As the entrepreneurial baby boomers progress towards retirement, the issue of succession is only going to become more prevalent.
There are some major risks for family wealth if the succession process is not carefully managed. Family dynamics often pose the greatest risk to the process of preserving family wealth for future generations. Disagreements among family members can cause the hard-earned wealth to be split up.
If you look at dividing the wealth of a family it is sometimes not in the best interests of the family as a unit, because the founders may have worked for many decades to build up this level of wealth and dividing it may affect the inherent value of a family business.
In order to build on that wealth, to provide that nest egg and keep nurturing it for future generations, it is often more beneficial to keep that wealth together.
It is of course much easier to grow a large pot of funds than several small pots – the large pot allows for diversification, investment into a range of opportunities or asset classes, and the ability to access larger investment opportunities that may offer better returns.
Common areas of conflict among family members include:
• Not treating the next generation equally.
• A founder who wants to exercise a high degree of control over the financial freedom of the children.
• Spouses working in the trading business and/or involved in the family office.
• Marriage break-down.
• Poor communication among family members.
• Salary and wages issues – disagreements over remuneration for family members working in the business versus those not working in the business.
• Distributions – capital and income.
In my view, a family concerned about passing on their wealth to future generations should undergo a process first of all to work out what are the shared values of the family members, and what common ground is there for the family to work together.
This allows for a set of rules to be put in place governing how the family will work together and how the assets will be managed.
The best way to facilitate this process is to use an external adviser. This has the benefit of allowing each family member to have their say in a confidential environment.
As an independent third party, the adviser then tables the issues, helping to reduce the emotion in the process.
An experienced adviser will also be able to provide examples and case studies of how they have assisted others (no names of course!), which can help families to navigate through any difficult sticking points.
Typically an adviser will assist to establish the following:
• A Family Constitution, which forms the basis of making family decisions and operates to keep the family issues out of the Family Office or family business boardroom.
• A Family Office, which is concerned with asset allocation strategy, investment strategy, reporting, debt policy and other pertinent decision-making in relation to the wealth of the family.
The key reason any wealthy family would start a Family Office is to invest the cash generated from a ‘liquidity event’, such as the sale of a family business, the result of a significant inheritance and/or cash flows which have built up over time from a trading business.
The wealth of the family is managed through the Family Office, which would normally be run separately from any ongoing trading business.
Often, however, families do not put such a plan in place to deal with the conflicting needs of the family as they arise.
Ultimately, the primary, but understandably sensitive purpose of the family going through this advisory process, is to pass on the family wealth and/or business to the next generation while the patriarch or matriarch is still alive.
It is wise to address this within the lifetime of the founder in order to avoid family conflict after their death, and the possible resultant splitting of the family wealth.
If you reflect on how tough it was to build the family wealth in the first instance – then surely it’s worth the effort to keep it together to benefit the next generation!
Kate Hill is a partner at Deloitte Private, Western Sydney. Contact her at 02 9840 7049 or email khill@deloitte.com.au
