Seven steps to successful family business transition

COVID-19 has delivered a sharp reminder of the need to plan ahead for unforeseen events; family businesses are no different.

In brief

• Good transition planning begins with a full review of the family business and wealth portfolio
• Don’t regard a takeover by the next generation as a foregone conclusion
• Good governance is crucially important for wealth preservation and successful transition.

According to a report published by Wealth-X, by the year 2030, more than $15 trillion in wealth will be transitioned from one generation to the next. However, many family businesses do not have a succession plan in place that is fit for purpose. Families tend only to consider wealth transition during times of conflict or on the death of the patriarch or matriarch.

But the pandemic has served to concentrate minds and demonstrated a real need for families to get on top of their transition plans, so that when events beyond their control inevitably arise, they are better positioned to deal with them. That’s why resilient families and businesses are taking the opportunity to regroup and refresh their generation transition intentions.

There is no magic bullet solution when it comes to family wealth and business succession. However, whether you are starting from scratch or reviewing existing plans in light of COVID-19, there are some practical steps that can ensure your transition plans support your ambitions and legacy.

Step 1: Take stock of your plans and legacy

Knowing where you stand now creates the foundation for effective and robust planning. It is highly likely that your business and investments will have been affected in some way by the pandemic. Your investments’ value and risk profile may have changed, or your business may have experienced profound disruption. It’s only by understanding the full picture that you can start to devise a plan, which may also include looking for new opportunities.

Step 2: Look at the family and the business as separate entities

While there will be a natural crossover between family and business considerations, a separate and distinct succession plan to support the transition needs of the business is essential. One of the key considerations is clarity on the options and intentions of the current owners on what is going to happen to the business when they retire or pass on.

In a recent study, many family business owners expressed concerns around whether the next generation would take an interest in the business. The potential for there to be no clear successor to the business can be difficult for owners to accept, as many wish to preserve the legacy of the family business for future generations. Whether the business is sold, or the next generation assumes leadership, management and ownership, it’s not an area in which to make assumptions. Having those conversations as early as possible is very valuable. The Family Business Network has confirmed that “there has been a significant increase in enquires to ensure that the Next Generation are adequately prepared for running the family business. Many of these have been prompted as a direct result of Covid-19” according to Clare Louise O’Donoghue, Head of Member Services of the Family Business Network.

Step 3: Keep a close eye on the tax landscape

The tax landscape of the locations where you and your family live and conduct business plays a significant role in a well-thought-out wealth transition plan. There are the traditional tax concerns – inheritance taxes, business taxes, transfer taxes, individual taxes, country tax schemes – all of which you must consider. At the same time, many countries are making changes to their tax regimes in response to the COVID-19 pandemic and this needs to be considered as part of a strong succession plan.

Step 4: Take all family stakeholders into consideration

In the first instance, you need to define who officially comprised “the family.” This can be as simple as identifying will beneficiaries and the establishment of appropriate trusts and foundations. There are also non-financial matters that you want to address. Generational ambitions and priorities may well differ significantly. The next generation may not be interested in taking over the business, indeed, it might not even make sound business sense for them to do so. They may also have very different social or environmental priorities than their predecessors. Talking to and, critically, listening to the next generation to find out where they stand can be very important in avoiding future conflict.

Step 5: Educate the next generation

Education is critical to ensuring a smooth transition. The next generation must be ready to assume the roles and responsibilities that they will be taking on and the need to learn the leadership skills, the fundamentals of running a business, the basics of how investment markets operate, and crisis management skills.

According to a recent study conducted by the Family Business Network[2], when asked which supports are most helpful for next generation family members, nearly half (48%) of respondents highlighted the importance of academic training, professional training or cross-business mentoring. In particular, respondents pointed to the benefits of next generation family members availing of external education and experience.

Step 6:  Put a high-performing governance structure in place

As much as it is crucial for a business to have proper policies and procedures in place, the same can be said for family governance. Family governance includes oversight of the family’s shared vision and values, who is part of family, and formal structures such as a family council or family assembly. This is separate from wealth governance and business governance. Wealth governance can be thought of as who controls distributions of the wealth, such as trustees of a trust, managers of an investment entity or executives of a foundation. Business governance includes oversight of investments, business and investment companies, formal boards and advisory boards, and selection of executive management.

Step 7: Make sure your plan is agile, relevant and sustainable

A succession plan is a living thing. Tax and business rules will continue to shift, family relationships will change, and births, deaths, marriages and other life events will alter the dynamics of the family. And global events like Covid-19 will continue to come from nowhere to impact on your best laid plans. In our experience, families who renew and revisit generational and wealth transition planning on a regular basis fare best.