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.
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.
The role of properly structured succession planning in reducing the risks to family wealth is beyond dispute. Yet this most important of all risk management tools is too often overlooked, both by the families themselves and their advisers.
It is a well known fact that most family fortunes fail to survive more than three generations. Less well known is that the prime cause of wealth destruction is a breakdown of communication within the family, which often results from failure to plan adequately for passing on the wealth from one generation to the next.
In the current economic environment there is a great deal of focus on the management of risk and, in particular, the potential vulnerability of the family business or the investment portfolio to a further banking crisis and a collapse in market confidence. Increasingly sophisticated risk management tools are promoted by wealth managers and private banks for this purpose.
In the longer term, the biggest risk of all is a failure within the family itself which, at its mildest, results in a loss of direction and leadership and, at its worst, can result in a full scale family war as different family members fight each other for the assets, the legacy or the family leadership. By the third or fourth generation the chances are very high that those who inherit were brought up in luxury with little concept of the work ethic on which the family fortune was founded.
Succession planning is therefore the most important tool of long-term risk management. It does not guarantee the preservation of wealth through the generations, but it can and does improve the chances that the wealth will survive, in an environment which enables family members to flourish as individuals, as part of the family unit and as members of society.
Why is it, therefore, that whilst so much time and resource is commonly allocated to other, less important risk management tools, far too little attention is given to the most important tool of all – succession planning?
The consequences of failure to plan are well known, and far too numerous to list. Perhaps the most obvious are disputes between siblings on the death of the founder or disputes between those who are involved in the family business and those who want it sold. There is also jockeying for position within the business and disagreement about its strategic direction, some perhaps preferring to stick to the core activity, whilst others advocate a more risky expansion and diversification strategy, involving substantial leverage.
There may be family members who want to use family wealth to invest in new ventures, following in the entrepreneurial footsteps of the founder, whilst others have no interest in business and prefer the wealth to be independently managed by professional managers. All this can have an impact not only on the business and the family wealth, but on the family itself, as the key protagonists try to lobby other family members for support. Sadly, in most instances, those who advocate the greatest risks have the loudest and most persuasive voices.
In addition to business strategy, there is the simple issue of management competence and the danger that the next generation does not have the talent to run a large business, either as managers or as owners.
All of these risks and many more, are greatly magnified by the lack of a clear framework for making decisions and a clear set of objectives which have been originated by the founder and renewed by successive generations.
The potential for damaging divisions and perhaps catastrophic wealth destruction is so obvious that it is hard to understand why an exceptionally able and talented human being, who has spent a lifetime putting together a large fortune, would ignore many of the basic principles of handing it down to the next generation. Yet many otherwise brilliant men and women do just that.
Some say that the biggest obstacle to succession planning is the typical entrepreneur’s belief in his or her own immortality, or to put it the other way round, a reluctance to face up to his own death or incapacity.
In truth, the answer is more complex, in that there are many hard decisions to be made, some of them straight business decisions, others highly overlaid with emotional considerations. Some may create a division between father and son, between brother and sister, or even between husband and wife and even when it is all done, the outcome can never be guaranteed.
Many entrepreneurs have observed that it is harder to pass on your wealth than to make it in the first place, but perhaps this is precisely the argument for some sort of formalised process. Such a process takes at least some of the emotion out of decisions, which otherwise have the potential to cause resentment and division. Pre-determined criteria will help provide an objective measure, to avoid the perception that one family member has been favoured over another.
The drawing up of a succession plan is clearly, in the first instance, the prerogative of the founder of the wealth, or subsequent family leadership. However, it is argued by most experts that it should generally be done with some degree of consultation among those principally affected. Those involved need to have a say and the opportunity to work together with other family members in defining a common set of values, objectives and governance framework. This can be a substantial task.
There are three main elements of succession planning:
Defining the purpose of the wealth
Much can be achieved by trying to answer the simple question ‘what is it all for?’ Is the wealth simply to provide for the living standards of subsequent generations? If so, how do you ensure it contributes to enhanced quality of life, when there is so much evidence that inheritance without responsibility can be damaging?
For some families, much of the wealth is tied up in particular assets such as a family business, a landed estate or an art collection, which the founder wishes to be maintained intact. If so, this must be made clear, to avoid future disputes. It should also be specified whether and in what circumstances the wealth should be used to encourage entrepreneurial or other creative activities of family members or to be used for philanthropic purposes. Whatever the specific purposes, the founder will surely wish to leave a legacy which encourages a positive work ethic in subsequent generations to reduce the prospect of wealth being squandered and lives ruined in the process.
Dividing the wealth
The next question is how the wealth is to be divided between different family members. Fairness and equality are easy words to use, but it is not so easy to define what they mean in practice. It could be argued that the wealth should be divided equally between members of the next generation. Alternatively, that a greater share is allocated to those with responsibility for carrying forward the family business or other assets. The responsibilities of family leaders have to be specified and mechanisms put in place to protect the interests of others. Some families have a ‘pot’ of money to finance family members with exceptional talents or business ideas, or those with special needs or suffering hardship. Without a guiding philosophy every decision has the potential to cause a rift.
The processes by which decisions are made is critical to the future wellbeing of the family.
For many wealthy families, their assets are held through a variety of ‘vehicles’, being primarily companies and trusts, each with their own objectives, their own boards of directors or trustees and their own governing instruments. However, most families have seen the benefit of some kind of family constitution, which defines the overall objectives and decision making processes for the family as a whole.
Communications will usually include family meetings (the whole family and consultative only) and the family council (representative body with some decision making powers). Where there is a family business making up a substantial part of the assets, the relationship between the family and the business will be critical, as will the rules which govern the highly sensitive area of family members working in the business.
The above is just a selection of the many issues which need to be considered by a wealthy individual or family, to which should be added all the usual tax and legal issues affecting a family with complex assets, especially those distributed across a number of legal jurisdictions.
As mentioned earlier, many wealth creators postpone consideration of all these matters, often until it is too late. Equally their advisers are at fault for failing to put the issue firmly on the table in a manner which provokes a positive response. After all there are so many arguments in favour of a properly structured succession planning exercise, that it should surely be routine for all advisers?
It has been demonstrated beyond reasonable doubt that in the vast majority of cases an effective succession planning exercise brings considerable benefits to a wealthy family. The question is when to start such an exercise and the biggest challenge is to agree the format and get the process started.
The scope of the exercise and the extent of involvement of family members will depend on the wishes of the wealth creator, or the current family leadership. Although it is generally regarded as advisable to involve the next generation in a consultative exercise, there may on occasions be reasons for not doing so. Equally, the founder may wish to lay down some principles from the outset, as a framework for discussion.
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.