Incorporate Family Dynamics Into Succession Planning

Advisors often consider assets in terms of what can be placed on a balance sheet, but to better ensure a successful transition, they need to revise this view to include human assets. Successful succession planning will incorporate other assets such as the emotional and social character, stability and strengths of family members.

In succession planning, the advisor’s role ranges between that of a pure problem solver and a consultant. He or she has information that the client doesn’t have and addresses a client’s problems. Additionally, the advisor can be seen as a counselor, directing the client’s issues to a workable solution.

Clients would be best served by advisors who adopt both approaches and ask the question, “What do you want as your legacy?” The client may reveal important information, such as the desire to leave a legacy (in addition to wealth) that supports the positive character of children or the client’s charitable involvement.

Advisors are accustomed to developing and reviewing business plans, but they aren’t as familiar with family governance plans. Just as businesses and other entities develop plans, families need a plan for governing themselves. They should meet regularly to discuss the business of the family. They should also consider supplementing the mission statement with a family vision and family values. Together, these 3 elements would be used to determine and test proposed courses of action.

The family can make decisions by vote or by consensus. Reaching consensus is preferable because, although voting can be easier, it often leads to future conflicts if family members feel they haven’t been heard.

The path to family business leadership must be clearly marked with educational and experiential requirements. To reduce conflicts, the family governance plan must account for members who enter the family business later. This can eliminate the subjectivity of the parent choosing the “fair-haired” child to assume the business leadership role, even if he or she is unsuitable for the position. In addition, the creation of objective hiring guidelines, in conjunction with education, experience and skills, further ensures the continuation of the family business.

One definition of a successful transfer of wealth is that it remains in the control of the designated beneficiaries. This definition may include the sale of the business to individuals outside of the family. Although this may be satisfactory for many assets, it is inconsistent with the goal of maintaining the family business. When developing a succession plan where the objective is to retain the family business and family harmony, the advisor should consider that some family members will want to retain the business and others will want wealth in another form, and they must be satisfied with other assets.

Advisors can improve the likelihood of successfully transferring family wealth beyond the second generation by considering the family’s dynamics, expanding the definitions of client and capital, and taking a balanced problem-solver/counselor role with their clients.