Historically, the family business has represented a simple and desirable route to a successful career. However, with more opportunities on offer than ever and a younger generation that are better equipped to pursue self-determined lives, family businesses need to prepare to thrive without their descendants. A robust, timely succession plan can make this process as simple and seamless as possible and ensure there is a liquid inheritance outside of your family’s main asset.
The world is in the midst of a generational shift. Baby boomers, the youngest of whom are 57, are rapidly heading towards retirement and, as such, are considering how to transition away from leadership roles within their family businesses. Many have likely pinned their hopes on their offspring and may be assuming their children are ready to step up and take the business into the next generation. But are they right to do so?
The family business is no longer the default career path for lots of young people. With more corporate opportunities and chances to start a business than ever before, ambitious heirs are no longer content to settle for a career in their family company. A recent survey by Peking University found that 80% of potential Chinese heirs were reluctant to follow in their fathers’ footsteps1.
The issue comes when owners fail to plan for how their business can thrive beyond family control. RBC Wealth Management found that, although most High Net Worth Individuals (HNWIs) would like to pass their businesses to their children, they are finding it difficult to sell succession in the family’s operations as a better pathway than entrepreneurship or a corporate career. So what is the alternative?
Taking a holistic view of succession planning
If your children are not going to be involved in the family business, you will need to address two distinct issues: ensuring your business succeeds without them, and that they receive an inheritance equitable to a stake in a multi-million-euro business. Fail to address either and your business could end up being sold by the next generation to fund their other ambitions.
Joachim Schwass, Professor of Family Business at Swiss business school IMD2, says that taking a narrow view of succession planning is a recipe for disaster. He explains that inheritance is a process, not an event, and should be treated as such.
“The most common characteristic of failed successions is that the family marks out the eldest son for the top job from an early age, and hands it to him regardless of ability.”
Equipping children for their futures
Research by the Institute for Family Business3 uncovered a mixed picture of how willing and prepared the next generation are when it comes to stepping up to the challenge of leadership. 44 per cent of senior generation members said they had fully achieved their objectives in engaging the next generation, whereas 20 per cent found that some members of the next generation were very difficult to engage.
Discussions that are not fruitful or lead to the outcome you were hoping for could be a sign that your business’s future does not lie within your family. Financially equipping your family to live their choices, rather than forcing them into a business they have neither the desire nor skills to run, will allow your operations to thrive for years to come. Additionally, your children will be more satisfied and able to create a career or business they love, rather than settling for one they do not feel passionate about.
Finding the right successors
Planning for a family business without your family is not always driven by children’s decisions. Some operations are looking to weed out nepotism and make sure the next generation have earned professional achievements in their own right before taking up a position in the business. Increasingly, it is the case that the generation currently in power believe experience outside the family business is needed to ensure the enterprise succeeds.
David Harland, Managing Director at family planning solutions firm FINH, quoted a survey from Family Business Australia and KPMG, which found that 75% of successful family businesses had well-educated and commercially experienced children4.
“Successful family businesses tend to have children who are more educated and worldly than the general population,” he explained.
By letting their children carve out their own professional paths, and giving them the financial backing to do so, family businesses are likely to be better off in the long run. If you’re concerned you do not hold enough assets outside your business to give your children a generous and equitable start, liquidity planning could be the solution.
Reassuring the outgoing leaders
One thing that can hinder the transition is ‘sticky-baton syndrome’ - when an older business owner is reluctant, or completely unwilling, to prepare for their eventual, and inevitable, departure from the business. KPMG1 shared the cases of Melvin Gordon, who died at the age of 95 still holding the position of CEO of Tootsie Roll, and Viacom’s Sumner Redstone, whose firm suffered due to his reluctance to fully release control until the age of 92, as cautionary tales.
Starting timely preparations for the next stage of your business is key to allaying the fears of those who will be stepping down. Being involved in selecting their successor could reassure the outgoing chairman or CEO that the business will be in good hands. Additionally, having the right liquidity planning solutions in place will reassure the business that it has the reserves to weather any temporary disruption as new faces settle in.
Planning for a fair inheritance
For smaller family operations, who do not have an estate or other valuable assets to fall back on, it may be difficult to leave an inheritance if your children are not going to be involved in the family business. Even if the next generation want to have some involvement, 63% say they would like to be financially independent of it5 and carve out their own careers alongside.
Regardless of what is going to happen next for your business, failing to create an orderly succession plan is a recipe for disaster. As the Harvard Business Review6 phrases it, ignoring the need for a transition until it is too late can lead to “years of tension and conflict as older and younger generations pretend to coexist in top management”.
The right inheritance planning solution will equip your children with the capital they need to live their choices freely. VUL solutions like Swiss Life Generations simultaneously preserve the asset of your business, as it will not need to be liquidated to free up cash for your inheritance plan.
Sources:
[1,2] https://home.kpmg/xx/en/home/insights/2015/12/getting-children-into-a-family-business.html
[3] https://www.ifb.org.uk/media/2033/next-generation-engagement-in-uk-family-business.pdf
[4] https://finh.com/news/why-the-next-generation-should-first-succeed-outside-the-family-business/
[5] https://www.ifb.org.uk/media/2033/next-generation-engagement-in-uk-family-business.pdf
[6] https://hbr.org/1976/07/transferring-power-in-the-family-business
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