SUCCESSION PLANNING AUGUST 2016
Succession Planning What Is It? Definition Ensures Provides Helps Event or Process Structured process involving identification of a potential successor to assume a new role Smooth transition of business from one generation to the other Peace of mind by making sure that all stakeholders are taken care of In avoiding conflicts and legal battles after you are not there anymore To ensure that your legacy outlives you, it should not be limited to an event, but should be a process
Stakeholders In Succession Planning Three categories of stakeholders Family members, Owners of the business, and Managers/Employees Each stakeholder has hopes and expectations Succession Planning could thus raise conflict of interests among people involved A formal process can quell some of these conflicts everyone feels assured that their concerns will be heard Family Successors may not be interested or able to take over active ownership of business. Succession Planning should therefore include how the business will be transferred to the next generation or how ownership will be cashed out and money used to support family. Even if you are the primary owner, any minority owners also need to be included in Succession Planning. For example, in the event of your retirement, the BOD will have a say in who gets named to run the company when you step down, even if your ownership portion gives you control over the Board. Business Owners Employees and Managers While this group has less power to influence how the Succession Plan is organized, it is also dependent on the continued viability of the business. For this group, a Succession Plan should inspire confidence that the business remains a going concern while the leadership transition takes place.
Principles for Succeeding in Succession Planning 1 Start Early Set Expectations, Philosophy and Values Upfront 2 3 Understand Individual and Collective aspirations Assess what s right for Business 4
Principles for Succeeding in Succession Planning 5 Develop the Successor s Capabilities broadly Develop a clear Selection Process 6 7 Find ways to balance business needs and family aspirations Build credibility through a phased transition 8
Principles for Succeeding in Succession Planning 9 Ask departing leaders to leave but not disappear Motivate the best employees and foster their support 10
Succession Planning Process Others Goals Owner s Goals Important to identify the needs, goals and expectations of family members, other owners and key employees. Consideration of their expectations ensures that goals can be met. Business Owners should identify personal goals for their future annual income, their level of involvement in business, their investments both inside and outside of business, their legacy for the future and their values Best case Scenario Unfortunately, this step is skipped by many business owners. Business owner needs to explore all options. This often means that after they have designed the plan, a new and more efficient solution emerges, leading to expensive changes midstream Explore Options Implement Management Needs To ensure business continuation, it is important for business owners to identify who is capable and willing to take on his or her responsibilities. This may include new compensation structures as an incentive to key managers. Based on Business Owner s values, he or she must balance the needs and goals of everyone involved. The resulting plan is Best Case Scenario. This is the most optimum situation in any Business Succession Plan.. The final step is designing and implementing the Succession Plan. Professional advisors who design the plan also help devise a process to implement it. A timeline for the same makes intentions clear while managing expectations
Factors in Succession Planning 1 2 3 4 5 Decision-making ability of Successor Successor s commitment to the business Inter-personal skills of the Successor Successor s respect of Employees Best person for the job regardless of family ties 6 7 8 9 10 Financial skills of Successor Strategic planning skills of Successor Relevance of Successor s prior work experience Successor s current ownership percentage Active role in strategic decision making (Advisory Boards)
Strategies and Tools in Succession Planning 1 : Valuation Most important tool while looking to transition out the business is to determine what it is really worth in the market. That means getting a thorough valuation done by professionals. Often, owners find this as an unnecessary waste of money, as they believe that they already know the business value. Unfortunately, this might not necessarily be the actual value in the market. 3 : Sale to an outsider Selling business to outsiders is traditionally not considered as Succession Planning. However, for some business owners, it may be the best way to meet their expectations for their retirement income. Steps here involve Cleaning up the business to make it attractive, bringing in an advisor for sale, putting the business on the market and advisor responding to interested buyers, negotiating with buyer, finally closing the deal. 2 : Keeping it in the family Majority of business owners want to continue family ownership of business. Unfortunately, 70% of businesses do not survive second generation. For a good Succession Plan, tools include gifting stock (which is most widely used), forming a Trust (which can help reduce Taxation), or selling to a family member (which may, in effect, maximize taxation). 4 : Liquidation of the Company Liquidation does not strictly fir into Succession Planning, as there isn t much succession when a company ceases to exist. In some cases however, liquidation in fact is the best option for the business owner. With liquidation value being Market Value of assets less liabilities, the process involves appraisal of value of company assets, and calculation of liabilities. Liquidation Value is generally lower than Market Value.
Why Think Of It Now When it comes to Succession Planning, one of the biggest traps to avoid is waiting too long It is emotionally difficult to choose between a close relative or an employee It takes years to train a potential successor and make them capable enough to take charge of the business Finding the right advisors also significantly determines the success or failure of Succession Plan Lawyer, CA, Valuation Expert and Tax Experts 1. Risk 2. Options 3. Control 4. Value The longer owners wait to design and implement a succession plan, the greater the risk that the plan will not meet goals, and that business will go down along with health of owner. The more it is delayed, the fewer options owners have to meet goals of providing continued income for family members and establishing a personal legacy Through succession planning, business owners ensure control retention, which would have otherwise gone into the hands of lenders or attorneys. Delayed or no Succession Planning can cause significant drop in the value of business. Intended beneficiaries in such cases, do not receive full value of business had a succession plan been in place.
Unplanned Transitions Destroy Value For many family-owned businesses, Succession Planning is the proverbial Elephant in the room. Despite recognising the importance of selecting and preparing a successor, the leaders of a family often do not give Succession Planning the attention it deserves. According to a survey by The Boston Consulting Group (BCG), family business leaders ranked succession as the second-most important subject on their minds, topped only by the closely related issue of achieving alignment among family members on critical topics. Despite this, more than 40% of family businesses have not adequately prepared for succession. Planned Transitions vs Unplanned Transitions Growth Market Cap EBITDA Margin Relative performance of revenue CAGR Relative change in Market Cap CAGR Relative change in EBITDA Margin -14 percentage points -28 percentage points -4.4 percentage points 17% 0.5% -2% -3.9% -16% Planned transition -11% Unplanned Transition Source: BCG Analysis of more than 200 transitions that occurred from 1994 through 2014
Problems Faced in Succession Planning As per a study by INSEAD Professors of the Asian Markets over a ten year period, it was found that family businesses lost almost half of their value or wealth as they underwent transition Second generation Second generation is often unable to create value in the firm. This generation should be able to tap into the strengths and family assets that the older generation has been able to create Lack of communication While leaders may have a clear vision for the business in his mind, he often fails to communicate it to the rest of the employees, or even his family members No retirement plans Business tycoons and bosses generally continue to lead their businesses, even in their 70s and 80s, and they never retire because they never plan so. Family management is not properly governed, and roles and responsibilities of family members not defined Source: The Family Business Map authored by Professors at INSEAD and Chinese University, Hong Kong
Things to be kept in Mind 01 Don t wait too long to begin It can take as long as a year to put together a Succession Plan, to be implemented over the course of many years. As per Kahler Financial Group, it is advisable for owners to start the succession planning process as early as 10 years before their anticipated retirement date. To reiterate, one of the biggest traps to avoid is waiting too long. Discuss and revisit Plans It is important to remember that a battle plan is obsolete as soon as the first bullet is fired. The Succession Plan must be dynamic enough to adjust for any changes, because tax laws and other regulations may change. Also, there might be need for course corrections as a result of things that are out of control. 04 02 Search for right Advisor Advisors may collaborate with other professionals including Lawyers, CAs, and Valuer, who would help in tackling estate planning issues, tax related concerns, and money management considerations in success planning. There is no checklist or flowchart involved. A lot depends on persons involved, shape of their records and their mindset. Evaluate own retirement savings Important for owners to consider whether they have sufficient retirement savings and insurance. Succession Planning is however, not synonymous with buying insurance and other products. Using risk-reduction products can be a smart move, though certainly not the only consideration. 03
Case Study of Tata Sons A 5-member Selection Committee established in 2010, with members from Tata Trust and Tata Sons The committee held 18 meetings in 15 months Interviewed large number of candidates Mistry family being the single largest shareholder of Tata Sons (18%) not a factor in selection of Mr. Mistry as the Chairman of Board Once selected, there was a year long transition where Mr. Mistry worked directly under Mr. Ratan Tata to get ready for the top job Some of the guidelines for identifying the successor of Mr. Ratan Tata: Long run way Leadership continuity for next 25 years Tata Group Ethos Experienced in handling similar size, scale, scope, complexity and diversified portfolio Shareholders/stakeholders acceptance
Case study of Emami Kolkata based Conglomerate have set up a Family Advisory Board Intent - to make the younger generations of two unrelated families of RS Agarwals and RS Goenkas to participate in family business. US Based The Family Business Consulting Group hired for its professional assistance in this process. Positive impact : No different voices in the family and they are similar in nature though comes from two different families. Younger generation trained to have a unified approach while working with the non-family professionals to make the operations smooth. A major step towards creating a coordinated structure/team of hired professionals and equally capable family youngsters. To ensure unanimity and achievement of business goals, formal business code of conduct has been laid down for the second generation. The code contains an exhaustive list of do s and don ts.
Family Businesses in India Family companies account for two-thirds of India s GDP 27% of overall employment (79% of organized private sector) is generated by family owned businesses Most of the big corporate houses including Tata s, Ambani s, Birla s, Vedanta, Bajaj, Ruia s, Ranbaxy, Bennett Coleman and Company and many more are all controlled by families Brand of family names, family reputation and goodwill, elements of self-discipline and self-governance are some of the factors that help family firms in India survive for generations Inter-family disputes, patriarch acting as a control freak, lack of professional management, lack of written agreements to address any conflict, lack of communication amongst family members and inability to keep pace with modern techniques and advancements are key challenges for Indian family firms 30% 13% 4% Successful transition from first to second generation of family businesses survive to third generation of family businesses survive to fourth generation Source: Sparrow Advisory research
Succession Planning Matrix Owner Motivation & Perspective Family Governance Personal financial planning Family Dynamics Successor Preparation Succession Matrix Business structuring Business Performance Mgt. Synergy and Team Work Strategic Planning Leadership Mgt. and Continuity
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