July 2, 2018
Authored by: Georgina James
Originally posted on the BCLP Private Wealth Insight Blog found here.
The family business not only represents the hard work and entrepreneurial spirit of the founders, sometimes across generations, but is often a reflection of the founder’s and family’s values and beliefs.
The family business has the potential to grow, adapt and continue to deliver value across generations – but can it, will it and should it?
Should the founders pass it on or sell it? Are the options binary?
In weighing up the options, the issues can sometimes seem conflicting.
- Does the need for financial freedom – to provide financial support to family; to explore new investments or philanthropic ambitions – necessarily mean the family business must be converted to cash?
- If there is no family member willing and capable of taking on leadership of the business, can the family business, to which the family feel emotional attachment, be kept as an investment?
To optimise success and to minimise conflict, family businesses should have a strategic ownership plan that is regularly kept under review. The family should consider:
- does the family have the financial and human resource to be productive owners of the business?
- are the family the right people to manage the business?
- is the business the best investment for the family?
If, at any time, the answer to any of these questions is “no” – the family should consider alternative strategies. However this doesn’t necessarily mean “sell”.
If there are natural leaders in the family with the passion and ability to take the business forward, the focus may be on inter-generational transfer of the business. This is a process and not an event. It should ideally be implemented during the founder’s lifetime – if necessary the plan can be adapted and improved. Key to minimising conflict is achieving a sense of fairness amongst the family members (this is not necessarily the same as equality) and building in the flexibility to react to change. Establishing a framework for taking strategic or “difficult” decisions and economic participation for the wider family, will be essential to minimising the risk of dispute when the founder is no longer around.
External leadership or third party financing?
“Capable hands” of a family member doesn’t always mean the right hands to ensure that the business can grow and respond to new market challenges. External leadership might inject the vitality and expertise needed to navigate the business through industry developments that the family are not equipped to face alone. Third party financing, perhaps through private equity funding, might bring much needed cash to reinvigorate the business or to release funds without having to go for a complete exit. Either way collaboration can preserve the family legacy.
Adapting to change
In any case where family businesses look outside the family for expertise or finance, they should expect to part with some equity. This doesn’t mean giving up control and there are different mechanisms that can be used to ensure the family continues to speak with “one voice” for strategic decisions.
Bringing in third parties will also bring new considerations for which the family will need to prepare. A dominant founder will need to collaborate. Dividend policies; decision-making, employment and remuneration structures, which are often less rigid in wholly-owned family businesses, will usually need to be formalised to encourage high performance and employee loyalty.
For some families the business was never intended as an enduring legacy to be handed down from generation to generation. For others, evaluation of the commercial value that the family can continue to bring to the business and the business to it, may mean the financial and emotional capital of the family could be better spent elsewhere.
While “sell” may be seen as the last-resort to some, it can be the most positive thing that families can do. It can mark the beginning of a new story and vision for the family.
But families don’t necessarily buy and sell businesses every day. Taking emotion out of the equation and getting the right advice is key to making sure the family are robustly represented at the negotiating table and are realistic in their ambitions.
Managing the expectations of moving from a business family to a financial family requires careful preparation, particularly where the founder has dynastic wealth transfer in mind. Key issues will be determining who will own the cash and who will control it? Balancing the financial needs of family members with the desire to maintain their sense of purpose as well as asset protection considerations all need to be addressed.
Whatever the deal that is put in place – succession, collaboration or sale, the tax planning should be addressed as early on as possible to maximise the availability of reliefs. “Parking” the issue of where the cash will end up until after the deal is done can often dramatically limit the options.
Planning the future of the family business often means addressing complex emotional and commercial issues. Sometimes the fear of “getting it wrong” paralyses the planning process. Every business and every family is unique. There isn’t always a “perfect” solution but there is usually a solution – sometimes good is good enough. A successful family business is never built on luck – leaving an enduring business or financial legacy cannot be left to chance.