Succession planning is essential whenever a family wants to effectively pass its family enterprise—whether it is a single-family office or family business—to the next generation. A lack of solid succession planning can easily lead to family conflicts that are consequently aggravated by severe personal and financial complications. The result can be the devastation of the family enterprise and considerable damage to the family itself.
According to Anthony Glomski, President and Founder of AG Asset Advisory Family Office and author of Liquidity and You: A Personal Guide for Tech and Business Entrepreneurs Approaching an Exit, “Succession planning has two major goals. One goal is transferring the family enterprise between generations to ensure its continued success. The other goal is to minimize family conflicts that can derail the family enterprise or damage important family relationships.”
The Potential For Family Conflict
Legal structures such as trusts can ensure the effective transfer of the family enterprise between generations, but do not negate the fact that family members can still fight over the assets, with potentially destructive results. According to Cliff Oberlin, Chairman and CEO of Oberlin Wealth Partners and co-author of Family Fortunes: How Family Enterprises Thrive Across Generations, “In our study of ultra-wealthy founders and inheritors of family enterprises, slightly more than half of the inheritors reported family conflicts within two years after they took control. Proportionately, inheritors of family businesses were much more likely to have to deal with family conflicts than those in single-family offices. Of the inheritors reporting conflicts, almost two out of five described the conflicts as severe. This was much more common among inheritors of family businesses than among inheritors of single-family offices.”
Severe conflicts can be extremely problematic or even disastrous for family enterprises. Aside from the direct damage they cause, they eat up considerable resources and frequently take an extensive emotional toll on the family members. “A disgruntled family member can always file a lawsuit. Even if that lawsuit does not prevail, it can cause extensive problems for other family members. There are clear benefits to effective succession planning aside from avoiding family conflicts. Still, the immense deleterious effect of family conflicts are commonly the most intense problems produced by no or poor succession planning,” says Homer Smith, Director of the DK Family Office Practice, Founder of Konvergent Wealth Partners, and co-author of Optimizing the Financial Lives of Clients: Harness the Power of an Accounting Firm’s Elite Wealth Management Practice.
There are two types of succession planning. There is financial succession planning which generally entails the tax-efficient transfer of equity. Then, there is operational succession planning, which ensures the continued effective running of the family enterprise.
Financial Succession Plans
Overall, 64% of family enterprises have financial succession plans. Among the single-family offices, about 80% have them. And about nine out of ten of the founders’ single-family offices have financial succession plans in place, compared to two-thirds of the inheritors’ single-family offices.
Have a Financial Succession Plan in Place
|
Generation |
Single-family office |
Family business |
Weighted average |
|
Founders |
88.4% |
37.5% |
74.3% |
|
Inheritors |
66.7% |
42.6% |
53.7% |
|
Weighted average |
79.9% |
40.9% |
64.0% |
N = 403 family enterprise respondents
Source: Family Fortunes: How Family Enterprises Thrive Across Generations
Financial succession plans are less common in family businesses, with slightly more than two-fifths of them having such plans in place. About two in five founders and inheritors had such a plan. That single-family offices are slightly more likely than family businesses to have financial succession plans is likely due to the role and expertise of the single-family offices themselves.
“Very often, financial succession plans are interlaced with, or subsumed under, wealthy families’ estate plans,” explains P.J. DiNuzzo, Founder and Lead Consultant of DiNuzzo Middle-Market Family Office and author of the Wall Street Journal bestselling book, The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families.“This does not mean that there are times when families are not transferring ownership—usually incrementally—to the next generation during their lives. It’s just that instructions to ensure the final transfer of ownership rights are built into their estate plans.”
Operational Succession Plans
Overall, slightly more than two-fifths of family enterprises have operational succession plans. While proportionately more single-family offices have financial succession plans in place, proportionately more family businesses have operational succession plans in place.
Have an Operational Succession Plan
|
Generation |
Single-family office |
Family business |
Weighted average |
|
Founders |
41.8% |
73.2% |
50.5% |
|
Inheritors |
8.6% |
61.1% |
36.8% |
|
Weighted average |
28.9% |
65.2% |
43.7% |
N = 403 family enterprise respondents
Source: Family Fortunes: How Family Enterprises Thrive Across Generations
Only about 30% of the single-family offices are engaged in systematic actions to prepare the next generation to take over. About 40% of senior executives at founders’ single-family offices, compared to only nine percent of senior executives at inheritors’ single-family offices, report having operational succession plans.
In comparison, about 65% of family businesses have operational succession plans. They are somewhat proportionately more common in the first generation than in the second generation. In general, C-level ultra-wealthy family business owners recognize that learning how to run the company is critical for continuity and regularly requires operational succession planning.
Vince Annable, CEO and Founder of VFO Advisory Group and author of The Household Endowment Model: Wealth Planning for Affluent Families, “There are many ways to prepare the next generation to take over the family enterprise. The family bank concept is increasingly attractive. A family bank is a formal legal entity a family sets up, with rules that govern how family members can access funds to start or support business ventures as well as how those family members are expected to pay back that money. It’s becoming increasingly common in the world of single-family offices and family businesses to use family banks to promote and support entrepreneurship among future inheritors.”
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
