The ‘skipped generation’ in family business succession is real and represents a clear risk to many multi-generational family businesses.
We are all living longer these days and many can expect to live into their 80s and beyond. But what does this mean to family business succession processes? It is common practice that ownership in family businesses will not pass until death. It’s sort of a safeguard, especially when the exiting family members still financially depend on income from the business or their personal assets are tied up in securing debt that is funding the business.
In these instances, daily management and leadership of the business has probably passed over to the next generation long ago. They run the business, make all the decisions and keep the exited retired generation in the loop as to what is happening. For this effort, they may only be paid a salary and get a small percentage of profits.
The impact however on the succession process can be dramatic. Let’s look at two examples:
- Four brothers have grown a substantial business founded by their Dad and they are in the process of discussing succession including an outright sale to a third party. They are aged from their late 30s to late 50s. The catch, well firstly, they have a sister who has not been involved in the business, and at least two of the brothers believe she has some entitlement. Secondly, none of them actually own any of the business as it is ultimately owned by a head trust controlled by their mother who is still alive and has all her faculties intact. The beneficiary provisions of the trust are quite wide and includes cousins and, of course, the sister. The boys have spent their entire working lives building a business which they do not own.
- There are two daughters aged in their late 30s and early 40s who are set to step into their parents’ shoes to take over the business. Dad has just turned 68 years old and is fit and healthy. Mum is a bit younger but is not active in the business anymore. The two daughters have children aged three to 11 years old. If their parents live into their 90s, as their parents did, the girls will inherit ownership of the business when they are around 60 years old. And, of their children, the eldest will be in their early 30s and, I expect, likely to be knocking on their door as a next generation leader. The girls have rightly noted that if Dad and Mum retain ownership until they both pass away, they will have spent their lives working for a business of which they own no part. In fact, their father has openly discussed passing ownership of the business directly to their grandchildren.
If generation to generation transition of family businesses is to continue to succeed, it is necessary that the incumbent family leadership team be adequately rewarded for their commitment to the business.
Careful consideration must be given to when ownership passes to underpin this commitment. Alternatively, reward structures must be adopted that provide a sharing of income and capital gains to retain the commitment of the current family leadership team if ownership is delayed or possibly will never fall into any individual’s hands, such as in continuing trust arrangements.
Active Knowledge Questions:
When will you pass ownership and control to the next generation? And will that underpin their commitment to the family business and its growth and transition to the next generation?
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All the best in the success of your business,
Richard Shrapnel
