In line for the throne

August 10, 2008

Family matters...Philip, Peta and David Hammon at Scenic World.

Companies need a succession plan in place for when the boss steps down, writes Bina Brown.

EVERY business owner faces the problem of what to do when their time is up or they have had enough. Whether it is a reluctance to let go or a fear that their hard work will be flitted away by new owners - either family or outside interests - very few family businesses have a succession plan in place.

A KPMG and Family Business Australia study of family business needs showed about 60 per cent of family business owners plan to retire this decade, yet only 22 per cent have a formal succession plan.

Philippa Taylor, chief executive officer of Family Business Australia, says succession planning is such an emotional decision for many family businesses that it is put into the "too-hard basket".

Yet when people get into businesses they should be planning, from the start, how they plan to get out, she says. "They might not use the exit strategy but if they talk about it then the process will be far simpler."

Lucio E. Dana, a specialist family business adviser and facilitator, adds that to have a successful succession you need to ensure that there are willing and able successors to take over the business, based on agreed timetables and conditions.

"Transferring the business to successors is about creating a shared vision for the future of the business and working co-operatively during the transition period to achieve results that meet the parties' expectations. Simply, it is about creating a 'win-win' strategy based on a genuine partnership."

DOs

Craig Holland, partner of tax services with Deloitte and author of The Art Of Business Succession: Who Will Fill Your Shoes, also says planning early is key to a smooth transition to the next generation, if at all.

Holland says there is no one single focus to succession planning; there will be people, legal, tax, valuation, retirement and insurance issues to consider.

"As if all the business and tax issues are not challenging enough, strategic succession planning becomes even more complicated when family issues - relating to legacy, birthright, communication, personalities and interpersonal dynamics - are added to the mix," Holland says.

Key to the planning process is addressing a number of issues including: defining personal goals and vision for the transfer of ownership and management; identifying and grooming talent to replace the owner; and the importance of family involvement in leadership and ownership of the company. One trend that is emerging is for business owners to redefine their role rather than retiring fully from the business - largely as a result of changes to superannuation laws related to working part-time and both men and women living longer.

A decision to stay in the business should not impede the transfer of ownership, transfer of management responsibility or the broader succession issues to be dealt with.

When it comes to exiting, how ownership is transferred - for example, through a trade sale, public float, a management buy out or a gift to family members - is as critical as the financing arrangements.

Decisions about how to transfer the ownership will depend on factors including the size of your business, family considerations and retirement goals.

DON'Ts

A big mistake is to leave succession planning to the last minute. Taylor says owners should start to plan five to seven years before the "departure date" and think of succession as a "process rather than an event".

Deloitte's Holland says owners need to be careful not to focus on a single element of succession such as tax. "There are a number of issues which need to be considered and it would be wrong for one person to think they know it all."

He says one of the big issues will be the emotional impact of an owner's departure.

"Its impact could adversely affect the business both financially and non-financially." He says it would be a mistake to assume that the next generation will want to work in, let alone own, the business. Then there is the issue of whether the chosen successor is competent and will do what it takes to develop the necessary skills to succeed.

Taylor suggests children coming into a business should work elsewhere for a few years.

"It helps them to establish a work ethic and see how other businesses run. It also makes it harder for other staff to make judgments about a family member and pigeonhole them."

PASSING ON THE BATON

Hugo Hammon is not yet two years old but the idea that he could be the fourth generation to work in the family owned business, Scenic World, is one that appeals to his father David.

"We'll see how he goes," said David, who, as the chief financial officer, works alongside his managing director father Philip, his cash clerk mother Peta and his site engineer sister Anthea.

Scenic World is at Katoomba in the Blue Mountains and is open every day.

The Hammon succession plan includes not only who will work in the business bought by David's grandfather Harry 63 years ago, but the finer details of how a specialised operation with unique equipment is run.

What started as an old green shed and a small passenger carrying car that held 24 people and ran only on the weekends in 1945 now hosts about one million visitors a year.

As well as the Scenic Skyway there is the Scenic Cableway - the steepest cable car ride in Australia - a 2.2-kilometre elevated boardwalk and a 100-seat cinema.

"Most of how everything runs is in Dad's head so at the moment we are working to get absolutely everything that goes on at Scenic World onto a computer program so that we have a record," David said. "Dad is 63. If he wants to leave in five years' time we have to worry about that now."

He said he believes a smooth transition will be one that involves good communication with the family.

To achieve that success there is a regular family meeting and they have found the right people to help.

"The main trick is to find someone who can guide you through it," David said. "We have an accountant that has become a specialist in family business."

Source: The Sun-Herald