Short sleeves to short sleeves within 3 generations. This is a common saying that captures the fact that most wealth does not survive beyond the second generation. In fact, 70% of all family business successions fail to transfer wealth successfully to the next generation, and 90% will fail within 3 generations.
A 2003 study by the Williams Group found that “less than 3% of failures are due to professional errors in accounting, legal or financial advisory planning or to estate taxes.” This means that advisors have the skills to help with the technical transition of wealth from one generation to another. What undermines business succession are the softer issues of communication within the family unit, unprepared heirs and a lack of family mission.
The technical aspects of wealth transfer are important and should not be discounted, but legal and tax-planning skills don’t guarantee a successful business succession. Advisors must not only focus on creating documents that have the right wording but also address how a family can manage the assets in the future.
The first step for advisors is to think of the transition as a family succession plan rather than a business succession plan. The estate planner should consider the family’s overall well-being and then determine the most efficient means of transferring the wealth to the next generation. To do so, advisors should expand their definition of a client, revise their definition of capital, and concentrate less on the transaction and more on the relationship with the client.
The main element of successful succession planning is respect for the individual while, at the same time, recognizing the importance of how that individual works with others as part of a cohesive unit. Although more difficult and time-consuming, a consultative approach that incorporates the voices and viewpoints of individuals in the succession plan is more likely to result in success.
Succession planning must move beyond concepts such as the “dead hand control” approach, in which the parent tries to control the next generation’s actions. Once the parents are gone, one or more of the children may feel empowered to disrupt the succession plan. A disgruntled family member can easily destroy the hard work of a generation, despite an expertly prepared succession plan.
Advisors should consider enlisting the help of a professional who deals with the psychological issues of family wealth.
Taking a page from the business world, the family should consensually develop a mission statement. This and other important decisions should be documented in the succession plan. Lastly, the next generation should develop, implement and practice the skills that put the abstract of knowing what needs to done into practice.