Fewer than one third of family businesses survive the transition between generations; Estera looks at what advisers can do to increase their chances of success.
Much has been written about the vast transfer of wealth from first generation to second that is set to take place over the coming decades. Along with that wealth transfer comes the handover of family businesses. Estera recently gathered a round table of wealth advisers to discuss the implications and how they work with clients to ensure a smooth business succession.
According to Forbes magazine, fewer than one third of family businesses survive the transition from first to second generation ownership and a further 50% fall at the transition from second generation to third. As millions of family businesses are set to make another generational transition, Estera examines the priorities for facilitating the arrangements as fairly and as successfully as possible.
Richard Prosser, Group Director at Estera spoke at the roundtable saying "Advisers, such as Estera, are experienced in helping clients through this potential minefield. There is an enormous amount for clients and their families to consider and we can use our knowledge of the family and our technical expertise to help achieve a successful outcome for everyone involved."
The priorities in preparing for the transition of family businesses between generations involve, establishing and communicating the overall vision and culture of the business, the best corporate structure, and whom in the family is in the best position to take up the reins; a leadership role may not be for everybody and this needs to be examined sensitively and equitably.
A family charter or constitution, ahead of the handover, setting out its priorities can help with these discussions, and serve to prevent or manage disagreements. Marrying the values of the family with the strategy of the business and its corporate governance can provide a clear framework for successful transition over the long term.
Nick Barran, Managing Director, Rothschild & Co Wealth Management, spoke at the roundtable about family business succession "the idea of an archive, a record of the endeavours of the family, is really important. It is a great basis upon which the constitution can be linked. After two generations, on what basis did the settlor make the money? What were the principles? That can be quite important."
There may also be discussions to be had about possible liquidity events. Nick Barran adds "Lots of families have an operating business and there are tensions because there may be family members who would like a chunk of value from that business. There may be third-party management in the business and the family has stepped back from it, which only increases the tensions. Or there may not be any successor for the business, creating lots of issues around how to advise on that corporate structure."
Matthew Braithwaite, Partner at Wedlake Bell, adds "You can set up an ownership structure where people are looked after well. You can remunerate third-party management and keep family members happy. There is lots of advice that can be given on that corporate side."
It is most unusual to be able to have all of the members of the next generation as directors of a company; it's important to make sure that those who do take up the roles are doing so for the right reasons, as a result of genuine interest, being the best fit, and not just to line up for financial rewards.
Matthew Braithwaite confirms "It is where you bring the next generation on board, if they want to be brought on board. Not everybody wants to be, so it is about acknowledging that and thinking about how you incentivise those who do, but equally recognise the entitlement of those who do not. That is a challenge as well."
It can be challenging to advise the founder on decision-making leading up to the handover process and communicating to children that they do not automatically have a right to work in the business if they are not suitable for it. As families become larger and more diverse, and founders tend to stay in businesses until they are older, this situation is arising with greater frequency, and can easily lead to conflict if the founder and family are not well advised.
Once successors have been identified, there is an education role to be fulfilled in both advising the next generation about the role they are being lined up for, and preparing them to take the reins. This may mean enhancing their exposure to the operations of the business over time, or organising work experience for them elsewhere in preparation.
Advisers play an invaluable role in ensuring the successful transition of family businesses between generations. In order to preserve family businesses' best interests, the roundtable concluded that advisers can: facilitate difficult conversations within the family; help to articulate a clear charter for the business; help to clarify the best fit for roles within the business; future-proof the corporate structure; educate the successors on the roles they are lined up for; and ensure equitable incentives are available to family members whether or not directly employed within the business, and without compromising the core business goals.
Richard Prosser concludes "Management succession is a significant moment in a family business's life and an issue that requires analysis from the perspectives of family, management, and ownership systems in order to understand the perspectives of the different stakeholders. Advisers can use their experience and knowledge of the family and its business to add immense value and to this critical process."
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