“Where there is the desire to smartly and efficaciously pass the baton that is the family business from one generation to the next, succession planning is essential,” says 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. “Lacking a solid succession plan can easily result is family conflicts that are consequently aggravated by severe personal and financial complications resulting in the desolation of the family business as well as considerable damage to the ultra-wealthy family.”
The purpose of succession planning is principally twofold:
• The transfer of the family business between generations in the most effective way ensures continuity.
• The minimization of family conflicts can derail the family business or damage important family relationships.
The Potential For Family Conflict
Keep in mind that there is a significant difference between putting even a well-designed succession plan in place and ensuring it endures and is adhered to. “While legal structures such as trusts and partnerships can guarantee the desired mechanical transfer of ownership of the family enterprise between generations, that does not negate the fact that family members can still fight over the assets with potentially devastating results,” says Jeb Burton, the Managing Principal of The Burton Law Firm. “Therefore, smart succession planning using all the available strategies and structures while taking into account the objectives and personalities of family members is essential.”
According to Cliff Oberlin, Chairman and CEO of Oberlin Wealth Partners and co-author of Family Fortunes: How Family Enterprises Thrive Across Generations, “Based on our study of 201 family enterprise respondents, slightly more than half of the inheritors reported family conflicts within two years after they took control. What we found is that relatively few of the ultra-wealthy families took steps to both tax-efficiently transfer their business between generations. We also found that many of them did not adequately prepare inheritors to take over. Of the inheritors reporting conflicts, almost two out of five said they were severe.”
“Severe conflicts regularly prove to be extremely problematic to disastrous for family enterprises,” explains 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. “Aside from direct damage, they eat up considerable resources, and habitually take an extensive emotional toll on the family members.” Family members are well served when they realize that a disgruntled family member can always file a lawsuit. Even if that lawsuit does not prevail, the problems it can cause other family members can be extensive. Effective succession planning results in not only the efficacious transfer of the family enterprise between ultra-wealthy family members, it also mitigates or majorly eliminates family dissent due to the transfer.
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.
The Need For A Succession Plan
According to Vince Annable, CEO and Founder of VFO Advisory Group and co-author of Your High-Performing Virtual Family Office: Maximizing Your Financial and Personal Lives, The first consideration is deciding if an ultra-wealthy family needs a succession plan. To make such a determination the family has to determine the preferred future of their family enterprise—the single-family office or family business.” Some of the questions family members might considering asking include:
• Does it make sense to continue as a family business or is it smarter to sell the company now as it presently has significant value?
• Are the potential inheritors of the family business up to the task of capably managing the company and, if not, what steps are needed to ensure the continuity of the family business when it is transferred?
• What will be the arrangement between equity inheritors who work in the family business and those who have chosen not to?
Putting The Best Team Together
If the decision is to keep the family enterprise in the hands of the family, then a succession plan is needed. “While secession planning in concept is the answer, the next—and equally important consideration is—how does the family ensure the quality of the succession plan,” says Anthony Glomski, Principal 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. “The answer is taking the time and effort to make sure all the professionals needed to both develop and execute the succession plan are the best of the best.”
A major complication is that it is more likely than not, for ultra-wealthy families when they do focus on succession planning to potentially be relying on less expert professionals. According to Justin Breen, the driving force behind the exclusive BrEpic Network and co-author of Superior Results: Maximizing the Value of Your Family Office Just Like the Super-Rich, “In order to best ensure an ultra-wealthy family’s succession plan is not only tightly aligned with the family’s agenda and state-of-the-art, but family members also have to take responsibility to ensure the professionals they engage have the highest levels of integrity, are technically brilliant and are process-oriented. By selecting the highest-caliber experts who can work as a cohesive team, the family will be able to optimize as the business is transferred across generations.”
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.