Finding the right balance between business objectives and family priorities is always a challenge, especially for small to medium sized enterprises in Scotland, of which almost half are family run. And according to PWC, just 30 per cent of family businesses survive into a second generation.
The family business sector is vital to Scotland’s economy and according to the Institute for Family Business Research Foundation there are 293,973 family-run SMEs in Scotland. This makes up over 90 per cent of all privately run Scottish firms. Careful transition planning will ensure these businesses are successfully passed on and continue to contribute to the Scottish economy.
Setting out a long term financial strategy and measurable business goals for succession planning is a start. Family SMEs should also consider the range of activities their office needs; tax services, charitable giving, wealth protection, financial planning and record keeping. In fact, tax is the third biggest challenge to family run businesses after market competition and regulation. Getting the fundamentals in line before passing on the business will give it the best start.
Among the many unique family challenges is ensuring that the next generation are prepared and understand the ‘custodian’ role they are taking on. They will be expected to protect and grow the business and wealth for future generations. Some might not be quite ready for the role at present and may need training and support before taking over.
Learning to manage substantial wealth and business assets isn’t necessarily something that is easily passed down the generations, although some private banks offer wealth training programmes to help with this. There are also governance programmes available to help family members navigate through the complex, and sometimes emotional, environment of family run enterprises.
One thing that many family SMEs may not consider is how personal affairs may impact the business. Three quarters of millennials now believe that living together before marriage or civil partnership is a good thing and the trend for this is growing amongst the next generation. Taking over a family business will have an impact on how this generation manages their personal affairs. Plans need to be made where, for example a living together agreement may be necessary to protect family assets connected to a business. Equally, for those planning marriage, a pre-nuptial agreement could be just as important.
Passing on the business to the next generation is not always straightforward for parents. Sibling equality can be an issue, especially if assets or wealth are passed down to one child and this can often be the case in order to keep the estate or business interests together. There could also be limited assets to equalise the position, a typical conundrum in farming families. However, those who are lucky enough to inherit the family business are keen to make their mark.
The PWC survey on the next generation of family business leaders showed that almost 90 per cent of next generation managers want to make their stamp on the business. Alongside this, 80 per cent are already attending directors’ meetings long before they have a seat on the board. Taking care not to pressure the next generation to ‘do as I have done’ may be advisable, future business owners should be introduced to the business advisory circle early to get them used to how this works.
Encouraging the next generation to spend some time in the family business and gain some valuable experience working elsewhere can give the next generation the ‘best of both worlds’. They’ll then be in a much better position to understand business dynamics and make their mark with skills specific to the enterprise or estate.
Family business succession is a process that can take many years and should be prioritised well in advance in order to have the best chance of preserving the health and longevity of a family estate or enterprise. With family SMEs generating over £500 billion gross added value contribution to UK GDP and employing over 12.2 million people in Britain, helping more of them to survive through the generations is vital.
Carole Tomlinson is a partner at Anderson Strathern and specialist in succession planning for family run businesses