Planning for posterity’s prosperity

Tuesday, 01 April 2014
Richard Bertin on why planning is key to preserving the legacy of a family business.

Many entrepreneurs see their business not only as their pension fund but also as a source of wealth for future generations. However, they face various issues when it comes to preserving their legacy.

For a start, there are no guarantees entrepreneurs’ drive and talent will be replicated in the next generation when the time comes to hand over the reins. Intellect may be genetic, but not necessarily direction. Serial entrepreneurs may have children who are, for example, budding poets or medical students. Quite apart from questions about succession, advisors have to help their clients navigate the delicate issue of how to treat their children differently, as wealthy parents may, for instance, wish to provide their poet daughter with more financial support so that she can pursue her literary career.

Family businesses can also create problems long before entrepreneurs have to tackle the question of succession. The early stages of a business can cause cash flow constraints, as too can an economic downturn or recession. Owners may need to sacrifice their personal finances to ensure the business remains solvent, impacting on school fees and mortgages.

Death and morbidity

Death can cause serious problems in a family-run business too, besides the emotional turmoil. Who will run the company? How can other shareholders afford to buy out a key family member? Typically, the latter issue can be addressed through life insurance and cross-option arrangements, but these are rarely in place. Many entrepreneurs have a fervent belief that hard work and stress lead to immortality.

Morbidity can also be an issue. Members of family businesses are not immune from illness. Take, for example, a family business run by two siblings, where one of the siblings starts to display signs of early-onset dementia. The problem needs to be addressed, very sensitively, but what if there is no lasting power of attorney in place and nothing in the articles of the company, never mind a shareholders’ agreement, that provides for how to address the issue?

Passing the business on

Passing a successful family business from one generation to another can pose its own set of problems, especially when some children work in the business and others do not. The hard-working second generation may expect more than just a salary – they may want shares in the business to reward their efforts in helping it grow. This can cause tensions, as parents often like to treat their children equally. This tension can be eased by mapping out the future for parents and their children in a very detailed cash flow analysis.

Selling the business

Selling a family business can create a whole new set of issues. Once capital gains tax has been paid, for many their wealth will become fully exposed to inheritance tax rather than perhaps shielded under the business property relief provisions. The family must then decide what to do with the proceeds, and focus on intergenerational planning. At this moment, it is sensible to put together a family wealth plan. This process generally requires independent counsel so that the family has an objective sounding board.

Typically, the family wealth plan needs to define the goals and objectives of the family, whether personal or philanthropic. At the same time, much like a business, the family has expenditure requirements that need to be mapped out, with a reviewable plan put in place to meet them. The sounding board and discovery process are key before investment decisions are made. The skills required in this process are part financial and part counsel. The sale of a family business can be an emotional experience, especially if the next step on the ladder is retirement. In these circumstances, the focus of the patriarch or matriarch should shift from business to family. Working on the family wealth plan is a natural evolution, and the engagement of an external family finance director is a good place to start.

A worthy legacy

Wealth preservation is one of the greatest challenges. The hackneyed expression ‘clogs to clogs in three generations’ is not without substance. A business sold for GBP10 million after tax would see the proceeds whittled down to GBP250,000 after 90 years, assuming inflation of 3 per cent and, more importantly, all income and growth being stripped by the surviving generations during those years, plus inheritance tax taking its toll. Death, taxes and school fees have a habit of eating into capital.

Entrepreneurs work hard to create wealth and therefore it is important to dedicate both time and money to ensure that the legacy left matches their personal ambitions. Plans happen by design – not by accident – and successful business people know that.  

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Richard Bertin

Richard Bertin is Managing Director of FF&P Wealth Planning.

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