How to navigate succession in family business

“This is a common concern”, says Nike Anani, referencing the research Barclays Private Bank commissioned on the emotional aspects of wealth and business transfer. It highlighted that business owners have difficulty in letting go and tend to think their children are never ready to take over. It means handing over a business can be as emotionally charged as letting go of your baby, as Anani puts it. But facts must be faced.

“If there is a desire to pass the business down to the next generation, then it will be the job of their children, either as managers or owners, to carry on the business and ensure its success, so it’s better to help them get ready instead of keeping them from making mistakes,” says Stirzaker. “A development and involvement plan is crucial to enable them to carry out their roles effectively. Defining what roles are available for them, the skills they need to develop and what success looks like, are key elements to help them prepare gradually and effectively.”

Encouraging the next generation to work outside the family business and build up additional experience can be a helpful strategy, adds Stirzaker. As can establishing mentoring relationships with non-family members who can help with their development.

According to Anani, one commonly neglected area here is the preparation of the next generation to manage relationships with their siblings. “The family business will transition from a founder-led business in generation one, to one that is led by a siblings partnership in generation two,” she says. “Becoming productive and collaborative partners is not automatic. It takes practice and time.”

“No matter what we may wish, the reality is that our children are not always like us and their priorities, values and capabilities may be very different – not only because of their nature, but also because they may have had significantly different life experiences,” states Effie Datson. These experiences may include periods of education and travel abroad, which can in turn bring new capabilities, expertise and interests. “As our research showed, this can lead to a lack of trust between generations,” she adds.

But new thoughts and ideas can be crucial for a business to succeed, says Risorto. “The evolution of a family business is reliant on fresh perspective and approaches. Just because something has been done one way for the last hundred years, it does not follow that it should be done so for the next hundred years.”

“We hope to help families navigate these tensions by setting out a purpose for the family office and family business, and helping entrepreneurial families plan for business succession,” says Datson. “That means identifying the right role and set of assets for each family member and the best ownership and management plan for the family’s core business across a wide range of options.”

Tucker argues that entrepreneurial skills may be over-rated in this context. “Contrary to popular belief, many entrepreneurs are not always focused solely on profit,” he says. “Whether a next generation family member is more entrepreneurial than managerial in approach is neither here nor there. It’s the adoption of a work ethic by the next generation that is seen as key. Successful entrepreneurs recognise that hard work drives opportunities.”

The clashing of family views is a familiar theme for all our experts – particularly for Anani, who specialises in bridging the gap between the generations. As she points out, “It’s the ‘family’ part of family business that is often the hardest part.” However, conflict can be a positive force. Anani adds: “The truth is that not all conflict is bad. It can be constructive, and as families we should strive to have constructive conflict as opposed to destructive conflict.”

Anani believes that in the arena of “constructive conflict”, it’s important to let everyone participate, and to let them say everything that is in their hearts and minds without judgement. Often this can mean that family members bring up long-standing, unresolved issues, but it’s important to be empathetic and patient. Inviting an expert to mediate can be very helpful here.

According to Tucker, a regular review of the family’s shared purpose is critical for avoiding the build-up of internal tension. “It’s important to ask why they actually want to be in business together,” he says. “This provides the opportunity for individual aspirations and anxieties to be shared. Business for families is not exclusively about driving profit, as there are many non-financial, emotional aspects at stake that can only truly be understood by analysing the family’s past and present values, and its vision for the future. Dialogue across all impacted members within the entire family business system is essential.”

“Family businesses tend to start planning for succession as a consequence of a negative event: a death in the family, a struggling business, opposing shareholders’ priorities and so on,” says Stirzaker. “The result is typically a knee-jerk reaction that’s often emotional and not well thought out, and answers to a specific set of circumstances instead of providing a consistent and objective decision-making framework.”

Families need to start planning long before any negative event in order to create a long-term strategic alignment between family members, she adds. Otherwise, tension is likely to get in the way of reaching a consensus.

According to Tucker, failure to agree a succession plan well in advance can have disastrous consequences. “Too frequently, we encounter a principal founder or owner who is the most dominant family member and who not only leaves planning too late, but also fails to embrace the perspectives of the next generation. It’s as if the values of the family business are to be handed down with no room for change,” he says. “This often leads to resentment and can even accelerate the collapse of the family business.”

Values are the glue that can keep a family business together, says Anani. “But the challenge families face, as the family unit becomes larger and more complex, is creating a compelling case for the family to stay together in business,” she adds. That compelling case often comes down to shared values.

“I find that an open, honest conversation about shared values is a vital starting point for organising the family’s business, investment, and philanthropic initiatives for generations to come,” says Datson. “We help clients to have these conversations and document their values and beliefs in a family charter and statement of principles. This helps everyone to find key points of agreement and to create a framework for evaluating specific initiatives against their core values and beliefs.”

According to Stirzaker, it’s essential to acknowledge the fact that values and beliefs can evolve with each generation. “Families should never forget their origins and what made them successful, but they should adapt to new needs so that progress and innovation are not stifled,” she says.

Sustainability is one area in which the younger generation tends to show greater enthusiasm. This was a particularly prevalent theme in our research and something we explored in our article, Building Sustainable Family Legacies.

According to Damian Payiatakis, when children are inheriting a legacy, they’re also thinking about how to continue it in a way that is authentic to them and their generation. As he puts it: “Younger generations want to inherit not only good businesses, but also businesses that do good.” Experience has taught him that encouraging them to explore new investment ideas and new business initiatives around sustainability can be a good way to connect them to the family business through a lens of their existing interest.

“Appointing trustees can be difficult for business owners, as they fear that they’re giving up control over their business and family matters,” says Stirzaker. “But trustees can bring expertise and an independent, objective view that adds an extra layer of protection for both the family and the assets held in trust.”

The most important thing, according to Stirzaker, is to choose trustees who clearly understand the family’s values and objectives and can build a successful long-term relationship with them. “Families are often tempted to choose family members as trustees, but this should be handled very carefully as may result in a conflict of interests,” she says. “They should think about the valuable role that professional, independent trustees can play alongside families to build a sustainable structure.”

According to Risorto, families should do all they can to educate themselves on exactly what a trust is and the benefits it can bring. “There are different types of trusts and deciding on what is best for a family and their particular circumstances requires the input of professional advisors,” he cautions.

“Families who don’t fully understand the importance of the role of trustees invariably encounter conflict,” says Tucker. “In many respects, they need to invest even more time developing relationships with the trustees than they would with fellow family members. Experienced trustees should have a deep understanding of the family’s shared purpose and their role in facilitating, rather than hindering, the maintenance of the family’s values and delivery of its vision.”

It’s crucial to get the right team in place, according to Tucker, who says the ever-increasing complexity of multi-jurisdictional investment has consigned the ‘one advisor’ model to history.

“The complexity of a family’s affairs will dictate the quantity and variety of professional skill sets required,” he says. “A team of banks, lawyers, trustees and other skilled advisors helps to ensure business succession plans can navigate any undesired pitfalls and evolve with the changing landscape whilst ensuring the family’s shared purpose is protected and maintained.”

Risorto agrees that good succession planning is a complex puzzle and says it‘s likely to require the input of professional advisors across multiple jurisdictions. They will need to liaise with one another to ensure that what is undertaken in one jurisdiction is not detrimental to any action undertaken in another.

At the very minimum, a family should map out where they operate, the ownership structure of the business and the different laws under which the business operates, he says. This will help identify potential conflicts. “It’s important that they determine who owns what, where and who they would want the asset to go to,” he adds. “Unfortunately, doing nothing is not really an option.”