COMMUNAUTÉS & EXPERTISES — Expertises

WEALTH PLANNING

The modern dynamics of Family-Owned Companies’ transfer



Maria Cristina Boscolo Berto, Director, Regional Head of Wealth Structuring, Lombard International Assurance .   (Crédit Photo :  Lombard International Assurance)

Maria Cristina Boscolo Berto, Director, Regional Head of Wealth Structuring, Lombard International Assurance .   (Crédit Photo :  Lombard International Assurance)

Families are like a mosaic. Multiple generations alive at the same time, leading international lives, with members working, living and studying in different countries around the globe. They have personal and financial interests spread all over Europe and outside, different lifestyles and inclinations, and do not necessarily share the same social identity.

Traditional families are disappearing and leaving space for families with intricate profiles, characterised by multiple marriages and children from different partners.

Whilst this adds complexity, it also unlocks opportunities, especially for advisors to wealthy families, to manage a broadening range of circumstances in different countries and jurisdictions. Regardless of whether a HNWI is passing down a business, their wealth, or their values, their advisors have an important role to play. Doing this effectively requires a deep understanding of a family’s dynamic, thoughtful consultation about succession planning at an early stage, consideration of how a family wants its wealth to be leveraged for the benefit of society, and the values they want to instil in future generations.

This is especially important when considering the succession of family-owned businesses. Research by Deloitte indicates that only 30% of family businesses are transferred successfully from one generation to the next. This is likely to become further complicated as life expectancy increases and businesses are transferred to the next generation while the testator is still involved. According to recent research by EY and DBS, 70% of wealthy families typically see their wealth diminish by the second generation, and 90% by a third. So, with the world’s wealthiest individuals set to pass down $15.4 trillion to the next generation by 2030, advisors need to identify and navigate the challenges impeding effective succession planning.

On the one hand, advisors will need to assess the family’s dynamics and their possible impacts on the family-owned business. There may be members that are interested in running the family company but may or may not have the right skills to do it successfully. A further complication arises when multiple heirs have different ideas about how the business should be run. Moreover, when the matriarch or patriarch maintains her or his leadership position of a family business, the next generation may become frustrated in the limitations this sets upon their own professional desires and business plans.

On the other hand, there could be cases where the next generation is totally detached from the family business and does not want to assume ownership or play a part in the business, preferring to inherit other assets that are part of the family wealth or even forcing the sale of the business. Of which, could happen in adverse market conditions or generate a loss in value.

Advisors will have to judge which of the varying wealth management tools and solutions that are available in the relevant jurisdictions would be suitable to achieve the goals of a specific family. It could be a trust or a foundation, a family partnership, a holding company, a life insurance contract or a combination of them. Each may entail a different level of control over the wealth and could present a higher value than others inclusive of a need for privacy, transparency or maybe simplification and flexibility.

A plethora of leadership succession planning should be anticipated and planned for. Succession could be hugely disruptive for a family. Family businesses are vulnerable at times of transition in leadership, regardless of company size and location. It is generally a challenge for the next generation to maintain the ingrained family values or existing traditions, and at the same time innovate and reshape the governance of an enterprise. This includes recruiting talented managers outside of the family circle and contemplating the recourse to external equity funding.

The preservation of a family’s legacy deserves - and must demand - the highest level of care. More than anything, this means taking the time to understand the intricate mosaic of needs, goals and ambitions that make up a truly modern family. This has always been complicated, but with the right support from wealth advisors, a family can protect and successfully pass on their legacy. Family wealth requires careful solutions that are sensitive to these dynamics to ensure that both personal and family legacy are preserved for generations to come.