In succession planning, financial details are often the easy part

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When it comes to succession planning for the family business, the old adage “fail to prepare, prepare to fail” is worth remembering. Without thorough groundwork, all kinds of problems can crop up, from brand damage to an inaccurate valuation of the company to a family member upset enough to go to court.

It’s no wonder that business-studies departments at universities devote entire courses to the subject, said Kevin Algar, chief executive officer of Algar Virtue Family CFO, a multi-family office based in Calgary and Victoria.

It fact, succession planning should begin early on in a client’s relationship with his or her family office.

“In our world it’s not a difficult subject to broach,” said Tom McCullough, chairman and CEO of Toronto-based Northwood Family Office and co-author of Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask.

“We’re advisors to families – it’s a little bit like a medical. You’re coming in to get everything checked. We really go through all aspects of their lives,” he said.

“We’ll talk about the business and what the game plan is. What do you want for your kids? How important is it for you that they follow in your footsteps? And how prepared are they?”

Before succession planning can be carried out, family members should establish a family charter, which is a mapping of the family’s mission or vision, Algar said. The charter sets out how communication and decision-making are done, and why.

“It’s critical that there’s agreement and buy-in to what’s going on” before succession can be contemplated, he said.

The human factor

Neil Hershcovitch, head of investments at Toronto-based BMO Family Office, said succession planning covers what he sees as the four pillars of capital: financial, intellectual, social and human.

“Often most of the resources are put against financial,” he said. “People are used to raising it, and it’s easier to talk about.

“But in fact, the biggest risk with succession, whether it’s the business or the family stewarding wealth, can often be posed within the other three pillars, which are more qualitative.” Among the factors here are family governance, mentoring, the assignment of rights and responsibilities, the company’s social brand – philanthropic and community leadership – and, on the human side, the relationships and values that, together with everything else, bind a family together.

People are always worried that their kids are going to turn out badly because of money.

Tom McCullough, Northwood Family Office

These factors “are very challenging to navigate because they’re not quantifiable a lot of the time,” he said. “They take a longer amount of time to lay out and become comfortable with.”

Family offices should also help clients consider interests outside the family and outside the business, he said. This can help prepare them for leadership roles and bring in new strengths across all four pillars.

“Should, for example, people go and explore the world first and then come back in with additional perspectives? All that to say there’s a lot of focus on governance, on building the right framework, to allow these conversations to happen.”

The process really matters

It can be tempting for clients to focus simply on the outcome, said Hershcovitch, but the process matters just as much, representing almost 80 percent “of the road you have to build first before getting to the outcome. And that’s where we see potential obstacles or challenges, where that process isn’t defined.”

The recognition that families and family dynamics can change is another vital part of a succession plan, making it in many ways a living, breathing document, he said. While such a document “lays out in black and white who is doing what and what their role is, it’s important that it continues to evolve. Just because you document it at the outset doesn’t mean that it’s written in stone.”

McCullough said, “You can set out a succession plan when you’re 40, and it’s for your child to take over the business. But if, for example, they’re not interested, then you have to have contingencies and continue to update.”

The stakeholders that begin the succession journey with a client family may not necessarily be the same when that journey comes to an end. Second or third marriages can occur, families become blended, and unexpected or unforeseen events happen.

“As you fold in more members and stakeholders,” said Hershcovitch, “the number of people you’re dealing with becomes greater and so too the complexity, and therefore the need to continue documenting that complexity. So it should be going back to revisit, but not starting from scratch. It’s really building all the layers as you go.”

Prep of the next generation

Succession is not just about passing on a business to another generation, said McCullough. “It’s also about passing on wealth and leadership in the family, whatever that means to the family.”

Preparation of the next generation is a big part of that, he said, whether it be preparation for leadership or preparation to be an heir.

“People are always worried that their kids are going to turn out badly because of money,” he added, “so one of the ways you [avoid] that is prepare them through shared experience, education, mentoring and leadership opportunities.”

Among families that have orchestrated successful transitions, experts say, good communication has been a key factor.

Disputes can and do arise, said McCullough. “We are all human beings and don’t have the exact same view. So honest and regular communication is one of the best ways to resolve disputes, and that’s often why families will have family meetings. They lay things on the table, and if somebody has a concern, there’s a forum in which to raise it.”

This kind of communication is what allows families to discuss differences and deal with the non-tangibles, such as intra-familial relationships, philanthropic interests and family values.

After all, said Hershcovitch, “when you think about successful stewardship of wealth across multiple generations – which is really what family offices are designed to help with – the emotional atmosphere and the family dynamics often pose the highest risk.”