Dr Edgar Paltzer is a Switzerland-based attorney-at-law who specialises in providing legal advice on wealth structuring services for clients. This article will look at the topic of succession planning, the aim of which is not only to pass family businesses to subsequent generations but also to preserve wealth for future beneficiaries.
Alarmingly, according to information shared by Business Daily, studies suggest that more than 60% of family businesses do not have a succession plan in place. Even business owners aged 60 plus neglect to take this step, with more than 50% of this demographic lacking a documented plan to pave the way for a smooth transfer of ownership following their exit from the business.
Businesses are often passed on due to sudden death or ill health rendering the original owner incapable of further executive involvement. Even where founders are undertaking succession planning, deciding whether to pass the business on to the next generation or sell it to a third party can be an extremely difficult decision.
In addition, deciding the appropriate timing for transferring ownership of a family business can also be challenging, with many social considerations that need to be factored into the process. Aspects that may have an impact on the business owner’s decision to divest or hold onto the business include the risk of losing bequeathed wealth, with the economist Adam Smith observing that great fortunes are often lost by children and grandchildren. Indeed, recent research indicates that just 30% of family businesses survive beyond the second generation of leadership, with just 10 to 15% passing to the third generation, and a paltry 3% making it to the fourth.
A common stumbling block in succession planning is a lack of an obvious heir to the business, in which case the decision to divest is inevitable. Furthermore, a chosen successor may prove reluctant to take over the reins, perhaps because they lack the founder’s skill, passion and interest in the business, or because they lack the confidence and intellectual flexibility necessary to steer the business through challenging economic times. In such situations, again, divesting may be necessary to realise the value of the business and distribute those funds among the beneficiaries.
Careful succession planning is required to keep businesses viable once the original owner relinquishes control. It is prudent for business owners to seek professional advice from lawyers and/or financial advisors, helping them to create a will and complete any other necessary documentation and formulate a solid plan to ensure that the business is passed on or divested according to their wishes.