The toughest call of all

You may run a family firm, but what happens if you don’t want the family to take over?

There is a reason why Logan Roy, the billionaire businessman in the hit TV show Succession, is so full of anger. Having spent decades building up his family business, he’s desperate to hand it over to the next generation – but does not regard any of his children as capable of rising to the challenge.

Naturally, Succession is exaggerated for television and there can be no excusing Roy’s behaviour, however frustrated he may have felt. But the problem is a real one for family business owners. You reach a stage where you’re ready to think about handing over the reins, only to conclude that there isn’t a family member who is up to the task.

That can be a difficult realisation, and it needs to be dealt with sensitively – for the sake of the business, as well as the family. Here are five ways to approach such a succession dilemma.

1. Plan well in advance and keep talking

“Open and honest conversations about what you want as a family are absolutely vital,” says Fiona Graham, Director of External Affairs and Policy at the Institute for Family Business in the UK. In practice, that means starting those conversations early on, rather than leaving them until succession is a pressing issue.

If you just can’t see your heirs stepping up to the top job, you don’t have to sell up. Of course, you’ll want to leave the business in safe hands – to protect other employees as well as your own legacy – but that might be a professional management team hired for the job, rather than a new owner.

Family members could be given the option of serving in other roles – as non-executive directors, perhaps.

But these issues need to be settled sooner rather than later, warns John Sheehan, a managing director at HSBC Global Private Banking, or the risk of confrontation increases. “In one case, a family business owner decided that one child would take over the firm but that they didn’t want the other two siblings involved in a leadership capacity,” he recalls. “When the detail emerged after his death, one of the siblings decided to sue the one taking over.” Avoiding the discussion can lead to unforeseen complications down the line.

2. Separate the personal from the professional

“These are going to be painful conversations,” warns Professor Winnie Qian Peng, Director of the Roger King Center for Asian Family Business and Family Office in Hong Kong. “But ultimately, family unity is more important than business continuity – you can’t force people to do things they can’t do, or don’t want to.”

The key, Peng stresses, is to try to take as much emotion as possible out of the situation. “This is about business competency, not family relationships or personal trust,” she says.

One way to set some boundaries is to ensure future plans and decision-making processes are set out clearly on paper, so there is absolute clarity about what is going to happen. 

Governance structures such as shareholder agreements, family constitutions and even wills set a framework for the future that everyone can see. If family members are involved in forming these agreements at an early stage, the potential for conflict later on is reduced.

Working with independent advisers on legal, financial and taxation agreements will also help take the heat out of the conversation. These third parties will automatically be less invested in a family drama.

3. Learn to let go

“Business founders are very often reluctant to let go of control over something they see as their ‘baby’,” says Peng. “But that might be one reason why they have dismissed the next generation as incapable – the truth may be that potential successors have never been exposed to any responsibility.”

Giving family members a chance to prove their mettle could even solve the succession problem. Someone who looks unsuited to a leadership role today may, with time, support and training, develop into a much stronger candidate.

However, even if that isn’t going to happen, founders need to learn how to take a step back. By holding on to power until the last possible moment, they make it harder for anyone to take over successfully.

It’s also possible to let go while setting a clear course for the company. “Look at how the business is held today,” advises Sheehan. “It may make sense to move the operating company into a trust structure, with instructions on ownership and management that will endure once you’re no longer involved with the business.”

4. Agree on how to use the sale proceeds

“Selling the family business does not mean you have to stop being a business family,” argues the IFB’s Graham. If a founder does decide to sell, she suggests, the sales proceeds could be used to seed new businesses, if members of the families have ventures they are interested in pursuing.

Another alternative is the potential for family members to serve in a range of different capacities, or to work with the family office’s support to pursue other projects. These might be commercial or philanthropic, for example.

“There is a perception that exiting the business is an admission of failure, but it really doesn’t have to be that way,” Graham says.

5. Safeguard your long-term reputation

“Families often assume that if they sell up, people will think less of them, or their legacies will be tarnished,” says Graham. “But that doesn’t have to be the case, particularly if you look for a buyer that shares your values and beliefs.”

One common strategy is to explore the idea of employee ownership, perhaps with trusted employees taking the lead.

“We had one client who had worked very closely with a president at their business for many years, even though he wasn’t a family member,” says Sheehan. “He bequeathed a significant stake in the company to this trusted colleague, with the intention that he would take over the running of the business.” Instead of centring on what seems initially the most fair, choosing what is right for your business and its future should remain the focus.

Thinking about exiting your business and not sure about your next step? Get in touch, or read more.