How To Start Succession Planning

Succession planning is often a thorny obstacle for families to overcome. Sensitive as all issues of this nature are, it is often tempting to put off discussions to avoid conflict. However, smart succession planning is essential to a family empire for a number of reasons, and with the right action plan, it can be handled without undue infighting.

It is impossible to overstate the importance of family office succession planning. As of the 2016 UBS/PwC Billionaires Report, over US$2.1 trillion in wealth is set to be migrated to the next generation already by 2026. Naturally, this kind of wealth transfer requires careful, precise, and strategic handling.

What’s Next For The Empire?

The first step to developing a succession plan is to decide what’s best for the business long-term. There are generally three routes a family-owned enterprise can take when the current leadership is ready for a handover. The first is to find a buyer for the business, dividing the proceeds between children or other beneficiaries. The second is to allocate assets or business units equally amongst children. The third is to allow for a gradual transition of ownership to one or more heirs, who will take up different roles within the empire.

The second option is contingent on the diversity and reach of the empire. If it cannot be divided equally between heirs, other methods of equalizing each stake are necessary. For example, careful liquidity planning to ensure the financial gains are spread evenly across the next generation.

Bringing In The Experts

Step two of a successful succession planning process relies on bringing in third parties. While it may seem unsavory to bring external advisers into what’s essentially a family matter, there’s evidence to suggest that it can do a lot for objective decision-making and conflict resolution.

Having that external presence helps to introduce an objective, experienced perspective into the discussion – someone who has worked with other families, but does not have personal opinions about the members of the given family. In addition, their presence can help to temper some of the more emotional aspects of the process, which are to be expected given the stakes.

Common issues during this process primarily relate to asymmetry between the perceptions of the older and younger generation. The older generation commonly adopts the view that heirs are lackadaisical in their approach to taking over the empire. Conversely, the younger generation’s complaint is that they are not given the necessary amount of responsibility or information reflective of their future role in the business.

Complexities can also arise at any time during the planning process. Long-standing sibling rivalries may be exacerbated and tension can stem from disagreements or people feeling as though their input into the discussion has been disregarded.

For all the above reasons, assembling a competent advisory team often makes the difference between a measured, positive transfer of wealth, and a less successful transfer that could result in bitterness amongst family members. Advisers can also draw up important frameworks and documents to provide structure to the process. For example, a family constitution or charter is commonly used to outline the vision and mission of the family business. Referring back to this document with an adviser can lend a sense of higher purpose to any discussions of succession.

Selecting A Successor

Perhaps the trickiest and most crucial aspect of succession planning is actually selecting an heir to the empire. There are several criteria that need to be taken into account and discussed with the advisory team:

• Should the company’s next leader be a member of the family, or an external party?
• Is there an obvious choice for the successor between existing family members?
• Are there any conflicts of interest to look out for, or any personal obligations that may affect this person’s ability to look out for the business’ interests?
• Could sibling rivalries become a factor in the decision?
• Does the next generation want to keep their parents’ legacy within the family, or divest the assets and use the proceeds for other ventures?

Succession planning also needs to be set into motion decades in advance. Handing the keys to the family empire off to anyone – even a spouse or a child – requires good education, a deep level of awareness of all aspects of the business as well as training in business strategy and management. Often, those pegged to be successors are introduced to the company through internships, training, and other relevant roles such that they have the work experience and a feel for the company culture before stepping into the Chairman’s office.

Bridging The Gap

Selecting and grooming a successor also means managing expectations and bridging the ideological gap between the older and younger generation. There needs to be a synergy and a shared set of values not only between the current leader and the successor, but also between the successor and the greater family and business. The younger generation may have different priorities or a different approach to business, having grown up with concerns of economic inequality and political instability, and growing pressure on the environment.

Building a shared understanding of the company’s values, a cross-generational appreciation for these issues and an action plan for tackling them through the business can go a long way towards the long-term stability of the company leadership. However, this is only possible if the greater family and external stakeholders are also aware of the issues and are of a mind to address them using company resources.

Overall, succession planning is certainly a long and complex process, but with a competent set of advisers and open minds, ultra-high-net-worth individuals can set themselves up for long-term stability – both within their businesses and families.