When it comes to family businesses, there is an old adage that goes “The first generation makes it, the second generation maintains it and the third generation blows it”. In a family business, there are tensions and expectation not only across the generations but amongst those involved in managing the business and those who are not.
Whilst every family business is different, there are common themes running through them, not least the important of succession planning.
When a family business is founded, the ultimate aim is to generate wealth for the founders and their families. Over time, as the wealth grows, those same founders must consider what should happen to the business after they have gone.
The founders of a family business clearly cannot go on forever, even though some think they can. That means they must take account of their own mortality and the need, at some point, to hand over the reins to others. In family businesses, there is always a desire to hand over ownership and day to day management to family members. Problems usually arise when some family members have no interest in the day-to-day management but wish to retain the benefits of ownership.
There are two fundamental aspects of succession planning in a family business. The first aspect is that of planning the continuing ownership of the business by the family and the second is planning the future management of the business. Each of these aspects brings its own challenges and that is why it is important to consider what steps need to be taken for effective succession planning.
The imperative of the founders in any family business is to see the business succeed during their lives to continue to thrive after they’ve gone. That means attention must be paid to two elements of the business – the ownership and the management of the business.
The founders of the business clearly own the business they have set up. However, for the business to be successful, they must consider who should succeed them, not only in the ownership of the business but in its management.
Founders will wish to provide for their family members, even though some of them might never have been involved in the business. The balance to be achieved is to ensure a fair division of the ownership amongst those family members who are working in the business and those who are not.
It is also important to consider the managers in the business who are not family members and whether their effectiveness might be undermined by family owners with no experience in running the business.
In addition to the personal dynamics, there is the challenge of incorporating the succession plan into the founders’ personal estate planning efforts.
Finally, it is also important to address the question of succession sooner rather than later. Leaving succession planning until the last minute does not auger well for the continued success of the business.
Successful succession planning entails a structured approach to consider all aspects of the business as well as taking account of the personal wealth management of the founders. The focus is usually on the continuation of the family business. That tends to mean involvement of other family members in the running of the business. This entails considering what share in the ownership should transfer to those members and when that should happen.
The founders may decide to gift different shares in the business in different percentages to family members, depending on their involvement in the business. They may decide to transfer these shares over time with the aim of reducing their stake in the business and taking advantage of any tax breaks available to them.
It is also very likely that successful succession planning in a family business will not be a one-off event, but a series of reviews taking place over a period of time.
Perhaps the biggest challenge is to satisfy family members who are not involved in the business as well as those who are whilst continuing to grow a successful business. This must go hand in hand with personal estate planning of the founders. A holistic approach is required to ensure that as much wealth as possible is preserved for future generations.
If you have a family business and are struggling to decide what to do about succession as well as your personal estate planning, please get in touch using the enquiry form or call us on 0131 225 1200. You can read more of our recent family business Insight blogs here.
Murray Beith Murray was established in 1849 as advisors for generations of clients, committed to our values of integrity, expertise and trust. This aim and these values continue to this day, as does our commitment to be here when you need us.