Passing on a family business to the next generation should be rewarding. Yet for many, it’s a fraught process that can leave people feeling unfairly treated and the business in a precarious financial position. Succession planning needs to do more than name an heir – it needs to create liquidity, flexibility and security for the business and the family.
Handing over a family business to the next generation is a complex process. With the family and business so closely intertwined, it is difficult to review circumstances with pragmatism. Perhaps it is unsurprising that fewer than a third of family businesses1 survive into the next generation, especially when different values and priorities stand in the way of creating strategies for the business’s future.
Despite the challenges that family businesses face, they do have the potential to flourish through the generations. Research from the Harvard Business Review2 shows that non-family staff members prefer successors to be from within the family. Likewise, more than 65% of owners3 want to pass their businesses to the next generation, but only 25% achieve their plans.
If employees and board members are largely in support of a family takeover, why, then, do so many succession plans fail? We believe that the plans themselves are not catering to everyone’s needs, and the vital missing component is flexibility.
Blockades to an effective succession
Succession planning for a family business can become a fraught process4. It often involves sensitive discussions and family dynamics can come under threat if people feel unfairly treated. Many family businesses fail to communicate the future plans for the company with successors, and the next generation may not have the same vision5, leading to disagreements. Not only that, but many successors have plans to take over the business yet are inadequately trained to do so.
Making decisions about the future of the business6 can feel like a balancing act. But when flexible succession plans are in place, decisions do not need to be final. Owners can make plans that suit family dynamics today while protecting the future of the business.
Ensuring equality through times of change
When wealth is tied up in the business, dividing equally valued assets between heirs is a challenge. Without sufficient succession planning, some families are left with little choice but to sell the business to meet forced heirship rules.
Strategic succession planning can solve the issue. Using a range of products such as life plans, business owners can leave different assets of the same value to each heir. To make this plan successful, however, it needs to be flexible.
The Covid-19 outbreak has taught us that business succession plans must be able to adapt to almost unthinkable shocks. In a matter of months, markets saw sharp declines and many businesses suffered immense losses, meaning asset values were not what they once were.
Not only can asset values rise and fall without any advance warning, but heirs’ future plans can also change. Succession planning should always be an ongoing process. The mechanism must be be flexible enough to be able to adapt to changing life circumstances and equalise the values as situations change.
Preparing the business for succession
Family businesses going through a succession can face great upheaval. They need to manage tax and other liabilities, they may have cash flow issues while affairs are settled, and they may need people to step into the leadership role while other family members take other career paths.
Despite these challenges, few businesses have arrangements for the handover, and the numbers have dropped further during the pandemic. Just 15% have an entry and exit provision8, down from 35% in 2018, and only 19% have emergency contingency procedures in place, down from 36%.
Without suitable planning in place, business owners are putting the future of their company at risk. A robust liquidity solution could provide the security and freedom that both the family and the business need.
Firstly, it gives a family capital to pay liabilities without needing to sell the business, enabling them the flexibility to make decisions about their future. Secondly, the business benefits from a cash injection to assure creditors of its stability and to manage cash flow during times of change, helping to protect it through the succession.
Meeting complex needs with flexibility
Families can be complex, with a range of goals and expectations. So can businesses. It is essential that a wealth protection strategy caters to different needs. Succession plans should also be able to adapt at pace with changing family dynamics and business strategies.
A product that enables maximum flexibility will give you confidence that your family and business are prepared for whatever comes their way. Our high life cover solution puts you in complete control over your future. It will create the liquidity your succession plans need and provide freedom of choice to meet your family and business priorities as they evolve.
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3 EY Family Enterprise statistics
7, 8 https://www.pwc.com/gx/en/family-business-services/family-business-survey-2021/pwc-family-business-survey-2021.pdf