“One of the biggest concerns of our clients – who are very successful entrepreneurs and have built thriving businesses – is ‘how do I succeed in transferring what I have built to the next generation says Franco Morra, CEO HSBC Private Bank (Suisse) SA and Global Private Bank Regional Head EMEA.
It is a question that is at the forefront of the minds of family business heads worldwide but it is one that is often not satisfactorily answered.
History is full of examples of family businesses such as Portugal’s Espírito Santo that have failed for a myriad of reasons but most often, at the heart of that failure is a lack of succession planning. In PwC’s latest Global Family Business Survey, only 16% of the 2,378 businesses interviewed had a discussed and documented succession plan in place.
From personal experience, Michelle Cartwright, Director, Head of Wealth Planning, HSBC Private Bank Europe, highlights the perils of not putting a robust succession planning in place.
“I am the third generation member of a family business that failed to make the transition to the next generation because my grandfather failed to plan,” she says.
“He thought he had time but died suddenly of a second stroke. My father was studying for a career in medical research and he was certainly not prepared for the challenges. He didn’t know the ins and outs of the business and, more importantly, he didn’t have the rapport with his business partners that his father had.”
For all the elements that can make family businesses successful – such as legacy, loyalty, and patience – there are unique aspects that can make long-term prosperity and the ultimate aim of preserving and increasing wealth more difficult to achieve.
The increasing complexity with each new generation, the potential for conflict, and the challenge of transition between generations all combine to make the need for sound succession planning even more important. Added to these there is the question of whether the Next Generation actually wants to inherit the family business – an issue that needs to be considered early on.
The challenge of longevity
The data confirms that many family businesses struggle to survive beyond the first generation – some 70% of family-owned businesses fail or are sold before the second generation has the opportunity to take over. And just 10% remain active, privately-held companies for the third generation to lead.
Stephen Skelly, HSBC’s Head of Private Wealth Solutions, EMEA and Americas, cites three main reasons why family businesses often do not survive beyond three generations – a failure to think strategically; allowing the family’s core assets to become fragmented; not having mechanisms in place to deal with the conflicts that often arise when a family is in business together.
“Many family businesses fail not due to a poor business strategy but because the family has not developed strategies to address the challenges it will inevitably face as it grows such as how to deal with the loss of a family leader and how to share collective decision making” he says.
While acknowledging the inevitability of conflict, Ken McCracken, a family business consultant at Withers Consulting Group, suggests families should not fear it.
“I think there is sometimes a misguided idea that conflict is a dysfunctional aspect of family enterprises. It isn’t,” he says.
“Every family will have conflict, it’s not a question of whether or not it exists, it’s how families learn to deal with it. If everyone is clear on where the business is going and there is a robust plan in place, then those conflicts are much more manageable.”
The vital role of succession planning is highlighted when you consider the increasing complexity of a family business with each generation that is added.
In the first generation of a family business, the dynamics are often relatively simple. Ownership and control is concentrated in the hands of the patriarch or matriarch and decision-making is more straightforward. However, over time the family itself and its activities are likely to become increasingly complex – so knowing how those decision-making powers are being passed on is vital.
“By the time you get to the third generation it is quite common to come across family businesses that have got 30 or more shareholders,” says Skelly.
“Such families can become very disorganised and lose their effective family voice in the direction, decision-making and operation of the family business.”
Added to all of this the very nature of family businesses means more wealth needs to be created with each generation, as McCracken explains.
“Families face a significant challenge in terms of growing their wealth and not just preserving it. If a family is growing demographically then the wealth through which their lives are connected must be able to grow at least as fast.”
That need to exponentially grow the family wealth means the entrepreneurial risk-taking that can provide the necessary return on investment is fundamentally important, which in itself can be a challenge for families says McCracken.
“A lot of families are not prepared to take that risk with their inheritance and do not want to be the ones that lose the family silver. Having a robust succession plan in place puts the subsequent generations in a stronger position to make the necessary decisions.”
Succession and wealth transfer planning is a complicated process exacerbated by many of the unique characteristics of family business but it is vital in maintaining and preserving the wealth of those businesses.
As Stephen Skelly concludes: “’Shirtsleeves to shirtsleeves in three generations’ is a saying you often hear when discussing family wealth. It’s certainly not a universal law but as with all clichés it holds a grain of truth. We know that wealth destruction can and does happen, but by far the greater risk is that families do not achieve the outcomes they would have wanted, for example, the basic desire to maintain unity and harmony within the family while allowing individual members the opportunity to fulfil their potential."