Keeping it in the family – overcoming the challenges of succession planning in a family business
By Frederick Bjørn, Partner at law firm Payne Hicks Beach
The challenges faced by family businesses when its owner passes away were highlighted in the extreme when Dubai’s ruler had to step in to resolve a dispute among the heirs of the late Majid Al Futtaim, founder of one of the emirate’s largest private companies.
A judicial committee has been appointed to deal with the problem, but not every family will need such high intervention to solve succession issues when it comes to the business or wealth. Preparing for these eventualities well in advance and putting in place clear family governance and succession plans is key.
Preparing for the future will depend on myriad factors including the stage of the family’s business, the ages of the key people in the business and the relationships within the family. It is only by exploring these factors that succession planning can begin.
Often leaders of family businesses have not actually considered what their purpose is. They may have concerns about planning for the future, stemming from the perceived de-motivation of the next generation or their reservations about that generation’s capabilities. It’s vital to address these matters at an early stage.
From the off, it is important to differentiate between three aspects of the family business: the control element, the economic element and the family (personal) element.
Looking at control of the business, it is not unusual for a family business owner to relinquish (some) control in favour of the next generation, but only once they consider the next generation to be ready. This seems logical, until one realises that in their eyes, the next generation will never be ready (they will, after all, always be their children). The key at this point is to consider how the next generation(s) can be involved without usurping the patriarch/matriarch. This is where structures can come in useful, particularly trusts and companies.
The advantage of trust structure is that the control and economics can be kept apart and this can often protect the underlying assets (most notably the family’s business interests). The disadvantage is that not every client is comfortable with the idea of passing assets into a structure with so much flexibility and so little certainty. If this is the case, the next consideration is whether the existing company (or a form of holding company) could be used to try and break up the control and the beneficial interest. Sometimes the use of family investment companies and alphabet shares are useful at this stage. In either case tax will be a consideration and may limit the business’s options, but until the business owner knows what is on the table, he/she will not be best placed to dismiss them.
Regardless of which route is adopted, once a child can demonstrate that they are capable both financially and in terms of running a business, this is when the older generation may be willing to concede a level of control. There is obviously a Catch 22 here, in that the older generation will not be prepared to do so until they are comfortable that the next generation are capable, but the next generation will not have the opportunity to demonstrate their capabilities until they have been given the responsibility. It is often this dynamic that needs to be played out. At some stage there has to be dialogue and an element of trust between the generations. Involving the next generation in discussions early in the process can help in this regard.
It is not unusual for the next generation to feel the responsibility of wealth and the pressures that come with it very strongly, and for this to manifest itself in an apparent apathy or unwillingness to immerse themselves. The sums involved can be daunting and the success of the previous generation can demotivate. They feel like they will never quite be good enough. This can be rectified if they are brought into the fold and made to feel like they can achieve something within the business or with the wealth that has been provided for them. It is easy to assume that this should be done by way of sheltering the wealth so that they do not have access to it. However, in some cases this can in fact be demotivating in itself. This is why it is beneficial to have a third party involved who can see things objectively without the parental prejudice that can be so evident.
Any family business will clearly benefit from planning for the future to avoid disruption.