A take-home point from this article is that for multi-generational family firms to navigate succession smoothly, planning is key.

A recent case about one of the world’s largest firms – and a family-owned one – raises questions about succession as and when the top guy stands down. Succession planning is meat and drink to today’s wealth management sector. With large families, spanning several generations, the complexities increase, placing more pressure on advisors to steer conversations in constructive ways.

To grapple with these issues is Hayden Bailey, partner at Boodle Hatfield, the London-based law firm. The editors of this news service are pleased to share these views and invite replies. The usual disclaimers apply. Jump into the conversation. Email tom.burroughes@wealthbriefing.com

In January 2023 it was reported that 73-year-old Bernard Arnault appointed his eldest daughter, Delphine, to run Christian Dior, the second biggest brand of the LVMH luxury goods retail empire. Arnault's son, Antoine, also involved in the family-owned business, is reported to now head up the holding company that owns the LVMH group. Arnault has three other children, but Delphine and Antoine are from his first marriage. The three children from Arnault's second marriage also hold positions in the retail conglomerate, with Alexandre Arnault working at Tiffany, Frederic at TAG Heuer and Jean at Louis Vuitton.  
 
These appointments may seem predictable for a family-owned business, but no business should underestimate the care that is required for a successful generational succession. As the family grows, it is natural that each generation will have a lesser sense of association with the values and intention of the founding entrepreneur, and potentially less of a desire to carry on their legacy. As a result, successful multi-generational family businesses invest heavily in the time and advice required to achieve a stable transition that does not damage the family or the brand.  
 
Family businesses of all sizes will regularly see family members holding prominent executive positions. This can benefit the external brand through a sense of continuity and instils a sense of purpose to the business that is not found in large "faceless" publicly owned companies. Family businesses have also shown themselves to be more resilient in times of crisis, due to their ability to take a long-term view across generations. The inherited values of the family can reflect on the company and vice versa such that the family's legacy and shared purpose transcends the generations. When considering whether a business is to become, or remain, a multi-generational family business, however, there are essential areas that multi-generational family businesses should focus on to ensure a successful transition.
 
1. Ownership  
When transitioning from founder to the next generation, business owners must consider whether the next generation will all own the same number of shares. This may feel like a democracy, but if one child wishes to exit and transfers their shares to a sibling, or a third-party investor, the equilibrium can be quickly disturbed. The founding generation should consider how any such “exit” or “pruning of the tree” should be managed and how the shares will be valued (and with what discount, if any) to avoid any possible disputes or tensions arising.   
 
Although it can be tempting to lock shareholders in by requiring that shares only pass down the family line, this can be a recipe for dispute if shareholders feel trapped, and unable to extract value. Drag-along provisions and a detailed shareholders' agreement can be useful in determining the circumstances in which the business could be sold. Founding members might also consider using trust structures to keep business ownership and control of the board centralised in a single shareholder body acting for the family. This can be an attractive option for asset protection and centralised control of a voting bloc but relies upon choosing trustees who will understand the business. Professional trustees are often chosen, but they can be disengaged and conservative, creating pressure from the family beneficiaries, who may feel powerless to effect change without a proper beneficiary forum.  

Business owners must also consider whether non-family, which in some cases has been seen to include spouses, and adopted or illegitimate children, can own equity in the business. Thought should also be given to whether external private equity investment is permissible, and how non-family executives will be incentivised if they cannot become owners. Defining “family” is important, and whether being a family member automatically equates to a voice in the appropriate forum.  
 
2. Management
For a successful legacy, family businesses should consider creating a framework so that family members understand the extent to which they can take up management positions. For instance, in the Arnault family, Delphine worked at a management consultancy before she joined the family business, and Antoine completed an MBA. Owners need to consider what qualification, if any, a family member needs to have before they can work in the business and prove their worth to other executives.
 
Pay can be a thorny issue when deciding management roles. It may be easy enough for Arnault to decide what his children should be paid, but when the founder generation are not here, how should this be agreed, and who sits on the remuneration and nomination committees? If the family take up management roles and the business profits start to decline, then how do the shareholders decide what dividends and compensation to pay them? There is also the possibility that a child decides not to work in the business. Should they receive the same level of dividend as those working in the business?
 
A family member may want to change the direction of the business too. All businesses must evolve and adapt but without sufficient checks and balances in place, family businesses may struggle to preserve the core capital. As the family grows, establishing a form of family council or forum would enable family shareholders to have a voice in the direction of the business and agree their shared purpose, vision, and mission statement. A carefully drawn shareholders' agreement can identify those decisions that are reserved for the business owners, and the protocol for reaching agreement. These reserved matters might include selling the business, electing the board, the business strategic plan, policy on reinvestment, borrowing and charitable giving.  
 
3. Taxation 
With family businesses often spanning multiple jurisdictions, founders must consider how this will affect taxation within generations too. Different jurisdictions will apply different tax rules and often the way that the business is treated for tax may depend upon the residence status of the family shareholder. 

Therefore, if a founder has children in the US, the UK, and France for example, they will find that the way those shares are taxed (such as in the case of death, lifetime transfer, or sale), can vary dramatically. A family business should have a policy in place, often through the family office, to coordinate shareholders obtaining advice in the relevant jurisdictions.  
 
In the UK, Business Property Relief is a valuable Inheritance Tax relief that can exempt trading businesses from IHT. However, this relief is by far from guaranteed and businesses should conduct a rolling review of their eligibility for relief, as it can be restricted or lost purely by holding investment assets or changing the nature of the business. Family businesses should also consider life assurance strategies to cover the economic risks associated with a death in the family, and contingency planning to ensure that any taxes can be funded without creating a sudden detrimental financial impact on the business or family.  
 
From our experience, to plan a successful succession in multi-generational family businesses, founders must have a clear blueprint that allows for generations to confidently choose their own path while safeguarding their legacy. Navigating this involves a delicate balancing act between acting in the best interests of the company and managing family relationships. Every family business will have its own dynamics so taking a measured, proactive approach to succession planning is key.