Succession planning process for families in businesses is inherently complicated. Before anything can be passed down a great deal of ongoing thought and open discussion should ideally take place. But is this happening? Indeed the fable is rags to riches and back again in just three generations. Alison Ebbage investigates.
Stephen Skelly, head of Private Wealth Solutions, EMEA and Americas, HSBC Private Bank says: "In the past this was a very difficult conversation but now families are commonly doing the preliminaries themselves and are keen to learn from others’ experiences and share best practice."
What then should a best practice succession plan entail?
Ian Woodhouse, partner at PwC comments: "If the founder of a business does not prepare the subsequent generation for transition and a succession plan is not in place then there can be power struggles and the whole thing can end up doomed to failure."Woodhouse believes that families able to transition successfully have the following attributes: good governance and strong family values – which means that they are able to plan, discuss and have a family roadmap for benchmarking purposes. They also spend time and effort to develop the next generation be that through education, social enterprise, philanthropic venture, external or in house roles etc.
Indeed failing to plan seems to be planning to fail in a quite literal sense. And to start at the beginning means taking a close look at what wealth means and what its future purpose and development should be in both a personal and business context.This first issue is then, governance and setting out a roadmap that everyone has bought into.
Mark Evans, managing director of the Coutts Institute, says: "The starting point is to consider the values that the family holds and the reason why they are in business together and why they might want to hold onto that. What is the family’s vision for the future and objectives- do they want to diversify or expand? How the business is passed on all depends on what it is that they want to achieve but ultimately the business needs to be sustainable and profitable."
Indeed in the past the ownership and the leadership of the business have gone hand in hand, but in today’s highly competitive business environment both the competency and willingness of the younger generation are now more likely to be taken into account. Chris Lintott, partner at Pennigtons, comments: "The classic dilemma is whether to pass a business onto someone who is clearly not ideally suited to the job. The options are to sell, pass it down anyway and cross fingers or appoint an external manager."
He thinks that cases where a business is passed down regardless of aptitude or desire to manage are now less common. Instead he says that family wealth (to be enjoyed) and business wealth (to be consolidated and built upon) are now much more distinct and that families are willing to consider a broader range of options.
"Is it never too early to start discussing but also the assumption of passing on needs to be avoided.Any good business will have a five year plan and that will include someone retiring, becoming less hands on etc,"says Lintott.
But instead of looking at the situation in black and white; suitable/ not suitable, another approach is to actively groom the next generation. This starts with education, MBAs, then hands on experience either within the family business or elsewhere. Some may encourage the next generation to actually start their own business and if it is successful to take it into the family business fold.One way in which experience can be gained for the younger generation is through managing philanthropic activity and being actively involved in social enterprise. Lintott says: "The general trend is towards active philanthropy. Setting money aside for this and encouraging younger members to build know how and expertise is good in a business sense and in a broader values sense too."
Another consideration when it comes to passing down a family business is whether professional management could bring something to the business that could not be found with existing management or family members. This is not simply a last resort if a suitable heir cannot be found, more a recognition that the business environment takes no prisoners and that external management has much to add in a mentoring role as well as growing and developing a business. Lintott says: "Appointing external managers is a growing trend as entrepreneurs realise that not everyone is suited to growing or maintaining a business. Today’s business environment is a tough one and no business will succeed without having top drawer management."
But Evans cautions: "Although professional managers have much to add, it is really important to make sure that their values and approach will fit well with those of the current and potential future family management. There also needs to be discussion over the extent and duration of the role and the balance of power."
Another option, according to Evans, is to choose to invite in private equity or venture capital investment. "This can work for either a short-term defined period to achieve a certain objective – at which point the family can buy out the investors, or for something more long term. This can serve to give a company a new lease of life or allow for growth," he says.
This change from the assumption of simply passing a business down to the next in line are party due to wider societal changes and party due to the source of wealth in the first place. In the past landed families have been keen to keep their estate together through primogeniture. But the entrepreneurial wealthy see existing wealth as a base to provide opportunity for further wealth creation, not an end in itself.In addition those who have made their own fortune tend to see less entitlement to wealth and more opportunity to create further wealth.
Indeed the self-made know that wealth can be made and lost and that being born into wealth does not guarantee future wealth.Woodhouse comments: "With entrepreneurial wealth there is less emotion attached to selling out and the belief is very much that business can be built from scratch."
But no matter what the source of wealth the trickiest of decisions is how to split it between more than one person. This is where open discussion and evolving decision making can really come to the fore.
Evans comments: "Whether to pass wealth down equally or unequally but according to need is a really hard decision to make. It can be extremely emotive and depends on attitudes to wealth and whether parents want children to stand on their own two feet or whether they might give someone that they perceive to be in more need, a greater share of wealth than someone they think has less need."
In a business context the decision is trickier still. Woodhouse says: "The plan for the business and for family member can be divergent- for example the current generation could leave a bigger amount of the business for someone who has an active role in the company than to someone who is not involved and just takes dividends. But no matter what the final decision, what is really important is that there are open discussions at an early stage and that the perception is that the overall benefit to individuals is equal or fair."
Skelly adds: "If lots of wealth is tied up in the business then it might be worth looking at creating some liquidity to provide some sort of equalisation to those that are not going to have direct involvement in the business. It is also important to ensure that stakeholders have a voice in the business even if they are not managing it."
There is then, much to discuss and think about; from deciding on where the business and family wealth should go directionally to how that is to be achieved and by whom. Indeed the succession planning process really does need to be an evolution requiring careful thought and discussion with the next generation. Common sense would suggest that the more open and involved the discussions are, the less chance there is of conflict within the broader family.
Evans concludes: "It is overall much easier to handle succession as a process not as an event. That way things can be assessed on an ongoing basis and the family and the business needs can be more closely aligned over time."