What can and should family businesses do to endure over the generations? This article tries to provide answers.

Business owners and inheritors should and do think about how to protect what they have acquired. Divorce, resignations of key managers, family disputes, unexpected illness and death can disrupt and even destroy a firm, particularly if it is family-owned. The desire to build structures that might build a more resilient business and protect wealth is, after all, a reason why family offices are founded, for example. 

There are a lot of pieces on the chessboard in this sort of discussion. A person well-placed to talk about it is Martin Atkins. He is a lead partner for advisory services in the London office at accountancy firm, Menzies LLP. Don’t assume that just because he is based in London that his arguments do not apply more widely. Readers in North America, Europe, the Middle East and Asia can learn from these ideas, which is why editors of this news service are pleased to share them. As always, this news service does not necessarily agree with all views of guest contributors. Email tom.burroughes@wealthbriefing.com and tom.burroughes@clearviewpublishing.com

It is often said that most family fortunes fade within three generations. For family business owners, the need to secure the future of the business and pass assets on to the next generation are key parts of their long-term strategy - but are they setting the right example and inspiring their kin to become the wealth creators of tomorrow?

Often, a fruitful wealth creator is followed by a line of wealth managers, many of whom are keen to protect the prosperity of the business but lack the same dynamics as the original business owner. This lack of foresight is just one of the potential pitfalls for family businesses.

Ultimately, entrepreneurial talent is something which sparks from passion and can be refined with the right mentor - it is not an automatic rite of passage for the next generation. Family business owners must be alive to this fact in order to safeguard the future of their business.

So, what steps should companies follow to overcome these issues and ensure a business’ successors are ready to lead it to future success?

Have a blueprint for success
A wealth creator must be confident in communicating their goals and objectives for the future of the business to the next generation. By ensuring that the best people are in place to carry out a time-specific strategy with a clear purpose, the wheels of change can be put in motion.

A documented succession plan should be made at least five years in advance and, perhaps most importantly, communicated to the intended successors as soon as possible. Establishing whether the intended successor(s) are keen to take over the company is crucial, as promoting the wrong person to a key position can often be the main reason for the downfall of a family business. The more time an owner-manager dedicates to grooming the next generation, the more quickly they will be able to identify and remedy any potential areas of risk.

Collaboration is key
Within a family business, it is inevitable that the lines between private and professional lives can be blurred. There are often fewer distinctions between different job roles and responsibilities which, if left unaddressed, can dilute the structural integrity of the business. Review meetings are therefore invaluable to discuss what is going well, monitor expectations, and facilitate planning ahead as a team. The outcomes of these discussions can then be measured against financial and non-financial KPIs to check that all parties are working towards the same goal.

Support - don’t undermine! 
Unfortunately, many families switch from a first generation “wealth creation” mind-set to a second and third generation management/preservation mind-set which they are never able to recover from.

Motivation and support can help companies to bridge the gap between the two generations; however, this needs to be instigated by the business owner. They are usually well-placed to see the potential in their successors; decide which role they would be best suited to and encourage them to develop their skills in a way that drives value for the business. It is important that the business owner adopts a strategic approach by setting goals and parameters to pave the way for the future of the company. Introducing financial rewards or opportunities for progression through the company will ensure that the next generation are playing to their strengths. However, business owners need to be clear on the terms of these agreements and ensure they fulfil their promises.

Most family businesses do not work in isolation. As well as the core team, there will inevitably be clients, suppliers, and other stakeholders to consider. It is important for business owners to introduce the next generation to these key individuals in good time so that they can begin cultivating their own relationships in preparation for taking ownership.

Evolution not revolution
For a business to thrive, there needs to be an understanding, and an acceptance, of change. Meeting regularly to communicate and reaffirm those objectives will help to prevent complacency from potential successors.

Most importantly, when the time comes, a business owner must be bold enough to let the business go. However, it can be very difficult for either current owners or potential successors to commit to a time frame, as this is a very personal decision. It is common for the founder to move to a chairman role for a period in order to smooth out the handover process; however, this should not interfere with the successor’s establishment period. During this time, the structure of the business may need changing and a successor may struggle to make these alterations under the eye of the previous business owner, so giving them autonomy is key.

Invest in advice
Calling on the skills and expertise of a third party can help provide a neutral, controlled environment for having any difficult conversations which may be necessary.

Whilst tensions can run high where finances are concerned, failure to address these issues could result in larger problems occurring further down the line. Agreements should be made to separate the wealth between generations, not only to protect the wealth of entrepreneurs but also to drive incentives for profit generation from successors.

When entrepreneurial talent is not developed, the family forgoes an important wealth creation opportunity and restricts the potential for the next generation to out-perform their predecessors. By having a clear strategy, timeframe, and trust in the next generation, family businesses can prepare themselves for future success and disprove the prophecy of three generations.

About the author
Martin Atkins is a lead partner for advisory services in the London office at accountancy firm, Menzies LLP. He advises businesses and their owners on their strategic planning, profit improvement, success and exit planning, outsourced accounting, taxation, HR and accounting system reviews. He also heads up the firm’s Business Services sector, focusing on advertising and media, recruitment, legal and financial services clients. Prior to Menzies, Atkins was the managing partner of an independent accounting practice which gave him direct experience of the unparalleled dynamics and challenges involved in running a business. As well as being a Chartered Accountant, he is also a Chartered Tax Adviser and licenced insolvency practitioner, which gives him a unique breadth of knowledge as an adviser to SMEs.