A realistic assessment of whether the business can continue successfully after the transition. In some cases, the older generation will pursue generational succession either as a means of keeping the business in the family, perpetuating their legacy, or to provide a stable business future for the next generation. While reasonable objectives, they only work where there is capability and willingness. Communication of expectations is essential.

Consider the capital requirements of the exiting generation. To what extent do you need to extract capital from the business at the time of the transition? The higher the level of capital needed, the greater the pressure on the business and the equity stakeholders.

In many cases, the incoming generation will not have sufficient capital to buy-out the exiting generation. This will require the vendors to maintain a continuing investment in the business or for the business to take on an increased level of debt. Either scenario needs to be assessed for its sustainability at a business and shareholder level. In some scenarios the exiting owners will transition their ownership on an agreed timeframe.

In many small and medium businesses, the owners arrange their remuneration from the business to meet their needs rather than being reasonable compensation for the roles undertaken. This can result in the business either paying too much or too little. Under generational succession, there should be an increased level of formality around compensation. Compensation should be matched to roles, and where performance incentives exist, these should be clearly structured.

Transition of control is often a sensitive area. It is essential to establish and agree in advance how operating and management control will be maintained and transitioned. This is important not only for the generational stakeholders but also for the business. Often the exiting business owners have a firm view on how the business should be run. Uncertainty in the management and decision-making of the business can lead to confusion or a vacuum - either will have an adverse impact. Tensions often arise because:

The incoming generation want freedom of decision-making and the ability to put their imprint on the business.

• Without operating control, they feel that they have management in name only.
• The exiting generation believe that their experience is necessary to the business and entitles them to a continued say.
• A perception that capital investment should equate to ultimate operating control.
• An uncertainty by either or both generations about the extent of their ongoing roles.

Agreeing transition of control in advance, on an agreed timeframe, can significantly reduce tensions.

Generational succession is often a process rather than an event. The extended timeframe for the transition requires active management to ensure that there are mutual expectations and to avoid the process being derailed by frustration.

The established generation may have identified that they want to scale down their business involvement and bring on other family members to succeed them. This does not necessarily mean that they want to withdraw completely. An extended transition period is not uncommon and can often assist the business in managing the change. This can also work well in managing income and capital withdrawal requirements.

A danger for many SMEs is the blurring of the boundaries between the role of the Board, shareholders, and management. With generational succession, this can become even more pronounced. Formality in these structures is important, with clear definitions of the roles and clarification of the expectations. For example, who should be a director and what is their role?

For some, the role of the family is managed by a family constitution – an agreed set of rules. For others there will be an external advisory group that advises the family to ensure that the required independent expertise is brought to bear.