Successful succession planning

Tuesday, 01 April 2014
Penny Lovell explores the longevity of family businesses in Scotland and highlights the issues that need to be addressed during family business succession planning.

No modern advisory firm can afford to ignore the opportunities presented by advising family businesses.

The Family Firm Institute estimates that family businesses generate 70 to 90 per cent of global GDP annually.1  Around half of the Canadian workforce is employed by family businesses, creating nearly 45 per cent of Canadian GDP.1  And, in the UK, family businesses have a turnover of GBP1.1 trillion, accounting for almost a quarter of GDP.2

Yet typically only around 30 per cent of family firms survive into the second generation, and even fewer to the third generation.3  Family businesses in Scotland, however, seem to have bucked this trend and mastered the art of passing on the business.

Scottish family businesses

Scottish family businesses make their own remarkable contribution to their nation. Fifty per cent of the Scottish private-sector workforce is employed by family firms, and 73 per cent of Scottish businesses describe themselves as family businesses.4

Many Scottish family firms are household names, such as haggis supremo Macsween of Edinburgh, Albert Bartlett, Arnold Clark and Tunnock’s. Or take the likes of Walkers, Baxters, Johnstons of Elgin, James Donaldson & Sons, Kinloch Anderson and William Purves – all are family businesses that share many of the same values.

John White & Son is the oldest family business in Scotland, having been trading for almost 300 years. The top 25 Scottish family firms have collectively traded for over 3,700 years, and on average have been trading for 148 years.

If there is truth to the often-quoted proverb ‘shirtsleeves to shirtsleeves in three generations’, these firms have bucked the trend. Not only do they each go back over 100 years, they have survived two World Wars, numerous recessions and economic ups and downs, and incredible changes in technology. They all contribute to the economy and have a major impact on the communities in which they operate, providing income, employment and support.

These firms know a thing or two about business continuity, and their expertise has been distilled by a new breed of specialist: the family business advisor.

Covering the basics

The traditional approach of the private client advisor to succession planning involves a mix of tax and legal structures. These continue to be important, especially as research into family businesses has revealed that well over four in ten business owners don’t have plans in place to cope with the tax implications of extracting profit from their business when they retire. Furthermore, 8 per cent have no understanding at all of the tax implications of taking profit from the business.5

The lack of tax planning is a more acute problem in smaller firms. The majority of owners of businesses with a turnover of between GBP750,000 and GBP1 million admit to not having put any plans in place. In comparison, 83 per cent of owners of businesses with a turnover or GBP5 million or more fully understand the tax implications.

Not only is tax planning important from a succession point of view, but simply having enough money to retire makes all the difference. Business owners will not want to pass on the business if they cannot afford to. This means putting in place a sound investment strategy outside of the business, usually through pension planning or establishing an investment portfolio for the long term.

The private client professional, working with an investment manager and/or financial advisors, will help to ensure a smooth handover. They can help business owners to have the relevant plans in place to maximise profit from their business when they retire. The hard work that goes into running a business can be lost if a proper plan is not in position when approaching retirement. The solutions can be simple if business owners seek the right guidance early, placing them in a stronger position to protect their wealth.

A different perspective

The family business advisor not only considers tax, structuring and retirement planning when considering the succession of a family business, but also the multiple unique perspectives that come with family businesses. This kind of succession planning is more about family politics.

Best practice, outlined in the STEP Advanced Certificate in Family Business Advising, tells us that succession planning for a family business will follow distinct stages, namely: preparation, exploration, choice and implementation. Exploring these stages gives us a framework for understanding what the client needs from their family business advisor, so it is worth getting to grips with them if you are going to give advice.

Preparation starts with an acknowledgement on behalf of the client that there is a need for planning. There is often a natural resistance to starting this kind of work, and a few clients will even be in denial. Indeed, as Sandy Loder of AH Loder Advisors has said: ‘Many business owners are so focused on growing their business from being an SME to a large enterprise that they do not see [succession planning] as a priority and will defer that whole piece of work.’ It is important therefore that the advisor works at a pace that the client feels comfortable with.

Succession planning typically begins in earnest when a trigger event takes place, and experience suggests that this is when the business owners reach a certain age (60 to 65, perhaps); a significant threat or opportunity arises to the business model due to changes in the external environment; or marriage, divorce or illness occurs in the family.

It is important to educate the next generation to prepare them for looming responsibilities, but no matter how well educated the next generation is, transition cannot occur until the senior generation, which usually has the power, embraces planning for the future. To prepare the senior generation for this transition, the advisor needs to listen carefully to their concerns and be able to present clear options for the future.

There is a particular point at which it is a good idea to raise the conversation. Business owners in their 60s are more likely to have children over the age of 35, and this is often seen as the point in their children’s lives when they are more likely to be settled and to seek responsibility.

Once matters are under way, it is best to clarify what work will be carried out, and agree a timetable and budget. The timetable should be generous enough for the work to be done thoroughly, but having an end in mind is better than starting off on an exploration without any sense of when it is due to be completed, or how much it will cost.

Exploration involves providing the clients with alternative possibilities in relation to the future governance of their enterprise. Projecting ten to 20 years into the future will help clients envisage their options in relation to how individuals will contribute to the family business, business ownership and active business involvement. Advisors should take care that this stage does not become an endless discussion about the future without any decisions being taken.

The choice stage is again best structured by projecting ten to 20 years into the future, as this will demonstrate that there are a finite number of choices. For example, in 20 years, the business founder may be 80, so will they still want to be an active shareholder? This question, along with others, should be discussed at length, but ultimately decisions have to be made. Nevertheless, this process may take some time, as a kind of grieving process will come into play for the emotional capital that has been invested in alternatives.

At the implementation stage, time and work needs to be invested in producing an effective implementation plan, committing to a timetable and developing an announcement strategy for the wider family and the business.


Adhering to the above stages gives the family business advisor an essential framework in which to help and reassure clients. For the advisor, it is also helpful to recognise that clients must move at their own pace.

There are multiple issues facing those who wish to pass their business down through the generations. If any one element is missing, the likelihood of the business being handed over successfully is vastly reduced. It is the role of the trusted advisor to coordinate consideration of tax, investment, financial planning and family dynamics. Such advisors must look beyond their own specialism and see the whole picture. 

  • 1 a b globaldatapoints
  • 2Institute of Family Business, IFB Members Survey Results 2013
  • 3Wendy C Handler, ‘Succession in Family Business: A Review of the Research’, Family Business Review 7 (1994); 133
  • 4Family Business United, The Oldest Family Businesses in Scotland 2013
  • 5The Oldest Family Businesses in Scotland 2013
Author block
Penny Lovell

Penny Lovell is Head of Private Client Services at Close Brothers Asset Management.

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