Asking yourself and your children the following six key questions will help you determine the best possible succession plan.
When is the right time to begin succession planning?
It may be the case that you don’t plan to retire from the business for many years. But circumstances can change and the unexpected often happens. While we prefer not to think about it, family dynamics can be affected by events such as illness, death, divorce or disputes. These can often act as the catalyst for a handover of ownership. If you don’t have a plan in place, then you become part of someone else’s plan.
Giving yourself plenty of time to prepare your succession plan, perhaps setting a specific timeline, will allow for a smoother and easier transition and more effective sharing of the family wealth.
Can I protect our family wealth from inheritance tax?
Yes. HMRC collected GBP5.2 billion in inheritance tax payments in the last tax year, more than double the amount paid a decade ago1. While every citizen should pay their fair share of tax, is it fair on your children and grandchildren to deplete their wealth needlessly through lax or ineffective planning?
There are several effective ways to maximise the wealth retained in the family and to potentially minimise the amount of tax you need to pay. Strategies including the setting up of family trusts, restructured wills, lifetime gifts and deeds of variation can help protect some of your family's wealth from incurring unnecessary taxation? It is also possible to get tax relief against trading businesses and agricultural land which (provided certain conditions are met) allow assets to be passed on free of Inheritance Tax. Please seek advice and guidance from professional tax adviser.
What is the fairest way to share out wealth among my children and grandchildren?
The next generations of the family may have their own expectations about what they are entitled to when wealth is passed on. These may differ from yours and that can create tensions. In most cases, fair shares will mean equal shares since equitable distribution of wealth among siblings prevents conflict and resentment.
However, it may be that one child has invested their time, talent and effort in working in the business and increasing the family wealth while another has shown no interest and made no contribution. In this case, rewarding one with a greater share of the wealth from the business than the other may be deemed fair.
Modern families often embrace second, and sometimes third marriages, with stepchildren and step-grandchildren involved in the mix. This should be carefully considered in the decision-making process.
What’s the smoothest and most efficient way to manage the transition of the family business?
A carefully planned handover is vital to the ongoing success of the family business, but it can also have a big impact on relationships within the family. Where there are several children who wish to be involved, someone needs to decide who will take which role. There is always the risk that someone will feel left out. 'Eldest first' doesn't have to apply. The best succession plans are based on a cool-headed appraisal of the different strengths and preferences of the next generation of potential leaders. That might mean favouring younger siblings over elder siblings, skipping a generation or going outside the family to bring in professional management. The family can still retain ownership without being involved in day-to-day management.
Gaining clarity on how your family wish to proceed will result in structures being developed to meet their needs, and will also provide a framework for the governance they require to meet these needs. These will evolve over time and will have to be reviewed to ensure they continue to meet the requirements of the family.
Also, it shouldn’t be assumed that your children want to run the family business. They may see their careers developing in a different direction and may feel pressure and a genuine burden of being judged against their parents’ achievements. In such cases, an alternative exit such as a trade sale or a management buy-out would be a better way to transition the business.
I’ve heard the famous warning about going from rags to riches to rags in three generations. How can I be sure that the next generation won’t squander the family business that we’ve built up?
It’s true that only 12 per cent of family firms survive until the third generation2 while more than half of successor generations expect to change the family firm’s strategy3. If you have concerns about the competence of your children to take over successfully, then it can be worthwhile canvassing second opinions from trusted advisers. In some cases, it may be best for the family to step back.
Where the business has reached a certain size, the founder might decide it needs the leadership of a seasoned CEO from outside the family – potentially disappointing children who had hoped to take over. But with good planning the family can still be involved in other important ways. Ownership and management are two different things and offer different ways of contributing to the firm's success. Family members can play an important role in the firm’s success by being good owners, putting in place strong governance and processes at ownership level.
I know we’ll feel awkward discussing succession planning as everyone has very different views. How should I approach it?
Wealth and succession can be a taboo subject in many families with many preferring to avoid it. This may explain why only 16 per cent of family businesses have a written succession plan4. However, clear communication between generations – and a willingness to have those potentially awkward conversations – is essential. Families that talk to each other generally have smoother transitions than those who dodge the subject. It’s worth bearing in mind that parents routinely overestimate the clarity and quality of their communication with their children on family wealth matters.
Bringing in an external trusted adviser to facilitate family meetings allows all members to voice their views in a safe and respectful environment. Getting your professional advisers involved in the succession plan gives a clear, dispassionate view and reduces the emotional temperature to everyone’s benefit.
Do you need help developing a succession financial plan? HSBC Private Banking’s wealth advisors will work with your Relationship Manager and Investment Counsellor to help create the succession plan that will work best for your family.
1Office of National Statistics
2PwC, Family Business Survey, 2016
3Deloitte, UK Next Generation Family Business Survey, 2018
4Deloitte, UK Family Business Next Generation Survey, 2016