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Succession Planning for Family Business in Preparing The Next Generation Part 2

21 April 2021

Want to live your life as Francoise Bettencourt Meyers do? A granddaughter of L'Oreal founder Eugene Schueller, a L'Oreal heiress who enjoys an annual dividend of up to 10 Trillion without having to become the CEO of the company?

It all started with a corporatization family company that has now become a fully public company.

As a business owner, you have to consider someone taking over the business at some point. Succession planning for a family-owned business is a big deal and is a huge problem if it's not well prepared.

There is a saying, "The first generation builds, the second generation enjoys, and the third generation destroys". And this has successfully haunted most of  family-owned businesses in Indonesia. Why? Because there are also many family-owned businesses that ended up destroyed after the business is given to the next generation.

Is there any family business that survived and became successful after passing 3 generations? There are plenty of them, such as Bakrie, Salim Group, Sinar Mas, Lippo, Gudang Garam, Djarum, Ciputra.

The question is, should the owner hand it to the family's next generation or leave it to the professionals?

Both can be options, but each of them has a different approach. What are the differences and how to prepare for both? The article below will summarize the answer for you!

 

Ownership Vs Management

There are two types of succession plan; one to prepare business’ succession for the family's next generation and the other one to prepare business succession for the professionals. 

Common misconception about succession planning is that it means giving up the business. There is a huge difference between ownership and management succession.

Succession does not mean handing over the business to the other party, but rather planning who will run the business leadership in the future. It can be the next generation family or professional management.

The succession planning process is complex because there are a number of questions that must be answered, including:

• Is there the next generation engaged and interested in becoming the leader of the company?

• If so, what are the requirements?

• If not, who will run the business? Does the company have to hire external parties? If so, does the family agree and be able to convey their vision for the family business? Or if you want to open up opportunities for the next generation of families, how do you get them involved?

 

The Three Circle Model 

The Three Circle Model is used to illustrate the interaction of the family component on the management and ownership of family businesses. The Three Circle Model  represents the ownership circle, the management circle, and the family circle

But often the more accurate illustration of interactions that occur in multigenerational family businesses are as follows:
 

The family circle is unique to family business and quite different from other non-family businesses. In many cases, the family dominates the management and the ownership of the business.

In effect, the ownership and the management is dominated by family. In these situations, learning how to effectively manage the family component is the most important thing to do.

The following model is illustrate how to effectively manage the all-important family component or family circle during the succession process.

The goal is to help family members to make the right decisions about their individual and futures in the management and also ownership of the family business. 

Establishing family business meetings for the active family members, family council meetings for the broader family, and business rules, will serve to guide the overall succession process. The business succession activities also include the grooming of successors and integrating the active family members into key management activities.

The succession planning activities are made to achieve the desired outcomes. By integrating family members into the process and by providing sufficient comfort to the current and future owners of the family business, informed decisions can be made. 

 

Preparing Family’s Next Generation

Family business is a pride, a legacy and an asset. And now it’s time for the next generation to take leadership roles.

So, how do you prepare for the next successor?

  • Identify a Successor

If you want to keep the business in the family, you may need to choose between family relatives.

As you observe your choices, look for potential successors who have shown a passion for the business and have leadership skills, be honest to yourself about who can truly lead the business.

  • Train Business Successors

The sooner the better. When you choose a successor early, you have time to train your successor yourself.

This greatly enhances and gives a smooth transition from the current leadership to the next generation of leadership and helps the new leader to feel confident, informed and ready.

  • Delegate and Let Go

When you are running a business, delegation can be strange to do especially when you’re used to running the show. 

Communication, patience and recognising contribution is crucial. Also, don’t assume it will be smooth sailing, you will need to keep your finger on the pulse and check in with those employees.

What if there are no heirs to continue? Corporatization is the perfect choice.

 

What is Corporatization ?

Corporatization is a process of transforming and restructuring business. From a personal or family business into a corporation. Or it could be from a government-owned company into a corporation. Corporatization's distinguishing characteristics include having a corporate administrative structure and a distinct legal status

Family-owned business can be illustrated as a monarchy. Monarch has a king with full authority in making decisions. All orders of the king are decisions that must be carried out. Nothing can get in the way. If the king died, his son would take his place. If the child is competent, the monarch will be victorious. On the other hand, if the child is incapable, the monarch will be destroyed.

Whereas corporate companies are like modern republic states. No king can act on his own will. Everything runs with a system based on the law. The president as the holder of the highest power cannot be at his own pace. Everything is set according to the system.

L'oreal is a perfect example of a family company that has successfully corporatized. Now it is a fully public company with no controlling shareholder.

Started as a family-owned business that corporatized which has now become a fully public company. Back when it’s still a family business, the management system was not strong enough. The business is usually running only based on likes and dislikes, this is what causes the family business stucked. Most of their best achievements were  opening 20 or 30 branches or outlets maximum throughout Indonesia. Not to mention the heir who acted however they wish which made the family business on the verge of bankruptcy.

It is a whole different story from family companies that have been corporatized. The company is organized according to proper corporate management and governance. Selection of human resources is done more professionally. The Founder does not have to stand as the CEO, but as a person who owns influential shares. Ms. Francoise Betterncourt Meyers, with a 33.14% stake received a 10T dividend due to the leadership of professional CEO Jean Paul Agon. Even without becoming a CEO, the company can grow rapidly. Each year can divide trillions. This is interesting, right?

 

Four Steps of Corporatization

So what does a family business have to do to get corporatoratization right? There are at least four important steps to take:

1. Determining Roles

First, family members must agree on the importance of being professional in business and clarify a vision for the future of the company. Families must align aspirations for business and for themselves.

Defining the specific roles of each generation is very important. It is often difficult for older family members to move away from the business that has become the main focus of their life and identity.

In order to define roles clearly, the family must link the particularities of the business and the success of the company. Then identify which elements must be maintained to ensure continued competitiveness.
 

2. Strengthening Governance

Governance must be addressed at four levels, and each level must be clearly defined and consistent with one another.

Family: Discuss and decide on how it will be organized and how it will manage its relationship with the business.

Board of Directors: By inviting non-family members to join the board of directors, family businesses gain access to executives and specialists who can provide valuable insights that support decision making.

The Corporate Center: Supports families in running a business and helps various business units achieve their goals.

The Executive and Management Committee: To be effective, the committee must focus on strategic and policy issues and not ruin operational issues.
 

3. Strengthening the Company

Corporatization requires strengthening the company itself. Several elements are essential for a high performing company.

Some families choose to hire an executive who will eventually become CEO. Choosing a candidate for CEO is a complex and important task. The best candidates are those who are not only competent but also fit in with families and businesses.
 

4. Determine The Company Identity

Business leaders must clearly and explicitly articulate their culture and values and then take steps to communicate it.

The company must also set behavioral expectations for its leaders, top managers, and employees throughout the organization. In addition to driving high performance from today's leaders, clearly defined expectations help aspiring future leaders understand the requirements for success in the company.

 

Conclusion

In terms of family business succession, the next generation is often a problem to maintain business success. In fact, not all family members are the best fit to lead a company, and some successors may not be ready or right for the job. This is why corporatization is the key, so that leadership can be taken over by someone who is most qualified.

As a family business owner, take the time and take the right steps to nurture and prepare the next generation so that they will not only feel welcome but will also realize what is really going to be involved in “running a family business”.

To make accurate decisions in a succession plan, you need accurate data integration in business. This data will serve as a reference for the performance of the team or individual.

For the perfect integration of business operations, inventory, sales and business accounting and financial records, you can use easy-to-use ERP software according to your business needs such as SAP B1.

By using this ERP software, your business can easily collect the data needed for succession planning as well as become a reference for accurate decision making.

To get more information on succession planning in the family business, click on this link to join the Indonesian Family Business Community

This  community consists of dozens of family business practitioners whose mission is to develop their business for more than 3 generations and break the curse of 3 generations in family business.

 

Created by: Team content TBI

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