INTERVIEW: Family Business Succession Planning: Preparing For A Shift In Ownership Structure

Eliane Chavagnon

27 January 2014

There are numerous issues associated with family business succession planning, such as resolving conflict, training future owners, competitive pressure and strategic direction - to name a few.

Family Wealth Report recently spoke to Amelia Renkert-Thomas of Withers Consulting Group about some of the challenges that arise when a family business previously run by two people, for instance, suddenly falls into numerous hands.

Withers Consulting Group specializes in helping family offices and family businesses with all things related to governance. The group is led by joint managing directors Ken McCracken in the UK and Renkert-Thomas in the US.

The tendency among parents is to divide ownership of assets between the children when they die, which in many cases is probably the easiest way because they “aren’t picking and choosing,” Renkert-Thomas said.

But if the heirs weren't ever really involved in running the business - indeed some are, some aren't - it is likely that they won’t have a “model” to refer to when it comes to making group decisions.

What is required in this instance is the establishment and implementation of a decision-making process, as well as an agreed-upon balance of power between the owners and management.

“One important point is that there is no single way to balance the power,” Renkert-Thomas said. “I’ve seen successful family businesses where the owners say ‘we trust you; managers do your thing, report to us once a year and send us a dividend check.’”

She added: “I’ve seen other family businesses where the owners say ‘we have tremendous family capital…and as the owners of that capital, we want some say in how you do things.’ There are all sorts of reasons why owners might want more say and want to shift the balance of power back a bit more towards them.”

Thinking things through

While the first step in formalizing a succession plan for some owners/spouses might be to have a will drawn up by a lawyer, a more thoughtful and effective way is to sit down as a family and envisage what the structure of the company will look like with, say, five or six shareholders.

Indeed, Renkert-Thomas noted that families often have different attitudes about who can be an owner. For example, some individuals will uphold that only those who actually work in the business can be owners, while some might say only blood relatives should be allowed.

She emphasized the importance of recognizing that “there’s no better or worse,” that families should go with their own general consensus. Spending time as a family to identify the above - before going to a lawyer - will give everyone involved a much better idea of how the family business will function when they are a group of owners.

A 2013 white paper, written by Dr Dennis Jaffe and entitled Good Fortune: Building A Hundred Year Family Enterprise, highlights that the family enterprise is a “complex social system” in which family members are both relatives and business partners.

Each generation is unique and must review and update practices to reflect new realities. As suggested by the “shirtsleeves-to-shirtsleeves” phenomenon, shared ownership by more and more family members presents new challenges, it said.

The bottom line, according to Renkert-Thomas, is that there has to be a shared sense of purpose so that families can answer the question of why they want to be in the business together.

“We find that that doesn’t always have as much to do with money as you might think,” she said. “It might have a lot to do with remaining an active force in the community, being charitable or providing for the next gen – or some combination of those and other reasons.”

Of note, Renkert-Thomas previously spoke to this publication about how there has been a lot of talk in the family business and family office universes as regards the value of structures like family councils and boards. The role of a client council at an SFO becomes increasingly important when there are lots of clients or when the clients are very diverse. The same, she said, is applicable in the context of a family business. View that feature here.

Exits

Of course, there is no one-size-fits-all approach when it comes to family business succession planning.

Renkert-Thomas said she has seen situations where the senior generation worked on the assumption that all the children will work happily and successfully together and as a result didn’t factor into the succession plan the possibility that some family members might want to pull out their assets and manage them separately.

“If the founder thinks it’s a good idea to control from the grave and tie everyone together legally and prevent anyone from selling or exiting, it’s more likely there will be more conflict in the next gen,” she said.

Additionally, if the first-generation owners or wealth creators live into their 80s or 90s, their children are likely to be at retirement age before they themselves are ready to step down.

“So who is preparing the next generation? There can often be no one ready to step into a role, whether as owner or as manager, if you have a long-lived entrepreneur,” Renkert-Thomas said.

In 2012, a US Trust survey pointed to a worrying lack of financial planning among high net worth business owners; many are so caught up in their efforts to create jobs and opportunities for others that they are at risk of jeopardizing their own employees as well as their families' financial security, it found in its Insights on Wealth and Worth survey.

“By not anticipating risks or a change in circumstances, they unintentionally may put the financial security of their families and employees at risk, despite their best intentions,” warned Keith Banks, president of US Trust .