Family Business And Cross-Generational Succession Planning

Deborah Robson

Charles Russell

25 March 2013

Editor’s note: As this publication has explained in previous articles, succession planning remains, particularly given issues such as inheritance tax and complexities such as cross-border ownership, a vital subject in the wealth management sector. In this article, Deborah Robson, partner at law firm Charles Russell, gives her views on some of the specific challenges that can arise.

Main threats to family business and wealth

Whilst a family business will inevitably be susceptible to factors which affect all businesses, such as market conditions and the fragile state of the economy, there are certain areas of weakness to which family business owners and managers are particularly vulnerable. For example, there is a greater risk in a family business of relying on the status quo, leading to financial risks not being identified and managed and to a lack of diversification, with the potential to destroy the hard work of previous generations.

The moral burden on family business owners and managers being particularly onerous, it can be difficult to manage many of the internal dynamics that are vital to ensuring the continued success of a family business. Effective succession planning goes to the heart of these issues.

Succession planning

One key to ensuring the continued success of a family business is to periodically review the continued suitability of the existing ownership model. Rather than expecting that the younger generation will be able or suited to take over the business when the older generation decide to step aside, potential candidates should be identified early on and supported in preparation for such a transition. It can in fact be worthwhile early on to encourage the younger generation to forge other careers prior to their involvement in the family business, and it should never be assumed that the best interests of the business can only be served by members of the family; an independent board can bring valuable commercial experience and objectivity to the table.

As a family inevitably expands, succession of ownership is another area that needs careful consideration. An alternative to the continued dilution of share ownership is the creation of opportunities for family members to have their interests bought out, as where a family business has grown over time, the number of individuals with varying degrees of involvement and interest in the business can become unwieldy.

The establishment of a family charter and family council can be invaluable in dealing with complex family situations. Although limited to the extent of legally binding obligations created, this type of governance can help to ensure that all family members are empowered, provides an important framework in which to deal and a good channel of communication. It all helps to nurture interest in the continued success of the business and has the potential to diffuse the negative effect of personal interests and issues such as sibling rivalry. Another benefit is the creation of an important separation between the business and family units.

The businesses and the family’s governance documents must therefore address the issue of succession with regard to both management and ownership. To question the existing arrangements (or lack of) can be particularly challenging for the younger generation, so it is important that they make use of the family’s professional advisers in opening up this debate and resolving any differences of opinion.

Best practice

Establish adequate governance and an appropriate forum or other means of the business communicating amongst the family members.

Ensure that the wishes of the founder(s) are established and accepted by the family as a whole and create a framework for the gradual evolution of this vision and the business model.

Have a clear policy on remuneration and division of proceeds.

Use a family trust where appropriate to make provision for family members less able to participate.

Ensure there is a mechanism to empower and protect all family members where control is dominated by a select few.

Establish a strong board, possibly led by a professional non-family director.

Think ahead about cross-generational succession planning and create opportunities for suitable candidates to be identified and supported.

Appoint on merit, reward family members and other employees equally, and deal with all employee-type issues via fair grievance and disciplinary procedures.

Do not rule out the option for family members to be bought out.

Consider using your professional advisors in facilitating major decisions and resolving differences between family members.