The pandemic has prompted many family businesses to re-evaluate their future, review their operations and brought family governance and succession planning to the fore.
The focus here is on family businesses, but much of what is written is equally true for families with significant wealth. The question in either case is where do we start when we, their advisors, are tasked with guiding them through the uncertainties of family governance and succession planning. We spoke to Frederick Bjørn, a Partner at law firm Payne Hicks Beach to get his thoughts. He advises a broad range of UK and international clients on personal tax and trust issues, but with his practice increasingly focused on advising entrepreneurial, business families on long term structuring and succession planning (often through the use of trusts).
Despite the importance of tax in the overall thinking, the ‘tax tail should not wag the dog.’ The first question should be – what do you want to achieve? The answer is rarely straight forward and will depend on myriad factors including the stage of the family’s business, the ages of the key people in the business and the relationships within the family. It is only by exploring these factors that succession planning can begin.
Often leaders of family businesses have not actually considered what their purpose is. They may have concerns about planning for the future, stemming from the perceived de-motivation of the next generation or their reservations about that generation’s capabilities. It’s vital to address these matters at an early stage.
From the off, it is important to differentiate between three aspects of the family business: the control element, the economic element and the family (personal) element.
Looking at control of the business, it is not unusual for a family business owner to relinquish (some) control in favour of the next generation, but only once they consider the next generation to be ready. This seems logical, until one realises that in their eyes, the next generation will never be ready (they will, after all, always be their children). The key at this point is to consider how the next generation(s) can be involved without usurping the patriarch/matriarch. This is delicate and is where structures can come in useful, particularly trusts and companies.
The advantage of trust structure is that the control and economics can be kept apart and this can often protect the underlying assets (most notably the family’s business interests). The disadvantage is that not every client is comfortable with the idea of passing assets into a structure with so much flexibility and so little certainty. If this is the case, the next consideration is whether the existing company (or a form of holding company) could be used to try and break up the control and the beneficial interest. Sometimes the use of family investment companies and alphabet shares are useful at this stage. In either case tax will be a consideration and may limit the business’s options, but until the business owner knows what is on the table, he/she will not be best placed to dismiss them.
Regardless of which route is adopted, once a child can demonstrate that they are capable both financially and in terms of running a business, this is when the older generation may be willing to concede a level of control. There is obviously a Catch 22 here, in that the older generation will not be prepared to do so until they are comfortable that the next generation are capable, but the next generation will not have the opportunity to demonstrate their capabilities until they have been given the responsibility.
It is often this dynamic that needs to be played out. At some stage there has to be dialogue and an element of trust between the generations. Involving the next generation in discussions early in the process can help in this regard.
It is not unusual for the next generation to feel the responsibility of wealth and the pressures that come with it very strongly, and for this to manifest itself in an apparent apathy or unwillingness to immerse themselves. The sums involved can be daunting and the success of the previous generation can demotivate. They feel like they will never quite be good enough. This can be rectified if they are brought into the fold and made to feel like they can achieve something within the business or with the wealth that has been provided for them. It is easy to assume that this should be done by way of sheltering the wealth so that they do not have access to it.
However, in some cases this can in fact be demotivating in itself. It sends the message that their parents/grandparents do not trust them. Often this is why it is beneficial to have a third party involved who can see things objectively without the parental prejudice that can be so evident.
It may be clichéd to say that it is a journey, but this does capture the essence of what we are dealing with. It is generally not a journey with an end, but it does twist and turn and produce some unexpected adventures along the way.