Planning for Succession, Part 1: Transitioning Ownership & Key Elements to Succession
The key to success is to be thoroughly prepared. Succession will happen within families, but it is not always certain that it will be accomplished strategically. Succession planning calls for deliberate preparation, and it requires time — typically years or even decades — as well as forethought, commitment, diligence and adaptability.
The decisions made regarding ownership of the family business or family office may not necessarily be the same decisions that are required for leadership and management. It’s critical to understand and acknowledge the different elements that proper succession planning entails.
The family wealth enterprise has three interconnected circles of participation — the family members, the family’s business and the ownership of wealth — and each circle requires a succession plan. Those plans should reflect the family’s shared values and aspirations, and they should be implemented with business-like focus and diligence that is tailored to each family’s dynamics and relationships.
To successfully transition the family ownership, business and financial wealth to succeeding generations, leaders must be groomed and/or nurtured to assume the mantle of these responsibilities with competence. Moreover, to ensure that the family legacy remains intact and on course, each person assuming a new role must embrace the family’s common vision. Outlining deliberate plans to accomplish related goals across the family, business and ownership will help achieve an orderly, prosperous succession that protects the family legacy for generations to come.
What is Succession Planning and Why Is It So Important?
Robust governance practices form the cornerstone of success for the family wealth enterprise, and ongoing succession planning is one element of a mature governance system. As a family considers its future succession, it is vital to understand why a well-conceived plan is so important and what the critical elements of the plan entail. The succession plan prepares heirs to transition successfully and preserve, grow and pass wealth from generation to generation. Otherwise, the family wealth enterprise can diverge from the family’s values, philosophies and direction, which may erode family unity, endanger the legacy and dissipate financial wealth.
Effective governance protects the five forms of family wealth outlined below, and succession planning is a pivotal aspect of governance:
- Financial capital (money and assets)
- Human capital (the family members themselves and their skills and experience)
- Intellectual capital (knowledge, ideas and perspectives)
- Social capital (professional and social relationships, community involvement and philanthropy)
- Ethical capital (values, philosophies and responsible practices that improve the lives of others)
Imagine the succession plan as the roadmap that provides all necessary directions to reach the desired destination. It outlines specific roles and a timeline for training heirs to manage of all five forms of family wealth. Thoughtful succession planning also gives business stakeholders confidence about continued stability during times of transition and beyond, thereby increasing the family wealth enterprise’s resilience. Challenges will arise — including economic downturns and changes in the workforce and workplace—so it’s important to prepare for the unexpected.
The Elements of Succession Planning
The succession plan must specify ways to prepare heirs to be good stewards of wealth and enable them to understand their evolving roles and responsibilities. The ideal candidates will need to develop their financial literacy and business acumen, as well as leadership and decision-making skills.
Heirs can build financial literacy from a young age by managing their own expenses and then participating in the financial aspects of the family business. Understanding key financial concepts and practices provides a foundation to gain valuable workplace experience and develop business acumen. When heirs understand the finance function and the inner workings of a business, they can think strategically to identify risks and opportunities.
To develop their leadership capabilities, heirs must appreciate the importance of being accountable to others while holding others accountable as well — an especially delicate task when working with family members. Sound leadership requires emotional and social intelligence to communicate effectively, bearing in mind that some family members will receive and process information differently. Strong leadership skills are especially necessary within the business, and these will help heirs thrive in supervisory roles and gain buy-in from stakeholders.
To fill ownership and leadership roles, heirs need to develop their decision-making capabilities as well. They will have to weigh competing interests and make judicious decisions that yield the maximum benefits over the near term and long term. Drawing on leadership skills and business acumen enables heirs to make decisions more effectively. Ultimately, when identifying a successor, it is prudent to empower those who demonstrate a passion for the role and have the necessary skills to make a meaningful contribution.
Interested in learning more about succession planning? Come back next week for Part 2 or contact the MFA Team to talk about your business’ unique circumstances.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.