Special Report: Family Business – when to hand over the baton?

Timing is everything in business. And for family-run companies the decision of when to hand over the baton to the next generation can be critical.

Succession planning is vitally important. But some family heads hang on in the managing director’s chair for too long. And there can be big problems if the strategy to secure the company’s long-term future when they do eventually step down hasn’t been mapped out clearly.

An increasingly expanding family – all with their own expectations and opinions – can also set its own challenges as businesses make their way down through the generations. Company founders and family heads may have worked long and hard to create a lasting legacy.

But figures reveal that only a third of family businesses survive into the second generation. And just 3% make it to the fourth generation and beyond. And even more worryingly only 13% of family businesses in the UK say they have a robust, documented and communicated succession plan in place.

Lack of preparation can have drastic consequences, family business experts warn. A PwC report early this year described family firms as ambitious, entrepreneurial, and committed to the long term. But it warned too many are risking the whole enterprise “by not planning properly for the transition between the generations”.

Growth adviser turned business group owner Paul Norris, managing director of Sobecamo Group, says he has seen family businesses on the verge of disintegration because a handover hasn’t worked. He cites the case of one company, saying: “The son was forced to take over when his dad died. His father spent 40 years trying to build the business, his son spent two years trying to wreck it.”

And he adds there are other long established businesses that get into difficulty as the family links are diluted. Norris believes that some family members feel “obligated” to carry on a business that might be second or third generation.

He also warns that family competition can “tear things apart”.

Norris founded Sobecamo Group with his wife. With businesses in Bolton and Bury, it is a first generation family operation but he has no intention of passing it down to his children. “I’m growing the group to make money, not to pass on a legacy or to say we are third or fourth generation. That’s not my motivation. “We have got four kids and they are horrified at the thought of ever working with us.”

Declan McGoff, global operations director at Altrincham-based construction, housing and care home business McGoff and Byrne, says: “You do see where family members hold on for too long”.

Succession planning and an exit strategy are at the top of his family agenda at the moment. And he doesn’t believe the business will be handed down to the next generation. He warns that having “too many family members” can kill a business off.

McGoff points out the number of children he and his brothers have and he asks: “How are we going to cope with those in the business?” He adds: “The point is the next generation down from us is just too densely populated. You have to restructure in some way to be able to cope with it.”

This feature is part of our special report on family business. Click here to download the full report for free.

Alex Wyers, joint managing director at Floorbrite, also sees the difficulties. He says: “My father wanted a legacy and we have had discussions about this, how you want the next generation past us to potentially benefit.

“If one family member is going into the business that’s great: but what if another doesn’t? To be fair we want all of them to benefit from what was created by my father. How do you pass on the wealth in the business?

“Is it a short term pay out; we sell the business when we’re done with it, or is some kind of ownership retained thereafter?”

Chris McLaughlin is managing director of MIS Active Management Solutions, based in Northwich, which delivers software for local authorities and housing associations.

He explains the business was set up a year before he and his twin brother were born and his father worked hard to hand it over to them.

However, he adds: “I can’t see how that would go another generation down. We’ve both got two kids and it would be hard. I can see myself putting money up and saying to the children if you have got a good idea I’ll run a business case and you can have a go at setting up your own thing.”

Andy Jones, financial director at Artisan Investments, agrees there are financial challenges to increasing the number of family members who are involved in the business as it goes down the generations.

He says: “If you get to a certain point, to take it very simply, and you have got a business earning £100,000 a year and feeding a mum, dad and two kids then that’s okay.

“If the same business is still earning £100,000 but is still trying to feed mum, dad, two kids and two grandkids, it is not going to work, it is impossible. A lot of families believe it can work, but it can’t.

“It is still the same pot of money being spread across different people. You have got to grow that pot.”

This feature is part of our special report on family business. Click here to download the full report for free.