Throughout history, family businesses have proven to be resilient. Yet succession – even when someone has been waiting in line for years – remains a weak point that often results in failure. Only a few family businesses survive into the third generation, which comes down to a poor succession plan. To break the so-called third-generation curse, families need to think beyond strength and instead focus on choice to create a succession plan that gives everyone a say in their future.
Family businesses have staying power. They proved their resilience during 2020 when, despite all the challenges induced by the pandemic, 53% of family businesses achieved growth1. With a clear hierarchy, family businesses can make decisions quickly, and they tend to have a committed team driving them forward – a team that can see their future in the business.
Thanks to their robust foundations, family businesses often outstay their corporate counterparts. Studies show that 74% of family businesses survive at least 30 years2, while publicly traded companies last an average of 15 years.
Yet even family businesses can encounter a weak spot when it comes to succession. The much-cited third-generation curse suggests they are eventually doomed to fail, but the great intergenerational wealth transfer could be an opportunity to break it. As the baby boomer generation prepares to transfer as much as $84 trillion3 over the next few decades, high-net-worth families have the resources to properly consider their legacy planning. Those that do will turn the great wealth transfer into a time for the whole family to prioritise self-determination.
How prepared are businesses for succession?
Succession remains low down on the priority list for many family businesses. Just a quarter of UK family businesses1 have a robust succession plan in place and only 42% have the family’s business values documented in written form. Without formalised plans and values in place, it is easy for family members to disagree about how to manage the business when the leader steps away or successors have to take over unexpectedly. Such disputes shake the foundations of the business.
There are many reasons why leaders are hesitant about making succession decisions. Around a half (51%) of survey respondents4 believe that clear succession isn’t possible due to a lack of qualified successors, while 30% say that the leader’s unwillingness to hand over the decision-making holds back their plans. The reluctance to pass control, often called ‘sticky baton syndrome’, is something that we believe can be overcome with the right succession plan – one that includes the following key ingredients.
The role of time in succession planning
Even the strongest family operations are left vulnerable to untimely failure without a robust, documented succession plan, and this takes time to get right. Less than half (47%) of European family business leaders4 say the next generation is “somewhat prepared” for succession and just 12% say they are “very prepared”. These business leaders are missing out on the opportunity to adequately train the next generation to manage the business and make all the decisions that come with it.
Family business owners and their successors also require time to agree on the direction of the business. According to PwC1, half of family business heads say they encounter disagreements about the business’s direction. This friction can leave businesses stagnant, with successors unable to drive them forward with their new ideas. With the benefit of time, however, family offices can discuss and agree on the business’s objectives and strategy before succession takes place, ensuring everyone feels confident in its next phase.
Why succession planning should favour choice
Succession planning is a way for business leaders to have an element of control over the way in which their business passes to the next generation. While the matriarch or patriarch may be clear about how they want to see the business managed, successors are often left with little control – or choice – over their future.
The governance of family businesses globally demonstrates a lack of autonomy for family members. Although nearly half (47%) have a shareholder’s agreement in place1, just 23% have a family employment policy, meaning that descendants may not be clear on their relationship to the business. Instead, it is assumed that they will work for the business and take over one day, which could mean they do not have the opportunity to achieve other ambitions and life goals.
Succession planning should be as much about making clear decisions as it is about giving people choice. By enabling successors to decide when they will take over, the role they will play in the business and even their working patterns, they can create the future they want. Not only is this freedom key for the individual’s success, but it is a vital ingredient for the business success too. New leaders may not feel the need to leave the business if they are achieving both their personal and professional goals.
Liquidity: creating opportunity
A key ingredient to a succession plan that enables choice is liquidity. In order to take a step back from the family business, leaders will want to ensure that all heirs get a fair share of the business – even those who have chosen not to take it over.
Regina Burlington, Head of Global Family Office Private Banking5 at BNY Mellon Wealth Management, explains why: “many family offices support multiple generations. This implies increased liquidity scenarios as younger generations purchase homes, raise families and pursue personal investment opportunities and charitable causes.” Liquidity in succession planning can do more than prevent disputes when the time to take over comes – it ensures all family members have the freedom and opportunity to achieve their life goals. If liquidity is not planned for, family members may pursue involvement in the business for the wrong reasons (to maintain their share) rather than to actively drive it forward, which can cause conflict.
Despite the importance of liquidity, it is often overlooked. Between 2018 and 2021, there was a 41% increase in wealthy families collecting fine art6, which demonstrates a preference for illiquid assets. If these kinds of assets (from real estate to shares in the business) are to be included in the succession, family businesses will need another source of liquidity to equalise the estate for a smooth handover.
Planning for a seamless succession
Time, choice and liquidity all work together to create a succession where all family members feel secure and confident about the future – their own future and that of the business. Rather than simply making decisions about these key aspects, however, families need to put plans in place to achieve them.
They need to build time into their succession process for everyone to plan. They need to build choice and freedom into their governance to support their family members in their goals. They also need to design asset allocation in a way that creates liquidity in the optimal way. Our Swiss Life Generations life plan is a solution that allows to generate liquidity up to EUR65.5m, which enables family members to take over the business while keeping equity invested within it. With this life insurance solution and the time to make careful considerations, families can smooth their succession and confidently break the third-generation curse.
More on solutions for a fair wealth transfer
Liquidity planning for a financially efficient inheritance
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