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Succession in companies
Family planning for small businesses
(Ajitha Perera, Manager, ACCA Sri Lanka, examines the necessity for succession planning for small businesses)
Many entrepreneurs hope that their business is something they will be able to pass on to their children. All too often though the family's "rags to riches" story turns full circle and ends up at "rags" again.

A combination of poor planning, tax problems and family conflicts can conspire to prevent the original founder's heirs ultimately seeing the full value of the business.
In Sri Lanka today many successful small businesses, which are family concerns, have grown to be successful enterprises. However, most of these companies still remain within the domain of the family. For these companies to continue to grow further there are many aspects they should be looking at - one of them being Succession.

Succession problems can come in a number of forms, but most involve a failure to plan ahead and an inability to communicate, even between members of the same family. One of the most common is simply leaving it too late. Many entrepreneurs are reluctant to share command until they are ready to retire. As a result, the next generation may not be sufficiently prepared to take over.

Parents running a family business frequently make assumptions about what their children want, but, by the time succession becomes an issue, they may have very different career plans. There is a tendency for fathers to underestimate the contribution that daughters might be able to make, and it is also easy to overlook the fact that key employees, not family members, may be better equipped to manage the business.

Tax presents a number of pitfalls and this is only one issue that a good succession plan should cover. Keeping it in the family, a booklet produced by ACCA for family-owned businesses and their advisers, recommends starting by asking about the "philosophy" of the business. Must it stay as a family enterprise or is it more important to realise the maximum value from the business?

The plan must be based on a sound knowledge of the business, and it should spell out, among other things: the criteria for selecting the next chief executive; how business practices, contacts and procedures are to be passed on smoothly to the next generation; when the changeover will take place; and how the retiring family members' aspirations are to be met once they have retired.

Conflicts over the succession plan can be resolved or prevented through setting up a "family council", a forum in which all those involved can talk over the issues in a neutral setting. That can counter the tendency of many business owners to act without reference to anybody else.

To preserve the value of the business, the plan must cover the handover of management responsibility as well as the transfer of ownership. The two will not always be the same. Also, a business, which is seen as a "one man band", will not keep its value when the founder leaves. It is important to build up the skills, contacts and knowledge of its future managers and to look at ways to use its brand name as an asset.

Arguably, planning for an exit is something entrepreneurs should be doing from the outset. If you invest in someone else's business, a major factor is how you get out. Few people ask themselves the same question in relation to their own business.
In countries such as the European Commission (EC) there are estimates that around 1.5 million small businesses in Europe run the risk of failure thanks to succession problems.

In the UK, more than 75 percent of businesses, are owned and controlled by families. More than 90 percent have no documented plan for succession.
Hence if family businesses wish to see their legacies grow, they should start thinking today for the future.

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