Continuity Planning for Family-Owned Businesses

Abstract

The overriding objective of any business family when undertaking succession planning is to ensure the smooth transition of wealth from one generation to the next, while maintaining family harmony and ensuring that the business survives the transition unscathed. The traditional approach of business succession and wealth transition planning, which focusses on a one time transactional process of transferring financial assets from one generation to the next in a tax efficient manner, often gets the timing and order of work wrong. Continuity planning is a long term, multidisciplinary process which starts with the human elements of the family. Researchers have identified the following four main causes of wealth transfer failures: 1. Lack of family mission and vision: 10%; 2. Breakdown of trust and communication within the family: 60%; 3. Failure to prepare heirs for roles and responsibilities: 25%; and 4. Professional errors in accounting, legal or financial advisory planning: less than 5%. Of note, less than 5% of succession plans that failed, failed due to professional negligence. Commonly implemented succession and wealth transition structures, which are primarily put in place to minimize or defer taxes and manage risk, result in a failed succession plan, not because of the structures themselves, but in spite of them. The technical skills of wealth transfer are certainly important and should in no way be diminished. That said, proficient legal and tax planning does not ensure a successful transition of wealth. Traditional succession planning only prepares the assets for the family. Continuity planning prepares the family for the assets. What follows is an overview of: 1. The nature of family business; 2. The main theoretical concepts of family business; 3. The unique importance of succession for family business; 4. The concept of transgenerational wealth; and 5. Continuity planning, its process and management.