Two-thirds of UK small businesses are run by families but a lack of succession planning means only a fifth of first-generation companies ever hand on the baton. We talk to four owners eager to safeguard the family firm for the future
Start it, build it, blow it is the classic trajectory of a family firm in any soap opera where the third generation locks horns in the boardroom while the business goes to rack and ruin. In truth, few grandchildren manage to misbehave in such a way, as the firm has probably disappeared.
"About 80 per cent of first-generation companies never make it to the second generation, and only 10 per cent make it to the third," says Ivan Lansberg, one of America's top family business consultants.
"All businesses have a natural life cycle," says Grant Gordon, director general of the Institute for Family Business (IFB), while plenty of entrepreneurs are happy to cash in. But for those who wish to pass on the baton, how many have thought it through?
PricewaterhouseCoopers, in its 2010/11 Family Business Survey, found that of 1,600 firms researched almost half had no succession plans, and of those that did only half had a designated successor.
"Succession most often happens without any discussion or preparation," says Lansberg, who reckons many owners simply sit down with lawyers as though drafting a will. "You're then launching a group of partners who have never talked about why they want to be partners in the first place."
It's a scenario Martin Stepek knows full well having suddenly become a 10 per cent owner of a top 500 Scottish company while still at university. Disputes over shareholding and pension pots forced him and his siblings to sell in order to save the family. Stepek, now chief executive of the Scottish Family Business Association, believes "founders often have such a love for their baby they don't want to let go. Their ego and status are tied up in it, and that's often compounded by a fear of retirement."
One US entrepreneur finally gave his 68-year-old son the power to sign cheques, because at 92 his hands were too shaky. At the other extreme, Stepek mentions a Scottish managing director who died young of a heart attack, leaving two sons in the business who "didn't even know the alarm number of the office or the name of the solicitor to talk to".
Lansberg often tells people "the issue is not whether things will change – they will. The question is whether you want to have any influence, or leave it all to fate." From that perspective the case for succession planning appears obvious. But Ken McCracken, a Glasgow lawyer and leading specialist on succession issues, believes any prevarication is "totally understandable. Especially if it involves the founder contemplating their own mortality."
The IFB's Gordon says the problem is often simply a lack of time, with successful entrepreneurs enmeshed in everyday company affairs. "Succession is a highly complex puzzle," he says. "You have to ask, what is the purpose of your family business and what are your shared values? If you can answer those questions, the clouds begin to disappear." To which McCracken adds: "If families get organised it increases the chances of success exponentially." We look at four companies which have done just that…
"We created a family constitution" Alastair MacPhie, Macphie of Glenbervie
Soon after becoming managing director of the family's food ingredients business in 1995, Alastair Macphie was summoned to his father's office. "What if I go to hospital and never come back?" asked Stewart Macphie, who was chief executive and on kidney dialysis. His son, who had already prepared notes, says: "We spent the next couple of hours working them into a document."
That document didn't save Stewart, but it may have safeguarded the company. "For the first six months after he died in 1997, my competitors had one go after another trying to put us out of business. They tried to poach every one of our customers and key members of staff," says Alastair, now chief executive.
Macphie is a third-generation company with a £45m turnover. Located on the family's 2,000-acre Glenbervie estate in Aberdeenshire, it's owned by Alastair, his sister and the employees. Because ownership is bound to fragment in the future, Alastair has created a 76-page family constitution. "It's not tablets of stone," he says. "It's a workable document that will need changing each decade." It sets out the company's mission of preserving the legacy of owning Glenbervie, and covers all aspects of governance from the selling of shares, to how younger generations apply, and what happens if the chief executive dies.
To any relative wanting to join, the chief executive is strict: "This is a serious business with 270 staff which needs the right management skills." Family recruits are expected to "go out into the big, wide world and earn their spurs". They are mentored for a few years to see if they are eager and have the right skills and aspirations. As he, fairly bluntly, puts it: "You might love to sit in my seat, but this is not a play pen."
"I spent two years getting an MBA" George Morris, Morris & Spottiswood
"Getting it right on succession is a mixture of serendipity and skill, but not in equal measure," says George Morris, chairman of Morris & Spottiswood, a Glasgow-based construction and shopfitting business with an £84m turnover. George's father, Ian, was the youngest of the second generation and started as a joiner at 16.
As a child, George remembers the business was often discussed at home, though not issues such as ownership or succession. "We'd be fairly typical in not having those conversations. It was a bit like the elephant in the room." Looking back, he feels there probably was an unstated expectation for him to follow in his father's footsteps, but instead it was his younger brother who joined as an apprentice, while he became a lawyer.
Having lost interest in the law, George had the conversation with his father about opportunities in the firm. "The old man was delighted, but wanted me to do something first, so I spent two years getting an MBA, before joining at 30." By then Ian Morris was a hands-off chairman who had left the day-to-day management to "a load of professional managers who had been expecting the end of family involvement". There was a rocky period of transition as George gradually took the reins as chief executive.
Luckily, his father was happy to embrace retirement, while his brother chose to leave and set up his own business. But now, two decades
on, it seems that succession is very much back on the agenda. "My oldest son is 16, so I have this issue coming at me at a rate of knots," he explains. "It's a very odd situation. You have this organisation you know so well, and you have your children who you've taught to tie their shoe laces. At some point you just have to let them get on with it and either sink or swim."
"You have to work your way up" Paul Wells, Charles Wells Ltd
In 1900, there were around 600 family-run breweries in Britain. Today, according to Paul Wells, there are just 28. As a fourth-generation chairman of the UK's largest remaining independent brewer, with 250 pubs and a £200m turnover, he believes that active family involvement is crucial. "There are two reasons why family brewers go. First, when no one from the family is in an executive role it becomes more difficult. Second, when there's a large, external shareholding that is no longer interested in the brewery or its pubs."
Wells, who has two elder brothers not in the business, worked in hotels and catering before joining as a sales rep in 1984. "These are the two house rules – you can't join until five years after university, and you have to work your way up." He feels there should never be any expectation placed on the upcoming generation in a family firm."It's awful when you see people living out their aspirations through their children."
Different divisions such as brewing and pub management are run as separate companies partly to make the business appear less intimidating for potential family employees. "Making the organisation look available is just as important as spotting the ones who might be interested," says Wells. With good governance and clear guidelines, he reckons you can reconcile the needs of the family with those of the business. "But the family must be as professional as possible," he adds. "That means there's no room for an overblown ego or any preferential treatment."
Wells accepts that the entrepreneurial flair displayed by founders of family firms is not something easily replicated by their descendants. But when it does happen, he believes you can "get a whole new generation of success".
"A united family can go on for generations" Christopher Oughtred, William Jackson Food Group
Founded in 1851, William Jackson is today best known for its Aunt Bessie's brand of frozen foods. As a business it has diversified and contracted greatly over time, but has always remained in family hands. Jackson's great, great-grandson, Christopher Oughtred, was just 22 when he joined in 1983 and went on to become managing director and chairman. "In hindsight, it would have been better if I had worked for someone else first, and that's what we do now," he explains. Family members have to gain at least five years' experience elsewhere before they can apply.
In his father's day ownership was split three ways "which meant any problems could be resolved over a sherry at lunchtime", says Oughtred. "But in my generation there were nine of us, so you couldn't do it like that." Something more formal was needed, so a family constitution was drawn up. "It identifies that mysterious line where family ends and business begins."
Whether the upcoming generation become managers as well as owners remains to be seen, but Oughtred is keen they all become "excellent shareholders". He explains: "This means being educated in how the business works, and learning to get on as a group. What kills a business is when different members of the family talk to the board about different things and the board becomes confused. If you keep a united voice within the family, you can go on for many generations."
THINGS TO REMEMBER
• Successful planning takes years – don't leave it too late.
• Define the strategic vision and values of the business before anything else.
• Talk to the upcoming generation about their aspirations.
• Enlist the help of key non-family members.
• Make rules on how the next generation can join and what is expected of them.
• Agree the age of retirement and how it is to be funded. Ensure all pension provisions are kept separate from the business.
• Look at establishing a family constitution and family council.
• Keep family members not working for the company as engaged as possible.
• When picking a successor, family firms should not expect to get it right every time.
For more information visit
www.ifb.org.uk (it will soon publish an online guide to succession)
www.sfba.co.uk (Scottish Family Business Association)
www.familybusinesssolutions.co.uk
www.iod.com/ias
