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The founder’s dilemma

16 October 2019

Family businesses can hit choppy waters in times of succession. Careful planning is the key to a smooth transition, says Bilal Zein.

For two thousand years the parable of the Prodigal Son has resonated beyond its religious context for one simple reason: families everywhere recognise the dilemma.

Younger brother squanders his fortune while the eldest son stays at home toiling in the family business. Prodigal returns home to a hero’s welcome, whereupon his stoic sibling is expected to offer up half of his own hard-earned share.

This eternal story of a sibling feeling hard done by because of parental treatment and inheritance is played out relentlessly, on a global scale. Real or perceived inequality between relatives is a perpetual cause of tension in families, regardless of wealth.

The most difficult succession dilemmas can stem from complex family histories

Down the years there have been many reasons for this tension. Unequal inheritance based on gender and birth order appeared centuries ago as a way to secure a long-lasting family legacy. Medieval monarchs turned to male primogeniture to prevent kingdoms being broken up after they died.

Passing the baton

Today’s more common equivalent, however, is the family business. Specifically, the founder’s dilemma of knowing when – and how – to pass on the baton. The longer succession planning is delayed, the more difficult it becomes.

And this is where the single family office (SFO) comes in. The exact involvement of an SFO varies widely depending on circumstances. Some, for example, are involved purely in asset management.

Others that have a wider mandate to manage a family’s wealth, including governance, will be closely involved in succession and should be equipped with the right skills and sensitivity.

The longer succession planning is delayed, the more difficult it becomes

There are tough questions to address, such as how best to steer the family through planning and implementing transition while protecting cohesion and long-term interests. On a more fundamental level, how should the issue of dividing up the business be approached?

A child who has devoted their career to the company may be expected to receive a greater reward at inheritance. But in practice, parents often decide to split their business and other wealth equally.

Complex histories

If the founder is alive, the SFO can ask for guidance on their wishes. They should then assess how practical the plan is, refine it and develop a back-up in case it fails. If, on the other hand, the founder has passed away, the SFO may have a more active role and need to identify pressure points. Where, they must establish, does the power now lie?

Some of the most difficult succession dilemmas stem from complex family histories. One prominent Middle Eastern family business, established under a traditional patriarch, handed leadership to the oldest male in each generation.

Family members were paid no salaries, only dividends. This led to problems after the second generation, when fewer relatives displayed interest in joining the business because they could receive just as much income by staying outside and relying on dividends.

Eventually the third-generation leader decided to address the dilemma and – after discussions with his son and independent advisers – bought out the family shareholders. Yet the strains caused by a failure to align pay policies fairly with contribution to the business had almost led to the dynasty’s collapse.

Equal opportunities

To prepare for a smooth transition, it is important to offer children equal education and opportunities. Strong role models and mentors within and outside the family can help the children develop.

An effective SFO has enough distance to offer objective guidance, ensuring a governance model is in place

An effective SFO has enough distance to offer objective guidance to individuals and blocks of family interests, ensuring a governance model is in place.

To preserve the office’s objectivity and avoid becoming too enmeshed in the family’s emotional relationships, it usually makes sense to outsource design of the model to independent advisers.

Succession is not a moment, but the culmination of a careful process. The family office will prove its true value by ensuring it is prepared, flexible and ready to act promptly.

Bilal Zein runs a Single Family Office based in London, which he established in 2001.

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