When it comes to succession planning for a family business or an estate, it’s vital for today’s owners to put in place a transition plan to support the next generation. A plan made with the agreement of everyone involved is much more likely to succeed.
The family balance
Finding the right balance between business objectives and family priorities is always a challenge, especially for small to medium sized enterprises (SMEs) in Scotland, of which almost half are family run. When it comes to passing the business on, however, there are unique challenges for family run enterprises. According to PricewaterhouseCoopers (PwC), just 30% of family businesses survive into a second generation.
Business transition planning is vital and there are some unique family challenges which need to be part of your business succession plan.
In advising our SMEs and landed estates clients, we aim to get to know the family as a whole as well as the individual members. This gives us insight into your values and an understanding of your priorities and concerns in the plans to pass on the family business to the next generation.
Putting your ducks in a row
Setting out a long term financial strategy and measurable business goals for succession planning is a start. We can also help with the range of activities a Family Office needs to consider; tax services, charitable giving, wealth protection, financial planning and record keeping. Making sure your ducks are in a row before passing on the business will give the next generation of your family the best start in running things.
Among the many unique family challenges is ensuring that the next generation are prepared and understand the ‘custodian’ role they are taking on. They will be expected to protect and grow the business and wealth for future generations. The next generation may feel pressured to come back to the family business. They might not be quite ready for the role at present and may need training and support before taking over.
The next generation will become the custodians of the estate or business and it can take some time for them to get on board with all of the necessary principles and values. Learning to manage substantial wealth and business assets isn’t necessarily something that is easily passed down the generations, although some private banks offer wealth training programmes to help with this. There are also governance programmes available to help family members navigate through the complex, and sometimes emotional, environment of family run enterprises.
Protecting business assets whether next generation couples are living together or getting married
Three quarters of millennials now believe that living together before marriage or civil partnership is a good thing and the trend for this is growing amongst the next generation. Taking over a family business will have an impact on how this generation manages their personal affairs. Plans need to be made where, for example a living together agreement may be necessary to protect family assets connected to the business.
Equally, for those planning marriage, a pre-nuptial agreement could be just as important in protecting long term family or business assets.
Discussing plans for personal affairs with one of our family lawyers beforehand may help to identify where the risks are and create a greater sense of security and responsibility for the next generation and their partners.
Thinking of all the family
Passing on the business to the next generation is not always straightforward for parents. Sibling equality can be an issue, especially if assets or wealth are passed down to one child and this can often be the case in order to keep the estate or business interests together. There could also be limited assets to equalise the position, a typical conundrum in farming families. Considering the options at an early stage may help your business transition planning go smoother.
Making your mark as a next generation leader
The PwC survey on the next generation of family business leaders showed that almost 90% of next generation managers want to make their stamp on the business. Alongside this, 80% are already attending directors’ meetings long before they have a seat on the board. Taking care not to pressure the next generation to ‘do as I have done’ may be advisable and your future business owners should be introduced to the business advisory circle early to get them used to how this works, with aim of building up their knowledge and confidence.
Encouraging the next generation to spend some time in the family business and gain some valuable experience working elsewhere can give the next generation the ‘best of both worlds’. They will then be in a much better position to understand business dynamics and make their mark with skills specific to the enterprise or estate.
Playing the longer game
Family business succession is a process that can take many years and should be prioritised well in advance in order to have the best chance of preserving the health and longevity of a family estate or enterprise.
Finding the right experts to help you to navigate your way through the transition is vital for the future success of your business. Anderson Strathern has a well-established succession planning and wealth team backed by a full service law firm and an Asset Management business which can offer you advice before, during and after succession planning.