Supporting client families in succession planning and family governance is core to our service offering. It is an integral part of almost everything we do and is a crucial consideration in major decisions.
Indeed it is well known that inherited wealth can sometimes have a detrimental impact on the lives of individuals and families, if the succession is not managed appropriately.
That is why helping you pass on an enduring financial and family legacy to future generations is probably the most defining feature of our approach to intergenerational wealth management.
Using all our practical experience, in combination with our technical and legal expertise, we help our client families establish a clear governance strategy wherever possible. In our experience most successful families have defined the purposes and objectives of their wealth in some detail; they have established clear criteria against which major decisions should be judged and they have put in place formal governance and communication processes.
However, there is much more to succession planning than developing a family constitution and governance framework. It is so often about achieving a meeting of minds, as one generation comes to terms with the fact that the successor generation may have a different outlook, different ambitions and different skills. These factors may have a deep impact on investment decisions both before and during the handover.
Where this is the preferred and appropriate approach, we help families develop formal succession plans, governance and decision-making frameworks. However, many clients, especially founding entrepreneurs, prefer a more informal and flexible plan for a gradual handover.
On occasions, this transfer can involve significant changes in investment strategy, with the transition managed over a period of several years. During this time we frequently act as a facilitator between the generations.
We not only help to develop family governance, we provide the framework, resources, systems and experience to ensure the governance is effectively and harmoniously implemented to the benefit of all family members.
We often act as trustees, providing sophisticated reporting against objectives and we arrange and facilitate family meetings.
We usually seek to engage with the next generation as early as appropriate, to help them become familiar with their circumstances and responsibilities.
We run programmes to help them explore the opportunities and challenges which lie ahead and we can sometimes play a useful role in opening up the dialogue between the two generations.
The growing trend for wealthy families to discuss and agree the ‘purpose’ of their wealth has been confirmed in numerous surveys in many countries, including the findings of Stonehage Fleming’s own report on family succession, entitled ‘The Four Pillars of Capital’.
This paper explores the practical benefits such an exercise may bring to a family, in particular to those who are beginning to plan the transition to the next generation.
All wealthy individuals are eventually faced with the decision as to how to leave their wealth, to whom and in what form. They also have to consider whether to leave it unconditionally or to leave guidance on how it should be used and managed. It is difficult to leave guidance without addressing the question ‘what is it for?’
Families have widely differing “purposes” for their wealth. At one extreme, there are some entrepreneurs who have left nearly all their money to charity, and at the other extreme, there is a family trying to create a 200 year trust with guidelines for distributions across eight generations.
Most of those who create large fortunes do so by building substantial businesses. As the business grows, the assets and revenues often exceed their needs, but the motivation to continue growing rarely abates.
Entrepreneurs are driven and ambitious and frequently seem to operate in a bubble of “eternal youth”. Only when they begin to consider succession do they think about the impact of wealth on their heirs.
The issues they need to address include the following:
The answers to these and many other questions are strongly interrelated and difficult to resolve in isolation. Conflicting objectives may need to be prioritised and reconciled around a central philosophy and purpose.
It can be immensely helpful to the next generation if that purpose and philosophy are developed and communicated well before the founder passes on. If not, the decisions made might come as a shock, causing resentment and perhaps dispute in the future with many negative consequences, including wealth destruction.
A family will probably include a number of individuals with differing abilities, personalities, interests and aspirations which are not always easily reconciled.
However, they may also have much in common and most people grow up with values, hopes and expectations which have been influenced by their family and their surroundings. Nearly all have a need to be treated fairly, if not equally, and to understand the difference.
Yet gross inequality and unfairness can be accepted, if they are ingrained in the family culture. For example, the English tradition of primogeniture involves large estates passing from eldest son to eldest son, whilst other children may receive relatively modest inheritances.
Underlying this culture is the tacit understanding that the central purpose of the wealth is to preserve the estate in family hands. In such cases, this fundamental objective takes priority over most other considerations, including the needs of individuals.
Some business-owning families may take a similar view in that they have a strong preference to keep the business in family ownership, which may have to be reconciled with the income needs of individual family members. It is well known that a family business can be the glue which holds a large family together, but it can equally be a divisive force which corrodes family unity, sometimes driving the business to insolvency in the process.
In any family dispute, the alleged intentions of the founder will be used by both sides, so clearly stated guidance can help prevent potentially disastrous consequences. Such guidance is no easy matter, as it must allow future decision makers the flexibility to adapt to changing circumstances.
Many families also have to cope with inheriting specialist investments which rely heavily on the skill and experience of the founder or other family members. Some families want to continue the heritage of investing in new ideas and young companies, in which case a carefully crafted statement of purpose will be of enormous assistance, especially if things go wrong.
Cash, quoted investments and some properties may be easily divisible between family members, but an art collection, for example, may benefit from continuing in collective family ownership, thus requiring an agreed strategy, decision-making framework and governance.
The desire to promote family unity is sometimes a factor in agreeing the purpose of wealth. Unity is usually not driven by fairness through equality, but fairness through common understanding. Understanding is driven by communication and leadership. Leadership without a purpose is almost impossible.
If the aim of a “purpose” is to help a family set clear objectives and make better decisions, with a recognisable strategy for their wealth, then it must be clearly articulated. There are numerous conflicting issues to be addressed and reconciled, so a few bland headlines are unlikely to be sufficient. Purpose is much more detailed than a ‘mission statement’.
Families sometimes assume that by bringing up their children properly they will understand the family’s vision through osmosis. This is possible, but not easy, as families are rarely as good at consistent communication as they think. It is not what one generation says that it is important, it is what the other one hears that matters!
Other families therefore opt for a more formal process. It is likely to involve a number of family meetings, possibly assisted by an external facilitator, who will drive the process and make sure all voices are properly heard. The objective will be to arrive at a consensus which is accepted by everyone involved, despite the fact that they may start out with widely differing perspectives.
The need for agreement is greatest when assets such as a family estate, family business or art collection continue to benefit from a degree of common ownership which implies shared decision making. This particularly applies to families who are asset rich, but have insufficient cash flow to support all the needs of a growing number of family members.
Issues to be covered should include the following:
For those with landed estates in the family for centuries, the practice of primogeniture will be clearly understood, but may need to be discussed rather than assumed, in the light of changing values in society.
The issue for business-owning families is even more complex. If there is an agreed preference for the business to remain in family ownership, the reasons for this must be clearly stated, with well-designed caveats to provide for changing circumstances.
Similar considerations may apply to other assets where there is a desire to maintain them intact, and which require active management.
Whilst the main object of investment is usually to preserve and grow the wealth in real terms, changing attitudes and values increasingly emphasise the importance of ‘Socially Responsible Investment’ and ‘Impact Investing’.
Families with a business background may also wish to encourage a continuing culture of entrepreneurialism and participate directly in backing new ideas and talented individuals.
There are numerous issues which need to be discussed in defining the family’s approach, in particular the willingness to adapt investment criteria to meet social and other ‘non-financial’ objectives.
The ongoing income required to support family members will usually be a key factor and the need for income should be debated in some detail, especially where it conflicts with other objectives.
Wealth is only beneficial if it helps family members to lead more fulfilling lives and to explore their potential as human beings. This may lead to certain controls designed to encourage the young to make good use of their own talents, and not rely too heavily on inheritance to make their way in the world.
A strong theme underlying many of the decisions above will be the extent that the family wishes to use its wealth to benefit the wider community. In some cases, the motivation is a balance between genuine altruism and enlightened self-interest.
In many countries, increasingly hostile public attitudes to wealth represent a significant threat, which may be mitigated by demonstrating how that wealth benefits the wider population.
This contribution can be made through the way the family conducts its business and investment activities, creates employment and supports the local community, but many families also dedicate part of their wealth to philanthropy.
There are various ways in which the family can organise charitable giving, often including active involvement by a number of family members, so that it helps to reinforce the unity of the family, working together for the good of the community.
All of the above will benefit from clearly thought out structures and decision-making processes, which can only stem from a detailed and well-articulated statement of purpose. This will often include a set of agreed values which guide individual behaviour and which can be more strongly applied to collective decision making. For some the family ‘brand’ is important.
Purpose cannot be discussed without risk, and risk cannot be addressed in the absence of purpose and objectives.
Management of risk is one of the most complex subjects to be considered as risk takes many forms, from the performance of the family business and the volatility of the share portfolio to the more intangible risks such as family reputation or transferring leadership and control to the next generation.
The discussion needs to take place within a structured process, if meaningful results are to be achieved.
Wealthy families and entrepreneurs have relatively few options when considering succession. They may of course prefer to leave it to the next generation to manage the responsibilities and privileges of wealth without guidance, but they are still faced with practical decisions which cannot be ignored.
Most people want to avoid giving excessively prescriptive guidance which ties the hands of their successors, but may still wish to create some form of legacy which is more than just financial.
Those families and entrepreneurs who want to establish parameters for their legacy have three main alternatives:
Whilst a defined purpose of wealth does not guarantee success, the process of agreeing that purpose can provide families with a clarity and understanding that ensures the plan for the transfer of wealth is understood and not imposed.
There may, however be circumstances in which the differences are unlikely to be bridged by such a process, in which case the terms of the legacy and the parameters for decision making will probably need to be defined in enough detail to avoid ambiguity.
A family business is a journey – challenging, rewarding and often unpredictable. Should you decide to sell the business – often a daunting decision – careful planning and skilled execution are required to ensure a successful outcome.
Perhaps the hardest decision for any family business owner is when, or if, to sell the family business. Selling a family business is like no other sale. It requires an approach which addresses both the family’s issues and the business’ issues as one, with the two often closely intertwined. It needs extensive preparation and great judgement, with timing and stakeholder management often critical.
Most owners have strong family and emotional ties to the business – part of their family heritage and their collective identity. They may also wish to achieve specific outcomes for wider stakeholders, including highly valued staff and long-standing customers. The challenge is even greater when family members are actively involved in the company. Some family members may take a purely commercial view, whilst others believe the business should be handed down to their children and grandchildren and be part of their livelihood and collective identity.
The business is often the most valuable family asset, so the sale should not be considered in isolation from the wider interests and future intentions of the family. The use of proceeds and future careers of family members are important considerations in the long-term success of the family.
It is highly advisable for family businesses to regularly assess their ownership and corporate strategy, both from a business and market perspective, but also with reference to the changing circumstances of the family.
A recent Fleming Family & Partners survey of 90 Ultra High Net Worth (‘UHNW’) families and their advisers (source: ‘The World in 2043: Wealth Strategies for Intergenerational Success’ report), found that they view a lack of strategic planning for the family as the greatest destroyer of wealth. After capital preservation, succession planning was seen as the second most pressing concern. Business owning families need to consider a broad range of factors, including successors to the current owner-manager(s), implications of growth in the next generation family shareholder base and the benefits of wealth diversification.
Individual family members will have additional personal considerations, including their own career aspirations and preference for income, capital returns or long-term investments.
From a business perspective, family owners will regularly monitor and assess market and business developments. Long-term trends such as the impacts of globalisation, increasing regulatory burden or rapid technological change may influence their desire to retain ownership. These developments may also drive wider market consolidation and the family will need to consider whether it has the appropriate resources, expertise and willingness to become an industry consolidator.
An essential element when considering the sale of the family business will be planning for events post completion, including use of the proceeds, as illustrated above. This may include re-investing in new business opportunities, acquiring a more diversified investment portfolio, investing in property or satisfying philanthropic objectives. This is discussed further in the Post Sale section.
It is imperative that the ground work is done well before there is any question of a sale. The more distant the prospect, the greater chance of rational discussion which gives everyone the opportunity to air their views, without the debate must be to work out some parameters and a ‘road map’ which will help those responsible for making the decision when the time comes. Noone can predict the precise circumstances, but if some broad principles have been agreed by the family at an earlier date, the potential for a destructive conflict is greatly reduced.
These principles will help define what factors should influence the decision. They should include a clear statement of the purpose of continuing family ownership, which may or may not include active involvement of family members in the management team. They should also include broad guidelines for the sort of circumstances in which the business should be sold, if it is not purely a commercial decision, and suggest a decision making process which involves all relevant family members.
Ideally, such parameters will be drawn up by the founding entrepreneur, at least 10 years before retirement, preferably in consultation with the family. Failing that, if the business is already in the hands of the second or subsequent generation, it is in the best interests of all for a family agreement to be initiated as soon as possible.
From a business perspective, positioning and preparing the business well ahead of the initiation of the sale process are key to a successful outcome. However, whilst families should be prepared and proactive, they should also be responsive to more immediate developments, whether this is an increase in sector valuations or receipt of an unsolicited approach.
Advance preparation is especially important if an owner-manager or other family members in senior management positions intend to exit the business. Their knowledge and expertise will need to be disseminated to other members of the management team and replacements may need to be recruited and integrated into the business. It is often wise to engage advisers at any early stage to assist with these preparations, to help with identifying any specific areas to be addressed pre-sale, developing a roadmap and positioning the business to maximise its value to a variety of potential purchasers.
Crucially, the family must discuss and agree whether the sole measure of success is price maximisation or if other factors should be considered, such as ensuring the business is transferred into ‘good hands’, to preserve its identity, to safeguard the family brand or to protect the future of the management or staff. There may be strong differences of view among family members and a valuation exercise should take account of these preferences, so that the family can debate the trade-off between price maximisation and other factors.
There may also be disparate views regarding the structure of any disposal. This could relate to the timing of the sale or the degree to which family members wish to remain involved post sale. Some family members may be willing to give warranties and indemnities or receive deferred consideration based on an earn-out in return for potentially higher overall proceeds. There may also be differing views with regards to the form of consideration and whether it will be cash, shares in the purchaser or a combination. Generally, the sooner these issues are discussed, the better.
Once a decision has been made regarding longterm ownership, the family should position the business appropriately to maximise its attractiveness to potential acquirers. This could include operational matters such as where to focus business investment, exiting loss making sectors or improving cost efficiency. They may also wish to develop relationships with decision makers at certain potential acquirers.
Timing is often critical. Sell too early and the family may sacrifice substantial gains; leave it too late and the business may have lost value, perhaps because of sector decline or because the company is losing market share to competitors. In certain circumstances, it may be appropriate to seek outside investment or a strategic partner, for example where finance for additional growth is required. For the purposes of this document we have only considered a full sale; however, in certain situations a partial sale may be more appropriate.
The main areas to be considered are summarised in the diagram:
Selling a business is often highly demanding of senior management, distracting their attention from the day-to-day requirements of running the business, perhaps for a lengthy period. This is especially the case where there is a small senior management team with limited experience of corporate finance transactions. The Chief Executive and Finance Director are normally key team members, usually with a corporate finance adviser who preferably has deep experience of family businesses and can help manage the family perspective as well as the business issues.
It is important to design a streamlined and structured sale process, which minimises the burden on senior management’s time.
The corporate finance adviser will work with management and shareholders across all the work streams to maximise shareholder value. They will also advise on numerous practical issues such as whether to commission independent due diligence which can be sent to bidders (known as ‘vendor due diligence’) or if the seller should prearrange financing packages to offer to bidders (known as ‘staple financing’).
The closing of a well-planned transaction can be highly rewarding for the shareholders, business and management. For the family this can often be a major liquidity event which allows for new strategic direction and flexibility - consideration and determination of which should ideally be agreed well ahead of initiating the transaction. However, this liquidity event can also remove some of the glue that holds the family together and to some extent can cause a loss of purpose and collective identity, especially if family members, including future generations, are no longer involved in the business post completion.
Once the transaction has been completed individual family members often find themselves in very different circumstances with regards to wealth options and personal tax situations and often need to ensure a smooth transition to the next stage of their family journey. Some families may decide to set up a family office to manage their wealth collectively or set up trust(or alternative) structures to manage and protect current and future generational wealth (whether managed directly or via professional advisers), whilst others are happy to transfer wealth to individual family members immediately following the deal.
Defining a common set of family values and objectives can act as a foundation for the family’s new wealth management strategy and help with making decisions regarding specific investments. For example, the focus could be on capital preservation or appreciation; dividend income or capital growth; wealth retention or philanthropy. The collective knowledge and experience built up within the business can also be applied to future business opportunities and investment decisions.
Those families who have a clear plan for the subsequent use of proceeds are most likely to preserve the benefits for subsequent generations.
On the 15th January 2015 Stonehage Group Holdings Limited completed a merger with Fleming Family & Partners Limited (‘FF&P’), a London-based Multi-Family Office.The combined company is called Stonehage Fleming Family & Partners Limited (‘Stonehage Fleming’) and is the leading independently-owned multi-family office in Europe, Middle East and Africa. Its advisory division provides corporate finance and direct investment advisory services as part of a holistic approach to advising wealthy families.
Family offices are struggling to cope with the growing demands for advice and expertise arising from increased regulation, a more litigious society and the risks of an unstable global economy. Andrew Nolan argues the need for tighter definition of its role and responsibilities to enable the family office to adapt to the current environment.
There is no blueprint for a family office, as each should be designed to serve the particular needs of the family concerned. There have, however, been some clear trends over the last two decades which need to be considered by any family establishing a new family office or reviewing the role of an existing one. Indeed the extent of the changes now taking place in the external environment is challenging the fundamental concept of a modern family office and its economic viability. Never before has it been more important to define the objectives and to design a working model which can realistically meet those objectives in a cost efficient manner.
Whilst a family office should in theory be ‘purpose built’, most have evolved over decades, new functions being added on in response to events. Many started as offshoots of a family business or an estate office.
The role was primarily administrative, keeping accounts, processing transactions and administering trusts and other vehicles. The family would take advice directly from professional advisors such as lawyers, accountants, stockbrokers and land agents and the family office would be responsible for implementing that advice.
Over the last twenty years, the role has gradually evolved from administration and implementation to adviser and ‘gatekeeper’ between the family and their professional advisers.
There are four main reasons for this significant change of role:
The problem is that the need for advice is growing so rapidly that it is challenging for a typical family office even to meet the requirements of being an effective gatekeeper.
The combined impact of ever more complex tax compliance, increasing regulation and a highly litigious environment is testing the capabilities of even the largest and best resourced family offices. Many indeed are so busy responding to the latest tax or regulatory changes that they scarcely have time to consider the bigger picture, especially family strategy, governance and succession planning.
The problem is often exacerbated by loose definition of the role of family offices, causing muddled thinking and duplication of effort between the family office and external advisers. Some family offices, for instance, have already overreached themselves in trying to duplicate the role of an external asset manager, without the critical mass or resource to deliver a fully competent service. Not only is this inefficient, but by immersing themselves in excessive detail in one aspect of the family’s affairs, they can be distracted from their core responsibility of implementing the family’s wider wealth strategy.
Defining what is expected of a family office can be more difficult than it sounds, as it involves articulating very precisely the relationship between the family, the family office and external advisers, both in reaching decisions and in the implementation. It will involve analysis of:
Whilst each one is different, the services required will strongly reflect the circumstances, size and history of the family itself:
Clearly it is a very different proposition to run the family office for a 1st generation entrepreneur with two young children than for a 5th generation family with 200 members scattered around the world, led by senior family members who are not particularly interested in business and are thus less involved in day to day decisions.
Equally, the role of the family office is strongly affected by the complexity or otherwise of the structures through which the assets are held and the governance framework which aligns family decision making with long-term strategy and objectives. The family office is often the guardian of family governance processes and in larger families, with many different trusts and companies, it requires considerable skill and experience to ensure key decisions reflect the interests of the family as whole.
The priorities of the family office will also reflect the main collective activities of the family which will generally include some or all of the following:
In each area, the precise role of the family office needs to be defined, for example:
How is responsibility for asset allocation and manager selection apportioned between external investment managers, the family office and the key decision makers within the family? Is the role of the family office to be a manager of managers and supplier of investment services or to stand in the shoes of the family in purchasing such services from the external market?
The difference may be subtle, but if not precisely defined, there is every chance the family office will become a shadow investment manager, with all the resource and cost which that implies.
Relationship with Family Business
To what extent is the family office involved in overseeing the relationship between the family business and family shareholders (often through trusts and other vehicles), ensuring that the interests of all shareholders are properly represented, especially when major decisions are made which impact on the risk profile of their investment?
In many cases the family leadership is directly involved in the business, so knowledge and skill may be required in ensuring their decisions are subjected to proper scrutiny on behalf of other family members. The family office may also be closely involved in succession planning for the business, often through a formal framework defined in the family constitution.
Private Equity and other business interests
Is the family office a mini private equity house accountable for performance or does it simply implement the ideas and decisions of senior family members to invest in private businesses on an opportunistic basis? If the latter how are the interests of other family members protected?
Again, the difference is quite fundamental, one requiring a team of highly experienced private equity professionals, and the latter requiring someone with sufficient corporate finance experience to research and implement, but not ultimately responsible for decisions. Either way, suitable governance will be required to protect the interests of the wider family.
Is the property for residential, leisure or investment purposes or a combination of all three? Does the family office find and negotiate the purchases on the family’s behalf, or does it simply implement the instructions of the family and provide ongoing administration services? Is it also responsible for considering the tax and succession implications and the alternative structures through which the properties should be held?
Is there a philanthropic legacy and what are its objectives, both externally and within the family? What role do the family members play in this and what support is required from the family office?
Arrangements for philanthropic giving vary considerably from one family to another, but philanthropy is increasingly combined with succession planning in leaving a legacy of social capital as well as monetary wealth, in which family members play a key role.
Administration and services
The administration requirements of a family office can require considerable technical expertise (trusts, tax, legal, banking etc) and a deep working knowledge of the family is also essential, including the history, personalities, preferences and objectives, so that the family office is able to process routine transactions without continuous reference to the family leaders.
Just how complex are the family’s requirements and what is the frequency of transactions requiring decisions and judgments in the implementation? Are they, for instance, frequently buying properties, works of art or leisure assets? How complex are the banking and treasury arrangements?
Legal, structuring and tax issues
All of the above are overlaid with legal, structuring and taxation issues, some of which may be relatively routine and within the competence of the family office team, whilst others may require specialist external advice. For complex situations even quite routine transactions may have significant ramifications which need to be considered.
Finally, risk management for a wealthy family now requires a highly disciplined methodology similar to that for a business. It starts with a full risk audit, analysing and prioritising all the risks faced by the family, across all the assets including direct business interests, as well as the investment portfolios and the risks in the family itself.
To address the role of the family office from a slightly different perspective, it is worth asking in principle what level of advice and service the family requires:
A. Implementation and administration only - family make key decisions with direct input from advisers
B. Family Office selects and coordinates external advisers
C. Family Office plays lead, trusted adviser role
D. Family Office sets agenda for family and plays leading role in facilitating decisions
At the extreme, the role of the family office combines that of a service provider, trusted adviser and management consultant, working with a range of professional advisers to identify the right course and build a family consensus, as well as being responsible for implementation and administration.
In practice the level of input may vary as between the different areas of responsibility. For instance a business family may want the family office to have limited involvement with the family business, but a much deeper level of involvement with the investment portfolio.
The nature and depth of involvement may also change over time, particularly as the family leadership passes from one generation to the next. The family office may have a role to play in preparing for that transition and for succession planning more generally.
Some family offices are led by one or more family members, although this obviously depends on having someone willing and able to fulfil that role, who is competent, acceptable to other family members and willing to submit to proper governance processes.
First, it must be accepted as a fact of life that the world is changing and that wealthy families will probably pay more tax than in the past and incur greater costs in managing their affairs, if they wish to avoid unnecessary risks. Unpalatable though this may be, they have to be realistic and can only set out to manage their wealth as efficiently and effectively as possible.
Second, in order to contain these costs, the objectives and role of the family office must be much more precisely defined than in the past, clearly specifying the division of responsibilities between the family, the family office and external professionals such as investment managers and lawyers. Improved definition reduces unnecessary duplication and time wasting caused by indecision or muddled thinking.
Third, for every significant activity (including high level strategy), the optimal balance must be found between the expertise and servicing capability to be maintained within the family office and the extent of outsourcing to external specialists. This balance will depend on the volumes and complexity of the anticipated work and the impact on quality as well as cost.
Fourth, considerable thought needs to be given to the need for a trusted adviser to the family and whether this advisor resides in the family office. Having such an individual regularly involved at the heart of the family’s decision making may not only improve the quality of key decisions made, but also save considerable costs by swiftly rejecting ideas which are unlikely to be viable, before too much has been invested in their appraisal.
Finally, the model for any family office must be realistic in terms of the ability to recruit, retain and motivate suitable staff, bearing in mind that whilst there are benefits of having advisers directly employed, these must be balanced against the benefits of using external advisers who have regular and ongoing experience of working with other clients in their field of expertise.