Succession planning plays an important role for any entrepreneur and has become a central strategic component for company owners and managers. A recent study on Swiss small and mid-sized enterprises (SME) by a large Swiss bank highlights the importance of this topic. According to this study, 3/4 of managers have spent time and effort on succession planning. This is not surprising considering that some 70’000 to 80’000 SMEs will face a generational change in the upcoming years in Switzerland alone. This step is not only important for each individual company, but also for the Swiss economy as a whole as these companies account for about 400’000 employees.
Succession planning: a strategic component for business owners
This trend is not going to change anytime soon as, by 2030, 750’000 people will be aged between 60 and 65 (a 50% increase compared to today). As a matter of fact, with baby boomers retiring and fewer potential successors willing to take over from their parents, corporate successions are going to become increasingly problematic. This scenario will result in a shortage of suitable heirs to guarantee healthy succession rates amongst family businesses.
This situation is even worse in the hotel industry. A recent study on the Austrian hotel industry shows that 2/3 of family-owned hotels will need to be handed over in the upcoming years. Considering that the vast majority (around 80%) of hotels in Austria (and also in Switzerland) are family-owned this constitutes a severe issue for the industry. In the same survey 63% of respondents indicated their desire to hand over their business to a family member, 25% expect a need to dissolve the business and the remainder anticipate to sell it to an outsider or lease/rent it.
Handing over a business to the next generation
While most hoteliers wish to see their hotels taken over by a family member, many underestimate the difficulty and complexity of such an endeavor, which affects both business and family life. Moreover, not every offspring is able to run a business and manage a group of employees. It is often easier to build up a business from scratch according to one’s own ideas than to take over an existing business while also being monitored by the previous owner.
So where does this leave us? Is there a miracle solution to handing over one’s business to the next generation? How can successions be made more appealing to the next generation and overall be more successful?
Unfortunately, there is no universal solution but a few points may improve the process. The four main points to consider are:
competencies and will of the incoming generation,
outside help and
letting go by the outgoing generation.
THE INCOMING GENERATION
The most important issue to spend time, effort and dialog on, obviously is determining if a member of the younger generation wants to run the business and when that will happen. In the case of multiple potential successors the complexity will be increased as either they will have to work together to manage the hotel or the non-involved heirs need to be paid out. In both cases this can lead to family feuds and failure of the process.
These decisions are not only highly emotional issues within the family but they have potentially strong (financial) repercussions on the business itself. It also affects the legacy of what the owner wants the business to look like over the long term, and how it interconnects with the family and the stakeholders.
Again, spending ample time and communication efforts in better understanding the aspirations, experience and competencies of the successor generation is key in choosing the best possible scenario and solution.
Another challenge is for the incoming generation to understand and accept, early in the process, the service-oriented side of the business which leads to long working hours. Especially in times of increased work-life balance and in terms of family planning, a hospitality career and ownership do not always appear as an appealing option to young people in their 20s and 30s. The newcomers need to familiarize themselves with the family business, its culture and its challenges. They also need to learn about the industry and make sure they take the most informed decision. Many family-owned businesses send their future owners to internships or summer courses to help with the discovery process. Immersive experiences such as the EHL Junior Academy have been sprawling over the last few years in various markets, offering first-hand deep-dives into the world of hotels and gastronomy.
One of the most underestimated features in succession planning is the time that is needed. It is not enough to simply contact a lawyer and draft a contract to successfully hand over one’s business.
The earlier one starts planning for the transition, the better. As a rule of thumb, a 10-year period appears appropriate for planning a succession. While this may seem long, one has to bear in mind that not all parties involved will be able to work on the planning full-time but will have to do it in parallel to work or studies.
Long-term succession planning allows for the junior generation to grow into the new role and to acquire some experience outside of the family hotel which will help to develop their own management style and implement new ideas. Moreover, it shapes independence as the senior generation cannot guide and influence business decisions on a daily basis. It can also help the incoming generation to learn the necessary management tasks from their predecessors or from external sources. This allows all parties to gauge how ready the successor is and provides time to correct eventual mistakes or a lack of competencies in certain tasks. In other words, the longer the succession planning process, the better the chances to mentor and bring the young generation up to speed.
Assuming the new generation is interested in owning and running the family hotel, working with a family business advisor may help to make the transition as smooth as possible. Advisors can assist with strategic positioning and shine a light down a specific road. They can frequently more objectively discuss the advantages and inconveniences of handing over the reins to one or more heirs as opposed to bringing in an outsider to run the hotel. The advisor can also help establish a coherent and written succession document that contains all the rules and duties to perform during the process. This allows family members to revert back to a written and objective document in case of disagreement. Many family owners still do not know that there are well-established processes to help prepare for succession. These can be tapped into with the help of professional advisors (auditors, consultants, bankers, etc.) or by at least reading some of the numerous books and websites dedicated to this topic.
THE OUTGOING GENERATION
Once the senior generation steps down and hands over the hotel to the younger generation, the latter should be given the opportunity to run the show. The senior generation needs to let the next generation make its mistakes, learn from them and let them do things differently. Sometimes, that is challenging and a tiresome experience. In a recent newspaper interview the owner of a German family-run hotel indicated that it took him 10 years to prepare the succession and to learn to let go but it took him another 5 years after the succession to start relaxing and not wanting to impose his views on his son. With time the relationship tends to become more relaxed and amicable. It can even lead to a strong family-work bond in which the older generation assists the new generation by helping out when there is need and ensuring the younger generation isn’t overwhelmed by the many challenges it faces.
Tips & Recommendations
As a final summary I would like to offer 8 tips and recommendations to ponder on concerning succession planning for family-owned hotels.
Run the succession planning like a project and define participants, goals, roles and a time plan.
Clearly define who has claims and rights on which issues.
Keep the business in the best possible shape for the big day: clear definition of roles in the organization, and clear ideas in relation to financing and investments.
Analyze what kind of help is needed and then obtain it externally from the best possible source.
Evaluate all possibilities to hand over the business with all advantages and inconveniences.
Ensure all legal and fiscal aspects related to the handover are known.
Be transparent on all aspects of the business in order to avoid the next generation having to face nasty surprises.
Plan your own future outside the company early on and learn to act more like an advisor and less like an owner.