The delicate balancing act of modern-day succession planning for family-owned businesses

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Protecting wealth generated by family-owned businesses for future generations requires a focused strategy that considers both the business and family dynamics. Picture: iStock
Protecting wealth generated by family-owned businesses for future generations requires a focused strategy that considers both the business and family dynamics. Picture: iStock

PERSONAL FINANCE


There is currently a high proportion of avoidable failure in succession and wealth transition planning. As we know, a family’s wealth is not limited to its financial assets. Human, social and intellectual capital also matter. Protecting wealth generated by family-owned businesses for future generations requires a focused strategy that considers both the business and family dynamics at play. Putting this strategy together necessitates planning and expert guidance around ownership, leadership, wealth preservation and legacy. It also requires direct conversations within the family.
The increased use of the “family bank” concept and construct internationally is enabling families to have more holistic and focused conversations around their purpose, values and aspirations

It is often the case that, as family operations are passed down through generations, the next generation is underprepared for the transition, and the root of the problem lies in a lack of communication and strategic dialogue. Families increasingly need to think beyond their main trading and investment operations, and undertake more comprehensive long-term strategic planning across the entirety of family interests. The most vulnerable point for family businesses and wealth is often at succession. Invariably, families try to walk a fine line between encouraging the next generation to become involved in the family business and allowing them the freedom to make their own decisions and make their own way, with the result that succession planning is rarely as comprehensive as it needs to be.

A dynamic approach to family business and investment reflects the reality that businesses and investments that survive and thrive over generations are those that adapt to changing times and which take advantage of opportunities that arise. Many people view these decisions as events that only need to be managed when they occur, but, in fact, they require thoughtful anticipatory planning and adopting a medium- to long-term view.

Working with an adviser to manage business transitioning can help business owners and their heirs prepare for and de-risk change. Today, it is widely recognised that enhancing family governance structures and embedding behavioural change is very important. The increased use of the “family bank” concept and construct internationally is enabling families to have more holistic and focused conversations around their purpose, values and aspirations.

At Standard Bank, we understand the importance of family dynamics in all effective succession planning. A business succession plan is an important part of an overall estate plan. By exploring the various ways a business fits into their estate, business owners could avoid unnecessary costs in the future. A common example of this is the capital gains tax paid on the sale of a business that has grown exponentially overtime.

Business owners should also be sure that their business is in a viable position for succession. Can they actually transfer ownership to someone in the family or are there minority shareholders who have a voice in what the future will be? Is there someone in the family who can succeed in leading the business in the future, or should the incumbent leader consider selling the business as a going concern? The answers to these questions will not only shape the decisions one makes when it is time to retire, but will also shape the succession strategy within the business. A sound retirement strategy is integral to any successful succession plan. When the business owner retires, there are considerations such as whether they are to receive a lump sum payment from the business or continuous funding. A retirement plan needs to work alongside the business plan.

There is an additional consideration for succession planning in family-owned businesses, namely having a transition strategy in the event of death or major life event such as disability of the principal owner of the business. In the event of death especially, there is a need to focus on two significant changes happening simultaneously: new ownership and management of the business. Again, family dynamics come into play because, while the ownership of the business might devolve to a surviving spouse or child, they might not have an interest in managing the business.

Responsible business owners should start by conducting a comprehensive succession health check to review the structures already in place for the protection of the family. They should also reflect on their views on the important technical and non-technical issues that will shape their approach. This forms part of a broader diagnostic of what the family’s concerns are around tax, political risk, divorce, legal claims and asset protection.

Based on a clear and thorough understanding of our client’s position and objectives, our wealth advisers at Standard Bank can put in place an investment plan built around our wealth management capabilities, including asset management, trust services and insurance. Our aim is to support many more family-owned businesses make effective transitions and successfully transfer wealth to the next generation.

*Forster is head of family office at Standard Bank


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