Succession: The multiple considerations of holistic planning

Some topics are always current, succession and transition being among them. Thanks to this week’s author, Glenn Murray, for addressing the topic from a holistic approach. This is one of those articles that can be helpful to clients who are beginning succession/transition conversations.

Yours in Practice,

The Practitioner


Family businesses face a lost opportunity for successful transition if they view succession, as it is often characterized, as an event rather than a process. Planning that primarily focuses on technical and legal issues at the expense of personal and family dynamics can be problematic. Through the introduction of an integrated, holistic process, a family can be better positioned for a successful transition of the business and the personal fulfillment of the current generation in the next stages of life.

Holistic planning
A holistic planning approach focuses on the technical and personal dynamics within succession. It deals with the issues associated with the current generation, the rising generation, management and ownership, while developing an understanding of the key participants’ roles, skills, goals, and the multiple factors influencing them.

Succession planning typically focuses initially on the current generation and considers strategic tax issues, appropriate legal structures, along with personal finances and estate planning. Too little attention is paid to the current generation’s need to determine what life will look like after leaving the business. This is a critical component of a successful succession plan. Leaving the business will often create a void which, if left unfulfilled, can result in the current generation not being able to separate its personal identity from the business. Any plan is incomplete without a clear understanding of how the current generation will maximize skill sets and time to generate a sense of fulfillment outside the business.

To enhance the ability to separate, current generations need to create a clear cash flow plan that meets their objectives and has limited reliance on the continuing success of the business. If there is too much reliance on the business performance to support their lifestyle, this cash flow reliance will inhibit the next generation, or new management, from the freedom needed to move the business forward.

No predetermined outcome
A predefined outcome should not exist for a succession plan to be effective. For example, the best transition for the business is not always a family transition. However, if a family transition is the desired outcome, then focus must be placed on the rising generation. Often the current generation has already decided who will run the business, but engaging the rising generation in the process must provide an opportunity for these individuals to be released from any obligation to work in the business.

Conversely, business participation and ownership for the rising generation should not be viewed as an entitlement, i.e., a clear plan for building skills and expertise should be a part of the strategy if the rising generation is to take over the family company.

Growing up in the shadow of successful parents or relatives can create both personal and professional issues. For the successors to build confidence and ease transition, it is often helpful for them to gain experience through outside employment prior to joining the family business. Further to this, they should receive mentoring, although not typically from the parent, to ensure the transition of knowledge and key business relationships. The more confidence family successors can gain in an outside environment, the greater the potential for a successful transition.

With no predefined outcome, the process has the freedom to move towards a viable succession.

Management team
The management team surrounding the successor is important to the outcome. For this reason, a clear knowledge of the management team’s expectations, skills and motivations must be understood and integrated into the strategy. Plans can be derailed by unrecognized expectations or motives of non-family employees. However, with the right team in place, the platform for success is enhanced. Ultimately, it may be determined that employees or management with complementary skills to the successor should be hired to support him or her.

Other considerations for the rising generation
The current generation’s financial affairs are often the primary focus of the planning, while the finances of the rising generation maybe overlooked. This approach can be a mistake, especially if the business has significant value. The plan must also include a focus on the personal financial situation and needs of the next generation, to ensure that it is equipped to deal with the financial and management aspects of ownership.

While a technical succession plan should effectively transfer ownership legally, it may fall short of properly preparing the family for the full impact of the transition. To this end, the development of a governance structure within the family will provide a platform for communication and conflict resolution, particularly where ownership extends beyond those working within the business. The family governance structure may create a family vision to provide a common purpose and direction, a code of conduct to define expectations, and a family council to support the vision and the individual interests.

Achieving a successful transition takes time and energy and one professional cannot accomplish a holistic plan. Rather, it requires the expertise of a team of professionals in disciplines such as wealth management, financial and estate, legal and business succession that also understands and can focus on the complex family dynamics.

About the contributor

Glenn Murray, CFBA, CFWA is president and CIO of Capstone Asset Management in Langley, Canada. He can be reached at [email protected].