Family business succession: “Neither life nor success can be taken for granted.”
How do you prepare for handing over the reins of the family business to the next generation? Citywealth’s April French Furnell spoke to family advisors to find out some key indicators for a successful handover.
From clogs to clogs …don’t lose it
Transitioning the management and ownership of a family business can be a daunting prospect for all involved. Those in the wealth industry talk often of family businesses that go from “clogs to clogs in three generations”, saying it takes one generation to found a business, the next to build it, and the third to spend it. A sensitive and emotionally charged process it commonly has founders unwilling to let go of control and the next gen feeling the weight of high expectations, it can be a challenging time.
The past year has helped the topic of succession come to the fore of business leaders’ minds as the pandemic acted as a stark reminder of our own mortality. A recent survey of 84 PwC partners who work with billionaire clients, undertaken by UBS for their Billionaires insights 2020 report, found that the partners ranked succession planning as a likely priority for their billionaire clients in the coming year. The report quoted one Singaporean billionaire saying, “The crisis has reminded us how unexpected the world and life can be. Neither life nor success can be taken for granted.”
For those wanting to make this change, where should they begin?
Make some time
The first steps are often the hardest. “It starts with breaking the habit of avoidance”, according to Rebecca Fisher, a partner and head of the family office group at law firm Russell-Cooke. “It requires a degree of proactivity; not leaving everything to the last minute and seeking advice from an advisor”, she added.
Everyone makes mistakes
Unfortunately, “family businesses with experience of a generational transfer going wrong, are more naturally inclined to understand the value of help and advice”, said Hayden Bailey, a private client partner at law firm Boodle Hatfield. “In my experience, where family members can identify past mistakes (often human ones), they appreciate the importance of investing real time and energy into the succession process.”
The key is to begin conversations as early as possible, before they become difficult, said James Carroll, joint managing partner at Russell-Cooke. “If it’s at the point of handing over the business, then it’s often more pressured”.
Conflicting values
The form that these conversations take will look very different from one family to the next. “How and when the money was generated is a big driver of how it is dealt with”, said Fisher. “With more wealth being created through entrepreneurship, we’re seeing new challenges for the next generation. Entrepreneurs are very driven, they work long hours, they never stop and are usually on to the next challenge. Being a child of that structure is hard. There are high expectations on you and the pressure is intense”.
Take things slowly
It’s important not to ignore the emotional side, added her colleague Carroll. “It’s easy to think these children are in a fantastic, privileged position but they might be carrying guilt that they haven’t earnt their wealth or feeling as if there is no room for personal growth. They might also be lacking in confidence. Our role is often to have gentle conversations with the next generation to bring them in to the business slowly.”
Manage the process with external advice
The conversations can be guided by an advisor to ensure that the family keeps focus. Andrew Dixon, Head of UK and International Wealth Planning at Kleinwort Hambros said, “we find getting the family to talk openly about what they all want is an important starting point. A good adviser can help the family to keep focus and, in some cases, help to define the end objectives before discussing topics such as family governance, business continuity, values, and purpose.”
Perhaps a role is better than a take over
Another challenge is deciding what role the children will have. Emily Griffiths-Hamilton, a family enterprise advisor, author and speaker explained, “As family businesses grow and mature, there can be a natural evolution of separating the role of ownership from management. When this happens, next generation family business owners find there is a role for them to work on, rather than in, the family business”. While management can be learnt in business schools, she describes ownership as an art: “ownership is the art of entrepreneurship”. That said, there are roles for everyone and part of the succession planning should focus on “Earning-A-Voice, ensuring that quality voices are at the decision-making table, understanding the roles and responsibilities of Ownership, and the need for different kinds of Leaders throughout the family enterprise”, she added.
Timing it
When asked when is the right time for succession, Bailey said, “no family is the same and no business is the same, so there are no ‘one size fits all’ solutions here and conversations need to be handled delicately to manage expectations”. He added: “It is hard to generalise, but in contrast to past generations, there is now more of an expectation that children should not automatically assume a seat on the board, but that they should go out and get commercial experience working elsewhere, being entrepreneurial and learning managerial skills, before returning to the family business, perhaps in their 30s.”
It’s a topic on which books could be written, with many a landed estate who have dedicated huge thought and time to the decision, and still can’t get it right.
Sell the business (60% do) or use a trust
Some families might consider a trust. “Transferring shares to the next generation is an important incentive mechanism, however, doing so through a trust provides additional levels of control, flexibility and asset protection that can rarely be achieved through direct gifts”, explained Dixon. Others might sell the business and set up a family investment company or utilise philanthropy to engage their next generation. It’s these ‘tangible solutions’ that are viewed as the added value an advisor will bring to the table but, they need to be balanced with the intangibles to avoid conflict. “If you want to avoid or minimise conflict and a mismatch of expectations amongst family members, a good advisor will place as much emphasis on the intangibles such as educating or facilitating compromise and listening to the concerns of all family members”, said Dixon.
Does your child have the skills needed?
If a family chooses to bring in their next generation, they’ll need to consider how to offset giving their children a better start in life with exposing them to what they might deem ‘getting their hands dirty’. “The next generation needs to understand the business and be comfortable with the responsibility of being an owner. There can be real challenges for family businesses if the children take a seat at the board but aren’t equipped with the knowledge and experience of how to be managers. Part of succession planning is ensuring the next generation have the appropriate skills to hold a board to account. With great wealth comes great responsibility.”, said Bailey.
Principal shadowing
A wise move would be to ensure the next generation forge relationships with a team of trusted advisors. Yogi Dewan, CEO and Founding Partner of Hassium Asset Management advises getting children involved at ‘topco’ level, so that they work alongside the principal and his trusted advisors as early as possible. “There needs to be a lawyer, accountant, and investment manager as a good starting point”, he said. Whether the next generation decide to continue the family business, or opt for an exit which Yogi says he sees happen in around 60 per cent of families they work with, they’ll have a team of advisors supporting them in their next steps.
Its not all numbers
On top of this, Dewan advises don’t forget about risk. “Of course, there is market risk and economic risk, but part of the education of the next generation needs to include an understanding of qualitative risk: regulatory, legal, emotional, and one of the biggest being marital risk where someone might lose up to 50 per cent of their wealth and security”. This could also be particularly pertinent if the child or children involved don’t want to join the business.
Dixon agrees: “With the nature of modern families, the ages of and “stability” of relationships will all also need to be considered. While these may or may not be important right now retaining hard earned wealth within the family can all form important parts of the final solution.”
Ultimately, it’s the responsibility of the older generation and incumbent upon them to take responsibility for succession planning. “My own view is that it’s never too early to start developing the younger generations commercial awareness and knowledge of wealth, and to instil in them a sense of ‘shared purpose’ and legacy that defines the family’s approach”, said Bailey.