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Unblocking the roads to smooth succession

Family Business
Succession planning
Business succession
Passing wealth
Next Generation
Family business

Unblocking the roads to smooth succession

Mar 17, 2021

Both younger and senior generations may face obstacles that require guidance, support and tools to overcome.

Some might assume that when the patriarch or matriarch of a family business steps down, it's simply a case of them handing over full control to the younger generation. In reality, succession is unlikely to be so straightforward. 

Multiple generations of family members may have roles in the family business, and alongside the practical issues that come with business transitions, families should not underestimate the emotions that might arise.

It may be tempting to avoid this period of preparation altogether; however, failure to do so could not only lead to conflict within the family, but also imperil the long-term survival of the business. 

Done well, succession planning will leave the senior generation comfortable with the transition plan and confident that the family's long-term legacy is intact. At the same time, the younger generation will be willing and able to carry the family mantle – and feel well-prepared to make their own mark in the family business.

"The further in advance succession issues are addressed, the greater the likelihood of a smooth transition," says Russell Prior, Regional Head of Family Governance, Family Enterprise Succession & Philanthropy, EMEA at HSBC Private Banking. A longer-term perspective, which considers the continuity of the business over successive generations, is critical.

This is particularly important given that life expectancy is rising around the world; there is a growing likelihood of succession taking place across three generations at the same time. For example, the third generation aged 20-30 and second generation in their 50s or 60s may all be involved in the family business alongside the patriarch or matriarch.

A reluctance to relinquish

A fear of letting go by the patriarch or matriarch is among the emotional factors that can make succession planning so difficult for families.

For the first or second generation owner, the family business is often a big part of their identity, their role in life and their social status. The business may have their name on it, and it may represent their remaining connection to their own parents and grandparents.

Passing it on to the younger generation could therefore feel like giving up much more than a business or a job title. Those misgivings can be exacerbated if they are worried that the younger members of the family are insufficiently qualified or prepared.

"For example, if you're a family matriarch or a patriarch in your 60s or 70s, you may be thinking about nominating a younger family member who is probably 30 or 40 years younger," says Prior. "In the normal job market you would probably hire someone with more experience, so in families you can often have a big experience gap."

Solutions through scenario planning

No matter the specific concern, discussing different scenarios and possible outcomes can help to open the lines of communication, making planning a gradual process and preventing any cliff-edge decisions.

For example, Plan A might entail the senior generation continuing to run the business into their later years, whereas Plan B outlines what the business looks like if they are no longer here today, next year or in five years.

"The more you examine different scenarios and talk about what 'plan B' looks like, the more you get the senior generation thinking about the future," says Prior. "It's about building up until you can start the conversation about the longer term and how ready they are for it."

He cites a recent example of working with a family business where the father was weighing up the succession issue.

"The first question he asked was: 'Is my son good enough to take over?' But really, the question was more: 'How am I going to organise the succession process? How can I ensure continuity?' So we looked at what the son would need to know, what he needed to learn, how long it would take, and who would need to support him. That then helped us set out the process."

Big shoes to fill

If the senior generation is primarily worried about letting go, younger generations are often concerned about their ability to step up and how proactive they should be in raising the issue of succession.

Different priorities can emerge, particularly where younger family members are reluctant to be tied up in the business or want to pursue other ambitions. The younger generation also may need time to 'find their feet' in the family business, which is already full of well-established individuals and personalities.

They may not be entirely clear about their parents' intentions for the business and might be hesitant to ask in case they appear pushy, Prior adds.

If the senior generation is anxious about letting go and the younger generation is nervous about asking too much, a communication gap can emerge quite quickly.

Paving the way

Concerns about capability and competence can often be eased through coaching and mentoring programmes, as well as next-generation training courses.

Working inside the family business can be a narrow existence, so it may be about giving the next generation access to executive programmes and networks, and the opportunity to hear the experience of other generations in other businesses. Or working outside the family business for a while, finding out more about yourself and gaining experience of how other firms work.

Clarity around roles in the family business – with responsibilities and expectations clearly defined – can address the next generation's worries about being accepted by other longstanding employees within the family business.

With research suggesting that around 60 per cent of family wealth transitions fail due to a breakdown in communication,1 dealing with the various emotional blockages and enabling open communication around the future of the business is a big part of getting succession planning right. The alternative is to risk the very future of the business and the long-term family legacy.

"In the end, it hinges on family members' ability to trust and communicate, because what you achieve has to be done on an agreed basis," says Prior. "It's about clarity of purpose and objectives, and having honest conversations."

Succession planning is not going to go away. But if you don't do it, your business may. HSBC Private Banking understands there is no 'one size fits all' solution, and family dynamics can be complicated. We can play a bridging role in facilitating communication between generations, drawing on our 75-year history of working with business owners to support them in protecting their family's wealth and business, and sustaining their success for generations. To learn more, contact us or your Relationship Manager.

 

1 Crossed Wires: Why Most Generational Wealth Transfers Fail, BBH, 2019 

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