The 500 largest family businesses in the world generate USD 7.28 trillion in revenue – taken together, if they were a country, they would make up the world’s third-largest economy1. Whether they are multinationals or SMEs, all family businesses have one thing in common – there will come a time when leadership must be transferred to the next generation, or to third parties.
Actively involving new generations in preparation for a transfer frequently poses a challenge, whether for passing the reins of a business or transferring family wealth following a sale. Discussions about intergenerational wealth transfer can soon highlight family divisions, exposing differing ambitions, hopes and visions of the future.
However, there are proven techniques and good practice that can smooth the path, helping to ensure that family businesses and legacies endure. Marie-Christine Pezold, Independent Family Governance Consultant with Lombard Odier, shares five pieces of advice drawn from her extensive experience. Marie-Christine is an active member of the Family Business Network (FBN) and implemented Lombard Odier’s Family Programme, which she has been developing for nearly a decade.
1. Define the family circle
First and foremost, it is important to define what the “family circle” means in terms of family businesses or intergenerational wealth. In other words, who is and is not within the family circle. This seemingly simple question will be a determining factor in how the family is organised for succession.
The question of who is within the circle can be defined by blood ties alone, for instance, extended to spouses, or certain branches of a family may be specified. Other questions to ask might include: how do we want to manage and control our wealth? How often should we meet? How will we manage potential conflicts?
“Every family has its own particular strengths, values and its specific modus operandi. Our mission is to help them identify, leverage and consolidate them,” says Marie-Christine von Pezold.
2. Clarify the “grey area”
After defining the family circle, it is important to clarify what might be referred to as the “grey area”, namely the family’s wishes and implicit expectations for the future.
All potential ways of working must be evaluated. Should certain members be granted de facto lifetime membership of the family council? Who will make up the next generation? How can a council, with a good balance of membership based on merit and legitimacy, be created? Should decisions be reached through votes by an absolute or a relative majority? According to Marie-Christine, these discussions will be specific to each family and should be put down in writing.
All potential ways of working must be evaluated. Should certain members be granted de facto lifetime membership of the family council? Who will make up the next generation?
Read also: Through the generations: the transfer of family businesses is accelerating
As families clarify what lies in the grey area, at Lombard Odier we can help them ensure their wishes are realised by recording them in a “family chart”. Though this document is not legally binding, it is a way to outline the framework by which the family operates. Elements of this framework can subsequently be included in a legal document, such as a shareholders’ agreement. “Throughout the process, we must act as advisors to the family, working closely with their existing partners, such as lawyers or family office members,” says Marie-Christine von Pezold.
3. Make it meaningful
Marie-Christine von Pezold regularly supports entrepreneurs who want their children to take over the family business, or siblings who have inherited and wish to consolidate their business or family wealth. At this point, she says, “It is important to reflect on the family heritage and the mission of the founder.”
The incumbent generation – ie those currently in charge of a family business or family wealth – would be well advised to involve the next generation in decision-making and ensure they are fully aware of all relevant aspects in order to facilitate the transition and make it meaningful.
Current custodians of family businesses or wealth often consider themselves stewards rather than owners, with their role being to preserve and grow the wealth, and prepare it for passing on through the generations. However, as an article published by the University of Oxford noted:
“The absence of a plan to inform the next generation of the assets they currently own or will inherit is surprisingly common. Considering oneself a steward presumes the eventual readiness of the next generation to inherit and serve as stewards themselves. This is difficult to-impossible when next generation members do not know what they are stewarding. Future inheritors must be fluent in upcoming forms of ownership and what these forms enable and constrain2.
When there is a transfer, it is fundamental to make narrative sense of the figures, in order to build a feeling of belonging and responsibility towards family wealth
It is just as important to define the values, meaning and legacy of family wealth as it is with family businesses, Marie-Christine says. “When there is a transfer, it is crucial to make narrative sense of the figures, in order to build a feeling of belonging and responsibility towards family wealth.”
4. Pass on good ideas
However, merely explaining what the wealth or business entails is not sufficient. It is not only a matter of transmitting information to the next generation, but also of encouraging their active involvement. This can be through business management projects such as pilot projects, internships or observation missions. In family businesses, innovative projects linked to digital technology or sustainability are often initiated by younger generations and can add to the family’s collective expertise.
“These new ideas frequently benefit businesses considerably because they allow new risks and opportunities to be identified, and therefore potentially new markets too. The new generations feel that they have a role to play and get even more involved,” Marie-Christine von Pezold says.
See also: How to successfully transfer family wealth to the next generation – without conflict
5. Preparing the next generation to take up the baton
In an ever more complex economic environment, it is essential to give the incoming generation a solid grounding, both in terms of technical and university training, and also in the internal workings of the business or wealth management. This can be achieved by initiating a family-wide dialogue that creates a sense of belonging and a common purpose.
Thirty to thirty-five years-old is generally considered a good age for the next generation to become actively involved
If the next generation makes their entrance too early, they run the risk of feeling undeserving or of being denied responsibility and being constrained. It is also important not to wait too long, as this creates a risk that members of the next generation will forge careers in different fields and lose interest in the family business.
Thirty to thirty-five years-old is generally considered a good age for the next generation to become actively involved. By then they have the maturity and enthusiasm to play their own part in the business and contribute new skills and expertise.
Speaking of Lombard Odier’s Family Programme, which she founded nearly a decade ago and continues to develop, Marie-Christine von Pezold concludes, “After close to ten years, I observe that the Family Programme is merely the start of the journey! The programme makes it possible to pinpoint the priorities families should focus on and to establish a sound family strategy, and then support the families with all their projects, generation after generation.”
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