The combination of aging baby boomers and an era of market uncertainty has forced many people to think more about their health and wealth—and what the future could look like for the next generation.
For globally enterprising families in particular, succession planning and family governance have always been an essential part of successful wealth planning. However, escalating political conflicts and the advancing age of heads of households have been a reminder of how fragile life is and the importance of preparing for the future.
“With the current economic landscape, succession planning has been more top of mind,” says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S. “The environment is spawning some interesting conversations around business and estate planning; and the next generation is starting to think more about how it’s all going to work.”
Some common themes O’Leary and her team have been discussing with the next generation include family goals and values around business succession, charitable giving and social responsibility.
For some, the increased availability of responsible investments has reminded them to revisit wealth plans to ensure they meet the current business and family realities for all generations.
“This is a great time to dust off that plan,” O’Leary says. “For founders, it’s likely their wealth has grown, kids are older and their outlook will probably have changed since the last update.”
Increased wealth means more planning
Advisors have long recommended family members with an ownership stake, who may also be involved in the day-to-day management of the business, have a succession plan. This keeps the company moving ahead and helps grow and preserve wealth for future generations. A succession plan can also ensure family harmony because there’s less likelihood of a surprise that could lead to disagreements.
According to research from RBC , in partnership with Campden Wealth, 27 percent of the next generation are expected to assume control of the family enterprise in the next 10 years, and 36 percent are expected to take control in more than 11 years.
The next generation is key to lasting wealth
The research shows the biggest obstacle to succession planning is that next-generation members are often perceived as either inadequately qualified (54 percent) or too young (46 percent) to assume leadership roles. Another barrier is the concern of respondents (29 percent) that family matriarchs or patriarchs are unwilling to cede control.
To smooth things out, O’Leary suggests regular facilitated communication and formal meetings to help families make crucial decisions. This is often referred to as family governance and can be looked at in broad terms using the three-circle model of family business. From the model, developed at Harvard Business School, there are seven groups with their own legitimate perspectives, goals and dynamics. “The long-term success of family business systems depends on the functioning and mutual support of each of these groups,” writes Prof. John A. Davis.
Family meetings should include open-ended questions that explore what wealth means to each family member or pose the question, “What’s important to you?” to the next generation. Some families have attached milestones to succession planning, such as having the kids complete a college education or being actively involved in charitable causes before entering the business.
Tips for starting family conversations around wealth succession
One of the biggest issues around successfully transferring wealth is how prepared the next generation is, says O’Leary. “Are you having the important conversations with everyone involved? Everyone needs to be at the table for wealth discussions to make it beyond the current generation,” she explains.
For those in the next generation, O’Leary suggests broaching the topic in a holistic way: “perhaps you’re working on your own family’s financial planning, and planning for your own children. One way would be to involve the parents by asking for their input.” This allows for a discussion of the full picture of family wealth rather than the more direct approach of simply asking about money.
Families also need to understand the tax implications of selling or transferring the business to the next generation, as well as approvals from a board or other shareholders that may be required.
“We work with the next generation to go through the plan, including all assets inside and outside of the business, and the different factors to consider,” O’Leary says. “It’s where advisors can really add value holistically.”
Business planning versus succession planning
“Business owners may be unprepared to transfer their companies because they don’t fully understand the difference between business planning and succession planning,” says Tony Maiorino, head of RBC Family Office Services.
Business planning is more about the company’s future growth, including its products and services, while succession planning deals more directly with people who will take it over.
“With business planning, a lot of owners are great at it because they’re immersed in it,” Maiorino says. “When it comes to succession planning, they think it’s the same thing, but they’ll often neglect the emotional component. That’s where we get into the tough conversations about who will take over, and when.”
The other part to consider are the two different forms of succession: ownership structure and management structure; both must be accounted for when preparing for succession.
Parents may have a vision of one or more of their kids taking over the business. If some children aren’t involved, the plan will need to consider how to equalize the assets, Maiorino says.
“It’s a big part of what we help with,” he says. “We believe it’s pivotal in keeping family harmony within the family business.”
Dividing assets between siblings
One hypothetical family situation could involve two siblings, Adam and Bryan, who founded a business, each owning 50 percent. Adam has two children and Bryan has one child. Should the ownership transfer 50 percent to Adam’s children (25 percent each), and 50 percent to Bryan’s child? Or, should it be 33 percent to each of the three members of the next generation?
These are all questions to consider, and generally, the larger the family—and the longer the legacy of the family enterprise—the more complex these decisions become, which makes formal communication even more critical.
Succession planning may also include discussing selling the business to a third party and whether to keep the family involved. In many cases, notes Maiorino, business owners will get more for the company if they sell to a third party, but money may not be the only consideration. For some families, it’s the legacy of the business that’s more important.
Families need to discuss their values and priorities for the longer term, Maiorino says. “Really getting a sense of the values and the culture of the business will help us guide them around what that next event might look like,” he says. “It requires having an open and honest dialogue.”
Review the succession plan regularly
Having a succession plan is important, but an outdated plan can be just as problematic as no plan at all.
“It needs to be a living document,” Maiorino says, adding that many clients are reviewing their business and succession plans due to market and supply chain fluctuations. “You want to make sure your plan fits, both from the perspective of a growing business and one that’s in a bit of difficulty.”
The result might be a change in plan or simply leaving everything as is, but having that reassurance is important. O’Leary adds that plans also need to consider other events, such as a divorce in the family that might change dynamics, or a change in tax policy, all of which can impact how plans are structured.
“It gets very complicated, and if you’re not keeping it current … it can get very messy,” she says.
Harmony across families can be maintained by having multigenerational conversations. Maiorino recommends families have an ongoing dialogue to ensure everyone’s needs and considerations are brought to the table.
“What’s most important around a family business and wealth is making sure everyone is aware of decisions being made and why,” he says.
“We often say to parents, before you transfer money, transfer your knowledge. Make sure your values and things that are important to you have been adequately transferred to the next generation,” Maiorino adds. “That’s going to allow for far greater success than just handing over the business.”
RBC Wealth Management is a business segment of Royal Bank of Canada. Please click the “Legal” link at the bottom of this page for further information on the entities that are member companies of RBC Wealth Management. The content in this publication is provided for general information only and is not intended to provide any advice or endorse/recommend the content contained in the publication.
® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © Royal Bank of Canada 2024. All rights reserved.