Succession in family businesses

Family-run businesses are the bedrock of our economy. According to the IFB Research Foundation’s report, The State of the Nation: The UK Family Business Sector 2019-20, there are more than five million such organisations employing more than 14 million people – half of all private sector employees. In 2018, they contributed £657bn to the UK GDP – 31% of total GDP – and paid £196bn in tax receipts – around a quarter of the government’s total revenue. It’s no surprise then that the Credit Suisse Family 1000: Post the Pandemic report declared that family businesses have been outperforming non-family concerns in every sector (and across the world) since 2006.

“Better performance in family firms is often due to factors around underlying purpose where there is alignment of values, vision and desire to be in business for the long term,” explains Paul Andrews, managing director of Family Business United.

Most recently, during the pandemic, the key advantage has been that family businesses are often able to make decisions more quickly, allowing them to adapt rapidly to changing market conditions.

Some say that the disadvantage of such operations is that once they are managed by a generation that did not see the struggles of the founder, they lose some of their additional motivation and care for the business. But this is a simplistic view, according to Jessica Booz, family business lawyer at VWV Solicitors. “A business in its third generation of management is probably at least 40 years old, which is a decent age,” she says. “I would also question how we measure survival. For example, a business that is sold to non-family owners continues to be successful even though it ceases to be a family business.”

However, succession planning remains an area of concern. According to the 2019 STEP Global Family Business Survey, more than two thirds of global family businesses did not have a formal succession plan.

Emma Rudge, a consultant at The Family Business Consultancy, suggests that introducing the next generation to the family business can be done by way of family assemblies as well as more formal programmes. “Either way, the family may wish to include information about the opportunities that exist now or in the future and what is likely to be needed in terms of education and experience,” she says.

A policy on employing family members should answer questions such as:

• In what circumstances may family members apply for roles within the business?
• In order to be chosen for a particular role, should a family member have ‘good enough’ qualifications, the same level of qualification as a non-family applicant, or be more qualified?
• What salary and benefits will apply?

The most important requirement is for everyone in the family who has an involvement to be able to talk freely to someone who listens, understands and tests their thinking without an ulterior motive, says Mark Bradford, a consultant at Family Business Solutions.

He recommends separating ownership and management to help each family member decide which category they would prefer to be in. “When it comes to management capability, there needs to be an honest appraisal that gives the senior generation confidence about succession,” he says.

Having a clear policy on opportunities for family members, the expectations placed on the next generation and on the business, and a clear selection process – perhaps laid down in a family charter – are important elements in avoiding conflict.

Russ Haworth, founder of Family Business Partnership, observes that if members of the next generation want to become the future leaders of the concern, the family may decide to introduce employment policies that clearly outline the expectations and requirements for that to happen.

This avoids the problems of some members feeling trapped and wanting to pursue their own career paths, and others having a passion for the business but lacking the skills that someone from outside might bring to the leadership role.

Family business consultant Chris Dowling suggests that rather than making an assumption that the next generation will want to follow in their parents’ footsteps (which is often the case), successors should spend some time in other businesses or activities to see the outside world and test their suitability.

He also advocates the involvement of non-family directors: “While the benefits of shared family values and background can be invaluable, working with an outsider will bring extra breadth and scope.”

Bringing in an ‘outsider’ can seem daunting to some families as they may feel scrutinised and challenged about how things have been done historically, adds Haworth. “This highlights the importance of ensuring they bring in someone who has worked with family businesses in the past and understands family dynamics.”

Andrews concludes by referring to the importance of defining responsibilities to ensuring that any non-family members introduced into key roles are provided with the necessary authority to do the job that they have been brought in to do. “Otherwise, they may not stay on board for long,” he warns.

Founded in 1901 by Arthur Lowe Dalton, Daltons Wadkin distributes and manufactures industrial machinery for processing materials, including solid wood and wood-based panels, composites, plastics, and non-ferrous metals.

Alex Dalton is the fourth generation of his family to run the company. He joined the business in 2003 under his father Nigel and uncle Francis. Following the death of Nigel in 2009, Alex ran the company alongside his uncle until Francis passed away in 2019.

“There was never any pressure to join the business, but rather a general understanding that the option was there,” he says. “I spent several summers as a teenager working as a workshop fitter to get a feel for the industry and, after joining full time, I worked in the service and sales departments to get an overview of the company’s activities.”

Alex says it is important that the workforce recognises any new family member has earned the right to join the company rather than being handed the position. New family recruits, he adds, “should also spend as much time as possible working alongside the previous generations to gather knowledge”.

MKG Foods is a multi-temperature food service supplier founded in 1950 by Lewis Mayling, great-grandfather of current director Philip Mayling. It supplies establishments across a variety of sectors, including catering, education, restaurants, sports clubs, care homes and pubs. Four members of the family are involved within the business.

“It was never a given that we would be invited to join the business, or indeed that we should want to,” Philip says. “Too often, family business owners can become obsessed with ensuring the business passes through the generations. However, we were always told that there was a bigger world out there and that even if we ended up in the business, we should look to find our own path to it.”

Before joining MKG, Philip completed a multinational graduate scheme, which he says gave him a greater understanding of how other businesses operate.

When asked about the most important actions to take to ensure a smooth transition between generations, he admits that having no pressure helps. “My brother and I had the luxury of time and didn’t opt to join until later in our lives,” he says.

“It was many years before we achieved board positions; before that we both worked for other businesses to get real world experience. I think the best approach is to look at a multi-year plan with exposure to key departments.”

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• Business & Management magazine, Issue 298, October 2021 (pp.22-23)

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