You have spent a lifetime building up a business but your children or grandchildren are not interested in taking it over. What are your options? Do you put a professional management team in place? Do you sell? How do you ensure that the proceeds will benefit family members?
It is estimated that in the US alone over the next few decades, the baby boomer generation will pass down USD 30 trillion in assets to their children and grandchildren. But how many of those children are ready to receive this? And how can one avoid the infamous problem of ‘from shirtsleeves to shirtsleeves in three generations’?
To sell or not to sell?
Often the first question facing many business owners is whether their business should remain family owned after their lifetime. Although important, other considerations are of greater priority. For example, if there are doubts that the next generation will be able to operate a single business, are they really going to find it easier if the business is sold and they are left to manage a much more heavily diversified and largely liquid investment portfolio?
A good starting point is to consider the strengths of one’s family members. How will decisions be made once the parents are no longer there to provide a guiding hand?
One for all and all of one?
There are obvious advantages to a family investing collectively, including better bargaining power, greater potential for asset diversification and increased interaction between family members. A single structure can bring a family together and allow each member to flourish within a particular role.
Two key issues need to be addressed:
- Distribution policy – The easiest way to destroy a business is to drain it of investment. Who can decide what profits should be re-invested and what can be distributed to meet family expenditure?More specifically, can family beneficiaries make demands for income or cash out their stake? Collective investment can be difficult to achieve if a family member can decide to go their own way at any time. However, the strongest family units work when everyone wants to be a part of the business and recognises the collective advantage. Family funds are an increasingly common vehicle to provide family members with defined rights to income and to exit on terms that can be defined by the founder, and tailored to the particular circumstances. There are numerous ways for family funds to be structured, from simple limited companies to fully regulated funds. This will largely be driven by the jurisdictions of the family members involved and professional guidance is always recommended to find the best solution.
- Investment control – Who will actually run the business? Typically, these decisions are kept separate from decisions on distributions. Here, professional involvement is likely to be key – but who will ultimately wield control?
Keeping it in the family?
There is no right or wrong answer as to how family and independent professionals should interact in the governance of a structure. Long term, both must have role.
In some cases, the lead family member establishes a council during their lifetime. They probably sit on the council initially, in the run-up to retirement, but eventually step down (while retaining a supervisory role via an ability to remove council members if things are not working out as hoped). After their lifetime, a balanced council is created reflecting all family branches and also with representation by independent professionals. Depending on the set-up, the independent professionals can be out voted by the family only if they act unanimously.
Nothing too taxing
Inevitably, any structure will also be determined by tax efficiency. If family members move jurisdictions, this can have a significant impact on the structure. Rules on taxation and disclosure of wealth vary dramatically between jurisdictions. While this will likely be a consideration when setting up a structure, it should not be a factor in the principal decisions. Tax rules will change constantly and families may move jurisdictions. An ownership structure must be flexible enough to adapt for that.
Putting your money in trust, not your trust in money
Often, trusts or similar succession planning vehicles -depending on your jurisdiction - also have a role to play in family affairs. A strong, professional trustee can act as an experienced arbitrator, interpreting the needs of the family alongside the wishes of the founder. Ultimately, they not only help to secure family wealth long into the future, but more importantly facilitate healthy family relationships.
About the author
Nicholas Pell is a Partner at Rhone Trustees (Switzerland) SA. Based in Geneva, the firm offers trust and corporate services, and is part of Julius Baer’s open product and service platform.
What matters to you?
Life, business, investments, aspirations - what matters to you matters to us. This article is part of our ’What matters to you?’ series, in which we have a close look at what lies close to your heart and how wealth planning may help you to achieve your objectives.