Why your family business needs a succession plan

Many small business clients say to us…

We don’t need to think about a succession plan that’s only for bigger businesses than ours.

But is that really the case!

Let me share with you a couple of stories. The first is about Bob who is in his 60’s, some 10+ years ago he “gifted” a third of his business to each of his 2 children both now in their 40’s, one is the financial controller and ensures that the business meets all its debts, watches the cashflow, arranges finance when they need to purchase another piece of machinery, car or even a building.  She is the go-to person that ensures the business is in a good financial position.  Her brother is on the factory floor, ensuring that the teams get the work done efficiently, on time and ahead of budget.  And Bob well he is the “mouth” as they like to refer to him, an old school fabulous salesperson who builds the relationships keeps the clients happy and makes sure that there is plenty of business coming in to meet their targets.

So what would happen if one of these 3 partners became incapacitated through illness or injury?

Would the business have the capability to continue and who would be skilled enough to step in?

Would the family dynamic and relationships be optimal for the business?

We asked this of Bob and his 2 children, and the discussion was interesting, both the kids felt they were replaceable, but as for Bob, it was unlikely that the business would continue at the current level of turnover and growth without some significant relationship building being done by someone else.  And whilst all 3 as a family (plus Mum) get on really well around the boardroom table, no one really wanted to be in business with one of the kid’s partners or their legal personal representative (their estate) should anything happen.

As a result after many meetings, we were able to put in place a partnership agreement, which included how and when shares would be bought back by the remaining shareholders and under what price (or pricing methodology). What insurances needed to be put in place to allow for this and what work and training needed to be done to pass on some of the skills that Bob has which neither of the kids had at the time.

Without the structured conversations that were held, and probing questions, they have all said they wouldn’t have come to the same conclusion, one that they are all happy with.

And if you think that that this is what happens to everyone else but it won’t happen to you, think again.  A good friend of mine fell asleep at the wheel of his car after playing golf one day and hit a tree at 100 kms an hour.  No, he had not been drinking, nor was he on the phone or were drugs involved, he was simply very tired and lost concentration, falling asleep.  Fortunately for him, his 10-year-old Audi deployed all the right safety equipment, airbags and a passing motorist stopped to check on the car, calling the ambulance as it was on a country road on the Mornington Peninsula.  He was unconscious, cut out of the car and ended up airlifted to hospital. Several operations later and months of recovery, he has been able to get on with life and now years later he is back playing golf.

What this incident did was remind us all that this can happen to anyone. The lessons from his accident we far-reaching especially when it came to his small family business. It’s not just the big things that are impacted but the little things too.  Ask yourself who else knows your passwords, has access to pay the bills, can look after clients, check your emails and more.  A couple of phone calls were required by his wife to us and again we were able to step in to help short term, to fill that gap, all because he had the systems in place that we could follow.

Consider: do you have the right people around you to keep your business operational? Having the right succession plan and disaster recovery plan in place allows others to know where all that data is kept that if you are out of your business for an extended period of time. Importantly, everyone will know exactly what your wishes are and how to keep the business running, or knowing when it needs to be sold.

Not enough small family businesses take the time to plan for the unexpected.  I would encourage everyone to stop, think and put a plan in place. Ask those tough questions that you don’t really want to ask but know they could be the difference to your businesses survival.

If you need someone in your corner, chat with the JBS Financial team so we can help mediate a myriad of conversations guiding you in the right direction.

Jenny Brown, CEO and Senior Financial Adviser