succession plan will have a much better chance of success if you work with your successor for a year or two before you hand over the reins.

6) Get expert help as required.

Talk to your lawyer and accountant and get their insight to your business succession plan.  They know the intrinsic values of your business and the key aspects to take care in a succession plan.

If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. A good succession plan can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.

To discuss this in more detail, KEL has announced a workshop on 12th December in India Club, Dubai.  All family business owners along with their family members are strongly urged to attend this workshop and participate in the discussions to the benefit of one and all.  Those interested, kindly register your names on Daijiworld online or send your details to info@kanaraentrepreneurs.com.