The inheritance of significant material wealth brings with it lofty expectations of successful leadership. Wealth generators generally want the next generation of their family to be responsible stewards of wealth – and to feel in control of that wealth, rather than controlled by it. This has proved elusive for many, and the challenge of succession often lies at the core of the issue.
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Family consultants Roy Williams and Vic Preisser, authors of Preparing Heirs, have conducted extensive research on wealthy families that have lost control of their assets. Breakdown of communication and trust was cited as the main reason and accounted for 60 per cent of wealth transition failures, with 25 per cent being due to inadequately prepared heirs, and the final 15 per cent attributed to everything else, including lack of estate planning, legal issues and poor tax planning strategies.
In Italy, family businesses represent 65 per cent of all companies, and while there are many success stories, a substantial proportion lack a formal succession plan. The Agnelli family provide a well-documented case where succession discussions did not start until the death of Fiat chairman Gianni Agnelli in 2003 and a battle over the estate ensued.
How to achieve a successful transition?
How do families achieve a successful transition when so many do not? Family business experts make the point that succession is a process; it does not start with an event like a death or illness. For a business to thrive, it must be seen by the next generation as an opportunity, not an obligation; it is not something that can be foisted on a reluctant or ill-qualified successor.
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The Wates Group is an example of a succession success story. Founded in 1897, it is now in its fourth generation of family ownership. Their philosophy when considering the next generation is to pass on ownership of the business only to those who are genuinely interested and capable. For those who are not, there is a well-documented ‘deal’ which allows younger family members to decide on their level of participation, rather than older members or others dictating it.
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What are the top tips to maximise chances of smooth succession? We identified some common themes. Starting early is certainly one. It is important to talk to your children when they are in their teens, or even earlier if appropriate. Teach them about the history and culture of the family and the foundations of the family business, but do not fall into the trap of saying: ‘This will be yours one day.’ It is important that they feel that they can choose their own path in life, but if they do take an interest in the family business, they will be welcomed. It is also key that they understand that this is not necessarily a choice for life. Some family coaches talk about the idea of a ‘revolving door’, a mechanism whereby family members can come in and out of the family business at various stages in their lives.
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Many families make it mandatory to get outside experience before allowing family members to come into the business. James Hoare, my colleague at Delfin, confirmed that this is something the Hoare banking family have done for many generations. Their view is that for a young person, forging your way helps to increase self-confidence and understanding of what it is like to work for someone else, broaden your knowledge base and can also help you bring fresh ideas into the family business when you get there.
It is also important to ensure that succession is something which is earned. Successful families have a development and training path, with clear milestones and a documented appointment process. This helps to ensure that the criteria for succession are objective and well-publicised, reducing the risk of disputes between siblings. Ensure that jobs are not created for family members but exist already. Family members working in a business need to have meaning and purpose and earn the respect of their co-workers.
There is no doubt that appointing the right successor is critical to perpetuating a family business and can be quite isolating for the family principal dealing with this. It is worth remembering that many families are happy to share their experiences both good and bad with other families, and that advisory boards with external members can be a valuable and stabilising resource to help guide business owners to prepare and achieve a successful transition.
Perhaps the most important guidance of all, however, can be found in the wise words of John L Ward, the famous business academic who likens family businesses to ‘gardens’. To flourish and bloom, they need continual maintenance, and if problems break out, like weeds, they need to be dealt with and dug up, otherwise they risk overwhelming and stifling the plants: ‘Dig it up, or tend to it; don’t just ignore it.’
Annamaria Koerling is managing partner of Delfin Private Office
This feature first appeared in Spear’s Magazine Issue 93. Click here to subscribe.
