Accumulating wealth goes hand in hand with the desire to ensure that wealth gets passed down to the people we want to succeed us – usually family members. Maintaining a family empire through the generations requires smart succession planning, ideally deciding what is in the best long-term interests of the family business or businesses without causing undue conflict within the family.
The Billionaires Report published by UBS and PwC in 2016 estimates that by 2026, more than $2.1 trillion will be passed down a generation. More key findings from this report can be seen in the embedded infographic.
Creating a strategic succession plan maximises the potential for ongoing success and helps to avoid the types of conflict that can have a negative impact on both the business itself and familial relationships.
Dr Edgar Paltzer specialises in estate planning, wealth structuring and succession planning for business as part of his law practice in Switzerland.
The Three Routes to Handover
There are three main routes that the head of a family empire can take when contemplating handing over the reins to their offspring. First, the business could be sold, with the profits divided among the heirs and other beneficiaries as a cash sum. Second, business units and assets could be divided equally among the next generation. Third, each heir could be offered a different role within the business, leading to a gradual transition to ownership and management.
If choosing the second option, there are various ways this could take place, which will depend on the reach and diversity of the empire. Working out the value and liquidity of each aspect of the business to ensure equalisation of each stake requires much forethought, careful evaluation and planning.
Finding the right financial planner may depend on which route is going to be taken, as estate planners may have different specialities. The PDF attachment looks at the three main types of financial planning services available.
Forming an Exit Strategy
Early planning is key when forming an exit strategy. By creating a succession plan well in advance, there is time to work with the heir or heirs who will eventually be taking over the business. This provides opportunities to instil similar values and objectives, as well as ensure years of knowledge can be passed on. This also helps the older generation to better understand the hopes and aspirations of their intended heirs before finalising any decisions on succession.
It may be that one or more children simply have no interest in taking over the family business, or that a natural leader emerges from an unexpected place. Some children may prefer to be silent partners or shareholders without getting involved in daily operations, while others may have a keen desire to take the helm.
Preparing People
Much of financial planning for wealth transfer focuses on how money and other assets will be prepared for transfer – ensuring paperwork is in order, drawing up contracts etc. – but it is equally important to prepare the people who will be receiving these assets as the assets themselves.
Most successful multi-generational wealth transfers occur because communication has been open, with heirs educated from a young age regarding their responsibilities to gain a thorough understanding of what the management of family assets entails.
Heirs who are already grounded in investment management, financial literacy and wealth planning are more likely to be able to continue to run the family business successfully.
In the short video attachment, you can find a definition of financial literacy.