Part one: Succeeding with succession

Adam Bernstein looks at the thorny issue of handing a business to the next generation

Published:  12 September, 2018

According to the Institute for Family Business (IFB), two thirds – 4.7m in total of UK businesses are family owned. Crucially, the IFB believes that around 100,000 of these firms change hands each year.

It’s not hard to find examples involving the trade. In March 2017, Baz Finney retired and closed his garage, TFM, in Pickering after 47 years of business. It’s unclear why the business didn’t carry on under his son John. Last August saw Wedgnock Car Sales close because the owner, Robert Buswell, wanted to retire and had received a good offer from a third party. He had bought the garage from his former employer.

Difficult discussions
David Emanuel, partner at law firm VWV and head of its Family Business team, considers succession issues to be the elephant in the room: “Current and future generations often find it incredibly difficult to talk about succession, and can make assumptions about each other's intentions which lead to misunderstandings and tension.”

Relationships can exacerbate the problem. Nick Smith, a family business consultant with the Family Business Consultancy, says families need think about relationship dynamics: “Will my children want to take the business over? Are they capable of running it? Is there room for more than one child? Will they fight? How do I deal with ownership if some want to work in the business and others don’t?”

The main issues
Every business needs a succession or exit plan. In the case of a growing business, family or not, there will also come a point when the current owners need to hire external talent to maintain growth.

One solution is for the family to find time away from the business to discuss the future. Family members must know that meetings are convened on neutral territory and that they are expected to speak their minds freely and honestly.

There are two fundamental issues for David Emanuel. Does the current generation want to retire, when, and on what terms? Conversely, does the next generation want to take the business on, and if so when and their terms? Nick Smith wonders about an inability of the senior generation to let go of the reins of the business: “This can be for a variety of reasons including a lack of faith in their successor, a belief that only they can steer the business forward, or a fear of just what life after the family business holds.”

Starting the process
Interestingly, David Emanuel sees many established family businesses wanting the next generation to forge careers of their own: “The decision to join the family business should be a conscious decision, rather than a sense of obligation, and it should bring with it the skills and experience learned elsewhere.”

For Nick Smith, there is a tricky balance to be struck between creating opportunities for the next generation and generating inappropriate expectations so that family members who, in reality, are neither suited for or motivated towards the business.

If the family aren’t committed to the future the best answer is likely to be to sell the firm. And it’s for this reason that David Emanuel says advice on value and likely exit options from an experienced corporate finance adviser is necessary. Smith believes that families often choose to sell to a buyer who they believe is most likely to preserve the culture and ethos of the family business; often another family owned company.

Plan also for the unexpected
Death and divorce are just as obvious risks for a family business. As David Emanuel notes, the death of a co-owner can lead to an interregnum and loss of vital skills and experience, as well the risk of shares passing to an unknown quantity, or a need to fund the purchase of those shares to provide some value for the deceased co-owner's family. Divorce principally presents the risk of shares passing outside the family, or a need to sell shares to finance a divorce settlement. “Families must think about what should be done in these circumstances and consider a shareholder’s agreement to cover these issues.” For Nick Smith, this is “infinitely preferable to having the divorce courts decide the fate of the family business.”

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    “Do you have a business or a profitable job?” Not sure which one you’ve got? Carry on reading.
        
    That question is a doozie and is often met with a few seconds of silence followed by a mixed range of answers whilst the questionee arranges their thoughts. The question is designed to be thought-provoking and entice the garage owner to work through the differences between the options.

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    What’s the difference between a profitable job and a business? It’s a fine line with a BIG difference.
        
    Quite simply if you have a profitable job the income from your work (where you spend your hours in the day) reduces when you’re not doing that work. You might be able to get away from the business for a week or two but longer than that will have you sweating, you’ll wonder if your techs are efficient without you in the building, concerned that your numbers are going south.
        
    A business on the other hand will run without you being there for a significant length of time. Which one do you have?
        
    I can feel the tension elevating as some of you may be rising from you chair ready to give me a good talking-to. Hang fire though and hear me out. In no way am I saying that having a profitable job is wrong. Quite to the contrary. If that’s what you set out to achieve then who am I to say any different? Here’s the deal though. Most garage owners don’t embark on this amazing journey to be ‘self employed,’ they do it to build a bigger and better future for their families. They did it to have more time with their loved ones, the funds to allow this and probably have early retirement thrown in with the business providing the income. Can a profitable job do this or do you need a business that’ll run without you? I think you know the answer.

    What’s the difference?
    So you’ve decided that a business is preferable to a profitable job. But is there really that much of a difference? Let’s take a look. It often comes down to nothing more than a state of mind that separates these different sides of the same coin.
        
    Let’s compare the owner with a profitable job and the business owner. At first glance I’d challenge you to notice the difference. They’ll both have a business that they’re proud of and rightly so, they’ve worked hard to build it. More often than not they’re both skilled technicians, have the respect of their team as well as their customers. Then how can it be that one earns significantly more than the next. One word, focus.
        
    Our owner with the profitable job will be very focused. He’s focused on his own ability to fix the vehicles in his workshop often working shoulder to shoulder with the technicians. The technicians respect him because of his technical ability and work hard alongside him. All admirable qualities.
        
    Our business owner also has a laser-like focus, his target is a little different though. His gaze is firmly fixed on a vision of the business he’s building and knows that long term success requires not only focus but patience. He’s acutely aware of the one thing that will bring freedom and the time with his family (the reason he started this venture) is the team he builds and trains.
        
    This isn’t to say that he doesn’t roll up his sleeves and lead from the front when required, it’s just that his daily focus is on the strategic functions of the business that drive success, rather than the day-to-day tasks that so many owners get caught up in. There’s a huge benefit to this as well. You get to keep the skin on your knuckles.

    Dominant thoughts
    It’s a proven fact that we all move through our day in the direction of most dominant thoughts. What does your typical business owner ponder?. Now I can’t read minds (how cool would that be?) but I do know that these are the questions that need to be answered:


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