Real estate, alternative real assets and other diversions

Succession planning within family businesses 30% of family firms make it to the second generation, 13% to the third and only 3% to the fourth generation or beyond.

Head Of Research

The matter of succession planning is something that gets a lot of focus from family businesses, and for good reason – it is one of the hardest things for both the business and the family to go through.

To give some context, people often quote statistics that only 30% of family firms make it to the second generation, 13% to the third and only 3% to the fourth generation or beyond. With the construction sector accounting for nearly a fifth of the five million family owned businesses in the UK, getting succession planning right is important to the long term health of the sector. 

However, these statistics miss the bigger picture, which is more positive and best explained through a case study:

Case study: third generation logistics business

The third generation leaders of this company had grown a successful business with eight sites across the country. They had three children, all with successful careers but no involvement in the business. The family decided that that they wanted to stay in business together, but not in the business of their parents. 

The family realised that the company had a substantial real estate portfolio that could generate greater returns than the operating business. They decided to sell the business and focus instead on property investment. A Family Council was established, including the three children, to oversee the management team that had been brought in to run the real estate portfolio.

Taking a narrow view, the operating business did not make it to the fourth generation. But the wider family enterprise continued with a defined role for the fourth generation.

What does succession planning mean?

The term “succession planning” means different things to different people. It generally involves a few things:

  • a financial transaction in terms of who takes on ownership of the family business;
  • determining who takes on leadership of the business and the family;
  • sometimes consideration is given to softer elements of the transition such as the psychological readiness of the people involved.

Often family businesses adopt a transactional approach, which focusses on the operating business, and the financial and legal issues. This leads to a short term mind-set, with succession thought of as a one-off event that seeks to replicate the past, rather than looking ahead to the future.

Succession planning instead should be seen as a process. It doesn’t need to start with a blank page and ignore all the things that have made a family business successful in the past. If succession planning is about writing the next chapter in the story of the family and the business, it is important to understand how the story has unfolded so far, so that the next chapter makes sense. 

What does an effective succession planning process look like?

From experience, there are three things that contribute to an effective process:

  1. Ensuring that the family has a strong foundation of values, vision and purpose is paramount. These form the “glue” that binds the family together. Being clear on what this glue is will help the family stay in business together for generations.
  2. There should be open and continuous communication to give clarity about what people need and want. It’s easy to make assumptions about what your family wants, when in fact they want something different. Approaching the discussions without a predetermined outcome avoids the risk of making incorrect assumptions.
  3. With any process, there should be time for reflection of what is agreed, implementing the plan, and then reviewing the outcomes as part of an ongoing virtuous cycle.

Who starts the discussion?

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