The overriding objective when undertaking succession planning for the family business is ensuring a smooth transition of wealth to the next generation while maintaining harmony and ensuring that the business survives unscathed.
In a non-planned situation, a family-owned business can easily fall into a survival trap.
To grow a family’s wealth and pass it on to the following generation for their stewardship can often mean that the next generation must be given the opportunity to take risks and pursue new directions for growth. In this context, the possibility ofdiversifying assets through a sale or strategic alliance should be considered.
A successful intergenerational transfer of wealth may or may not involve the transfer of an operating business to the next generation. The family should also take into account not just financial capital, but also:
- human capital – the individuals who make up the family including each member’s ability to find meaningful work;
- intellectual capital – the knowledge gained through the experiences of each family member and the ability to share what they know;
- and social capital – the family members’ relationships with each other.
What can go wrong?
Studies have shown that the main causes of wealth transfer failures are:
- breakdown of trust and communication within the family;
- failure to prepare heirs for responsibilities;
- other causes, such as a lack of a family mission and vision as well as errors in or lack of proper accounting, legal or financial advisory planning.
The best chance for a successful continuity plan is to have your advisors work together over time to address the issues.
But at the bottom of it all, business continuity planning requires the setting of clear objectives, agreement, good communication, recognition of risks and timely action.
Proper governance in your organizational structure will help the group make decisions. The governance of a family business is more complicated than that of anordinary company because of the central role of the family that owns and leads the business.
Ongoing planning
As the business matures, wealth management becomes a more pressing issue than during the initial wealth-creation phase of the business. The family must decide if they wish to remain connected through management of their wealth or to pursue their own separate destinies. Typically, some will wish to stay in the business, others will want to pursue their own interests.
Continuity planning for family-owned businesses usually brings together professionals from diverse disciplines, including your lawyer, accountant and possibly financial planner.
The Family Office
A family office may be useful in this process. In an appropriate situation it can provide:
- family meeting co-ordination;
- development and maintenance of governance structures;
- conflict prevention and conflict resolution;
- tax, estate and financial planning;
- wealth transfer planning;
- asset protection and risk management;
- investment consulting, monitoring and performance measurement;
- financial recordkeeping, compliance and consolidated reporting.
For families with a strategic approach to wealth management, a family office can perform an important function for the maintenance of their long-term wealth across generations.
© The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.
