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Making a success of succession

Planning early and putting a formal agreement in place is key to a good outcome when handing over a business to the next generation

‘Any firm with family involvement faces the inevitable intra-generational question at some point.’ Photograph: iStock

‘Any firm with family involvement faces the inevitable intra-generational question at some point.’ Photograph: iStock

 

Succession continues to be the dominant question facing Irish family firms.

Regardless of market conditions or industry, any firm with family involvement faces the inevitable intra-generational question at some point, Ian Smyth, lecturer in human resource management at Ulster University, says.

“Whilst a true figure is difficult to accurately pinpoint, around 75 per cent of private-sector companies are recognised as being family firms and 50 to 60 per cent of those intend to hand over to the next generation in some way, which marks the succession issue as critical for private-sector growth in many ways. What complicates this issue, versus non-family firms, is the idea of effective endowment – specifically any non-financial capital or psychological attachment to the firm that the family owner wants to retain, maintain and keep within the family,” he says.

Planning early for succession then is vital, but not something that Irish family firms are very good at, as only somewhere between 10 per cent and 18 per cent make it to the third generation.

“Given the continued difficulty in acquiring and retaining talent across the board, this sharpens considerably when thinking about talent available within the family when the goal is family handover,” Smyth adds.

The statistics on having a formal succession plan are dismally low, with only 18 per cent of Irish family businesses with a formal plan in place.

Why then, if 53 per cent of family businesses want to pass the business on to the next generation, is there such a disconnect between the aspiration of continuing the legacy and the reality of achieving this aspiration, Catherine McElhinney, PhD student at UCD, asks.

“Because while planning always involves an element of uncertainty, the addition of family throws an added layer of complexity with emotions, expectations and desires, often creating a resistance against the need to plan for the future,” she says.

Next-generation leaders

So how are businesses finding their next-generation leaders?

The desire to keep the business in the family is a strong motivator and results in the next generation often being groomed for senior management and leadership roles, McElhinney says.

“While traditionally, family members joined the business early in their career and worked their way through the business to understand it from the bottom up, rapid advances in industry and increasingly globalisation of the economy has led many businesses to believe that continued success depends on their future leaders gaining experience outside of the family business. This will enhance their skillset, help them gain knowledge and understanding of wider industry workings and to bring new thinking and expertise back to the family business. This external experience allows next-generation leaders to avoid becoming ‘institutionalised’ by the family business by gaining perspective on how other businesses operate whilst also strengthening their credibility and ability against possible accusations of nepotism,” she says.

The main issue to be considered is whether or not there is someone within the family with the ability, skills and interest to take over the business, Shaun O’Shea, partner at law firm Beauchamps, says.

“Experience shows that a better outcome is achieved where family members are consulted and where there is early and consistent communication between family members. It is also very important that succession intentions are discussed and clearly mapped and recorded. We would also strongly recommend the establishment of some form of family forum to address and manage any conflict or potential conflict that might arise. Key skill requirements are a major concern for any business and in this regard a family business is no different and again we would strongly recommend that a family business charter or constitution is put in place and those skills are clearly identified in it. Admission of new family members into a business, if not handled correctly, can result in the departure of experienced, skilled executives,” he says.

Opportunities

In terms of opportunities for new entrants into this market, Ian Smyth says: “We are seeing a lot of opportunity within the tech sector for co-preneurial family firm start-ups, for example, husband-wife teams. They are developing really interesting and innovative firms that are perhaps more lean and agile as they are small by nature, but with the innovation and opportunities to scale more rapidly, and as a result take more risks, perhaps more than in a traditional family firm. That said, the research shows that family firms always outperform their non-family counterparts, so for a new entrant to start off as a family firm, they have a prime advantage.”

However, the concept of a family business will change dramatically over time, with technology being the key determining factor, according to family business consultant Paul Keogh.

“To understand how technology will change the concept of family businesses, we must look at who are the new tech entrepreneurs. More often than not, these new tech companies are not started by what we would describe as the traditional ‘founder’, who builds a business and encourages his/her children to join. The new tech companies are started by techies that want to build a business and sell it and keep ‘inventing’ new tech products and sell them. The founders are often college friends with like-minded skills, not family. The main exception to this would be Stripe, which was started by brothers Patrick and John Collison. I am guessing that they are far too young to be thinking about the next generation.

“This is not to say that family businesses are on the way out but they will remain very much in the traditional industries you see today – construction, started by a skilled tradesperson, agriculture and agri products, fashion, services businesses such as pubs, garages, shops, hotels, and leisure.

“The problem for the future of these traditional industries is that they come with long and often very anti-social hours. The current generation in Ireland may not be prepared to work these hours, favouring a more flexible work-life balance,” Keogh says.