Last Updated on: 22nd November 2023, 07:02 am
Lance Ranger, Attendus Company AG director, is a practising UK solicitor who has lived in Switzerland since 1991. Attendus is a family office and fiduciary company providing professional legal and business services. This article will explore the topic of succession planning for family-owned businesses, looking at why it is so important to put in place the right action plan to prevent problems later on.
Succession planning can be immensely difficult for many families. Passing wealth down the generations is an incredibly sensitive issue that can create tensions at every level.
Carefully and sensitively implemented succession planning for a family business can safeguard the future of a family’s wealth. By adopting an appropriate strategy, it can be handled without pain (or at least with ‘less’ pain!).
Whilst succession planning is itself of fundamental importance, where the fortune is locked up in a family-run business this type of wealth transfer requires even more careful handling. One of the most important preliminary issues to consider is the long-term future of the business.
So-called ‘family-owned businesses’ may adopt any number of approaches when the current leadership decides to relinquish the ‘reins’ of power. Shares may simply be allocated among the children/grandchildren. An alternative may be to prepare for a more ‘gentle’ passage of ownership of the business to one or more heirs, each of whom may assume executive functions. Another option is to find a third-party purchaser and to divide the proceeds between the family.
A significant step in any succession planning process will be to seek professional assistance. This may initially be regarded as an unwelcome development in what should be an internal family matter. However, expert and neutral advice may help in making non-emotional decisions, which may help avoid pain in the longer term.
Older and younger generations often have widely different points of view as to information sharing. This can lead to rifts between such groups instead of harmony. Younger family members may feel looked-down upon or patronised by older members of the family. The younger generation may have their own ‘way’ of dealing with modern issues that may be more effective in the evermore technology-driven world. The older group may push back against increasingly technical solutions, although those may lead to a breakthrough in cost savings and process-driven solutions.
Rivalries between siblings may arise and cause family tensions and disagreements. Professional advice is essential to ensure that the transfer of wealth is conducted in a sensitive manner, whilst reducing scope for potential conflicts between family members. Advisors can also prepare critical legal and commercial documents and put in place a framework to ensure that the process is followed in an orderly, structured manner. Family charters or constitutions (although legally non-binding) may also play a role in synthesising the governance and legacy of a family business.
Deciding on the right successor for a family enterprise is one of the most difficult decisions a business owner can make. They need to weigh up a variety of different criteria, including whether new leadership should come from within or outside of the family. Who are the clear contenders as successor amongst the pool of potential family members? Does the potential heir (if there actually is one) actually have the time, knowledge, education and inclination to assume a leadership role? Furthermore, the present owner must consider what potential conflicts of interest may emerge that may affect the chosen candidate’s desire to put the business and its interests first.
The process of engineering the transfer of a business should ideally be commenced as early as practically possible, providing heirs with mentorship and instilling in them a comprehensive understanding of every aspect of the business. Waiting until the eleventh hour to start the succession process may result in ill-considered decisions, creating scope for negative consequences to the business.
In addition to the preparation of heirs to take on greater leadership roles, early planning also helps the outgoing generation to gauge their heirs’ plans and aspirations for the business. Outgoing business owners should also seek the advice of tax specialists to ensure they are aware of any tax liabilities incurred in exiting their respective shareholdings.
Building a successful business empire is no small feat. For a founder who has devoted years of blood, sweat and tears to making their business a success, the emotional investment is huge. However, for every founder, there comes a time to relinquish control to ensure the safe survival of the business. Carefully laid succession plans are crucial to ensure that power and control are transferred to the right people at the right time and for that process to be as smooth as possible.