How to find and prepare the right successor in the next generation for your Family Business

How to find and prepare the right successor in the next generation for your Family Business

How do you find and prepare the right successor in the next generation for your Family Business? You choose a successor leader of the family who has earned the trust and respect of the other family members.

Why do Family Businesses fail from one generation to the next?

At my first family office meeting with the P. Family, I asked them what they thought were the main reasons for a business family to fail from one generation to the next? I explained that the two most common reasons are: lack of communication and unprepared heirs.  

Lack of Communication

Mrs. P. and the adult children agreed that better communication was a top family priority. Mr. P., a renowned speaker and writer, was taken aback by this revelation, and was determined to address it. I then recommended that the family have a weekly meeting on Zoom from wherever they were located at the agreed-upon time of Wednesday’s at 12:00 noon. The weekly agenda would have two topics: the family and the business.

The next day Mrs. P. wrote to me with many thanks for creating a framework for the family to have better communication.

Sometimes the simplest suggestion can resonate and have the most lasting impact.

Unprepared Successor and Heirs

At the second meeting of the P. Family, we considered the issue of how to prepare the successor and the heirs. For a family to preserve its wealth it must, like any business enterprise, create wealth, particularly in the form of the family’s human and intellectual capital, while exercising excellence in its stewardship of the financial capital.

We discussed how human capital can be enhanced through the following practices: 

  • Dignity of Meaningful Work: this is important for an individual’s sense of self-worth; and the family can assist each family member in finding the work that most enhances that person’s pursuit of happiness. All such work is of equal value to the family and to the growth or the family’s human capital, regardless of its financial reward.
  • Highest Educational Standard: such a goal ensures that every family member understands, at the highest educational standard possible for that individual, the workings of the family governance system and his/her role in it.
  • Without intellectual capital and with all the money in the world, undereducated family members will not make enough good decisions over a long period of time to outnumber their bad decisions.  There is a need to provide a forum and support for educating family members in their own personal development, but also to be responsible owners of family assets and possibly the family enterprise. Intellectual skills are necessary, such as how to read a balance sheet, understand key elements of the legal structure and relevant agreements governing the family assets and family enterprise, how to be an effective board member, and how to ask the right questions of executives running the enterprise.

What makes a succesfull business family?

We also discussed the characteristics of successful business families:

  • Meaningful connection to each other;
  • Meaningful connection to the business;
  • Functioning governance structure;
  • Trusted and respected family leader; and
  • Appropriate engagement with family, shareholders and business.  

As the meetings with the P. Family continued, it became clear that Mr. P. was handing over more and more responsibility to his daughter, M., to run the family business, as his health was deteriorating.  Unfortunately, this was a case of a father’s unconditional love blinding him to his daughter’s lack of education, inadequate preparation and incompetence.  As M. took over more of the business, she terminated the senior advisors that Mr. P. had hired in favour of her own peers, whom she could control.

In her pursuit of the wrong God in furtherance of ambition, without the counterbalance of prioritizing the management of threats and the protection of assets, M. put the family’s business and legacy at risk.

Eventually, the family business failed.  

Fortunately, Mr. P. had set aside surplus investments which now provided the family with the wherewithal to persevere without the family business.

Lessons to take away: 

  • sometimes the simplest solution, such as a weekly family Zoom meeting, can resonate and have lasting impact; 
  • choose a successor leader of the family who has earned the trust and respect of the other family members; and
  • a critical issue for families to consider is the extent to which members of the younger generation are meant to be owners of assets or custodians/stewards of assets for future generations.  In the P. Family, M. styled herself the owner and not the custodian/steward, which proved to be the undoing of the family business.

 

As a tax lawyer at Gardiner Roberts LLP and a partner in the complementary family office of Omega WealthGuard Inc., I have helped successful families remove obstacles to preserving wealth and harmony.  I work with the family to identify how to leave a legacy and preserve values for succeeding generations.  With my background in law, I start with asset protection, tax and estate planning.  However, over the years these services have expanded to include leadership development, strategic planning, organizational development, effective decision making, governance structures, family dynamics, business savvy, experiential education, coaching and so on.

Gardiner Roberts LLP & Omega WealthGuard Family Office
+1-416 6251 832
https://www.omegawealthguard.com
lsaltman@omegawealthguard.com

Lorne Saltman

Lorne Saltman

Gardiner Roberts
Professionalising Family Business

Professionalising Family Business

Appointing non-family board members to the Family Business

Sha is the third-generation director of a mid-sized and progressive medical company. His grandfather started the organisation on a very small scale in a small town in UP. The Board of the organisation consists of his uncle (father’s younger brother, cousins (father’s elder brothers’ son and himself) – all family members. Most of the key positions in the organisation are also managed by themselves. Over the years, they have grown to be a known brand with a large presence in Central & North India. During Covid and post covid period, this organisation has achieved notable business growth, especially in nutraceutical products and in modern marketing outlets.

While discussing about engaging consulting organisations to support this growth, Sha has brought in the idea of appointing a non-family expert to the Board as an independent member, which was rejected immediately. Rest of the family members did not find any reason to bring in a non-family member to the Board.

What’s preventing most non-listed family businesses from appointing an independent and non-family member to their Board?

While reasons vary, the last few years of working with Family and Family Managed businesses of various sizes and industry has provided us with few insights into the how, why, and what – to enable you to appoint an independent board member.

Establish a meaningful purpose

For a traditional family business sharing their space and secrets is a big move. Whoever is proposing this idea to the Board (family member / family business facilitator), must establish and communicate the purpose of the proposal.  For example, in the above case, to bring in strategic input on nutraceuticals.

Create consensus

Creating consensus among the board members on the requirement of an independent director is paramount. All board members should be able to accept the idea of having a non-family member sitting on the Board. They should also understand that this person will be a neutral person who will take decisions based on his/her experience or subject-matter expertise and data. For him/her organization is the objective not the individual. The objective of appointment should not be to side-line or silence another member of the board.

Remove the fear of insignificance

Most of the time, family members object to the appointment of a non-family member to the Board due to the fear of being seen (sometimes being felt) as insignificant on the Board.  Fear of being marginalized and side-lined by the rest of the directors along with the external person will lead to future issues in family and business.  Family Board members should collectively discuss about it.

In some cases, we have advised, in the initial days, that the family board members meet separately to discuss topics before they discuss the same in full board meetings to avoid conflict in the presence of an external person.

Objective assessment leading to fair / neutral decision

An independent BOD applies an objective angle while making decisions; they have nothing to lose, and their main role is being responsible for stakeholders and shareholders equally. Therefore, they are unbiased and will make decisions that are beneficial to the ultimate users /clientele. This is also a great advantage when succession planning needs to be put in place, as conflict of interests is a key issue in appointing a successor. Many a times promising candidates are overlooked during succession planning because of bias / prejudice / lack of perspective etc.

An organic change is essential

As the business grows along with time, people, technology and demands, so too a board needs new eyes that help keep pace with this dynamic turn. Challenges and complexities have to be met with and in order to sustain and develop the business even further, a change in the BOD is also essential. Independent directors are an asset during such times.

Areas beyond current capability

Once the consensus is created, members need to identify the area of appointing an independent director. BOD should look for areas beyond the capabilities of the current directors; in some cases, they look for futuristic areas.  However, the Board must ensure all members have a similar thought process.

Identifying an expert who has exposure in the family owned and managed business, especially for the first time, is crucial. An independent director with similar industry knowledge will help and find it   easy to align with the thoughts of family directors faster. In many cases, totally radical or different ideas are not accepted well and then the director will feel out of place and becomes non-value adding.

An independent board member with exposure to family owned and family managed business environments will bring in a lot of value and acceptance from the rest of the BOD.

Set right expectations

An appointment with clarity will lead to clear expectations. Board members should have clear expectations from the external members. It is imperative that this is shared during the initial process.  Most of the initial dialogs should be about the role of the independent director.  All family board members must participate in these meetings.

Communicate

Design and communicate the job description, period, and frequency of meeting, point of contact etc. The chairman of the board should intimate the appointment of the independent board member to the rest of the family members / family board/ family council etc. Key executive leadership of organisation also should be briefed about the appointment

Appointing an independent non family member on board is the sign of progressive family owned and managed business. They will bring in fresh perspective to the board and help them to take well informed decisions. An independent board member also brings in an effective governance system to the family board thus can make the entire organization to be professional and progressive. So, move out of the fear zone and embrace progression. 

To understand more about how to professionalise your Family Business, visit our website (www.gatewaysglobal.com), and take a look at the article in the link below for our unique 5C Approach to Family Business Management to support your business empowerment.  For more information on our 5C Approach please click here.

family business

M.R. Rajesh Kumar

GateWaysGlobal
Family business succession through an Austrian perspective

Family business succession through an Austrian perspective

Family business succession – We all know the topic from numerous books, movies and TV series. Thomas Mann’s “Buddenbrooks”, HBO’s “Succession” or books about real business families such as the Krupps or Henkel – the rise and sometimes also the fall of these families, their companies and the personal fates associated with them fascinate and move a large number of people.

The Importance of Family businesses

Whereas some publications just serve the peoples sensationalism (Thomas Mann excluded) the real part of the fascination with family businesses lies in the fact that they are actually an essential part of many people’s lives. Family businesses are part of families. Around 1.9 million people in Austria are employed in family businesses. The owner family usually has a decisive influence on both social and political issues in the region in which it operates.

Numerous charitable projects are initiated and supported by family businesses. Family businesses assume responsibility far beyond their companies, for the families of their employees and for the region, and thus represent an important backbone of the Austrian economy.

It must be acknowledged that family businesses are such attractive employers and business partners precisely because the owner family represents a stable constant with handshake quality that is also willing to assume responsibility and which actions are strongly based on values.

The successful handover

In the coming years, more family owned companies will be handed over than ever before. Also, the fact that Austria currently does not levy gift or inheritance tax encourages the transfer of family assets.

Austria provides for several corporate options to structure family businesses. Depending on size and owner family partnerships, companies with limited liability or even private foundations may be a suitable solution. Such corporate structures may be supported by a family-charta or family boards in order to safeguard that the family’s principles remain recognized in strategic business decisions.

If we now consider that, in addition to the question of who should take over the company, family businesses also have to decide how the values and ideas that have historically grown in the company, which have made the company what it is, which have virtually created the company’s own, family DNA, should be continued and lived by the next generations, the question of a “successful handover” quickly reaches a level of complexity that goes beyond questions of corporate law and taxation.

The family dialogue

The good news is that one can trust that despite the complexity of these issues, the owner family itself knows the answers to these questions best.

Indispensable to this is the willingness for an open dialogue about the possible structuring of a succession within the family. Within this dialogue the family can exchange ideas about common values and goals. The next generation is called upon to contribute its ideas and wishes just as much as the handing-over generation. In the best case, old and proven ideas should be complemented by new ones to form a future-proof whole.

One product of such an exchange can be a family constitution, which represents a kind of morally binding intergenerational contract. Another product of such an exchange can be the assignment to a lawyer and tax advisor to examine and implement the very structuring desired by the family.

The great advantage of this approach is that the family members involved will be much more accepting a solution worked out independently in this way than a solution presented to the rest of the family by one family member’s advisor.

Of course, an experienced advisor can assist families in drafting a family constitution and/or structuring a succession plan. However, such a consultant should by no means act in an advisory capacity, but should be the facilitator of a constructive and thus value-creating dialogue within the family.

Conclusion

There is a reason why family businesses have been so successful and innovative for generations – each owner family was able to find its own unique way to success. This fact should give trust in the succession structuring process and shall also guide and strengthen the next generations. https://schindlerattorneys.com/

 

family business

Philipp Hoyos

Schindler Attorneys
family business

Clemens Schindler

Schindler Attorneys
Daniela Jöbstl

Daniela Jöbstl

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Succession Planning in the UAE for Family Businesses

Succession Planning in the UAE for Family Businesses

Succession Planning in the UAE

Succession Planning in the UAE – Family Businesses (“FBS”) are significant contributors to United Arab Emirates’s Gross Domestic Product (GDP), wealth creation and economic stability. However, research demonstrates that the survival rate of FBS over the generations is low. Several factors contribute to the low survival rate, from increased competition to lack of capital, with one of the key reasons being lack of succession planning.

It is typical for high net worth individuals to delay succession planning indefinitely as they believe there is no threat to their health and safety. In context of the impact of COVID-19, FBS in UAE are now concerned as health of family patriarchs is at risk. FBS increasingly recognise the importance of succession planning to safeguard family interests and to ensure preservation of wealth.

Succession planning is a mechanism through which the family patriarch sets out terms under which the business will be transferred to the future owners. It also includes a corporate governance framework setting out the roles and responsibilities of each family member and the rights and obligations of the management and board of directors. This briefing deals with the succession planning strategies which FBS may adopt within the legal and regulatory framework in UAE.

Trusts

As trust is a common law concept, UAE does not recognize the concept of trusts except in Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”). A trust is governed by a trust deed and is created by a settlor who transfers property to a trustee who then holds legal ownership of the assets for the benefit of beneficiaries. While the beneficiaries do not have legal ownership of assets, they receive income from trust property or can receive the property itself.

Trusts are a solid asset holding structure where the assets remain within the family. For example, a settlor under a trust deed assigns an asset to his wife for life and on her death to their children. The wife cannot then sell the trust property to a non-family member, which is a possibility if the transfer is a gift.

The legal framework of trusts in DIFC is governed by DIFC Trust Law No.4 of 2018 (“DIFC Trust Law”) and is governed by Trusts (Special Provisions) Regulations 2016 in ADGM. DIFC Trust Law sets out that a valid DIFC trust is not voidable in the event that it conflicts with foreign law. There is a notion that “foreign law” in this context also refers to Sharia law. However, it cannot be stated with certainty that distribution of assets under a DIFC trust made for succession planning will not be voidable if it contradicts Sharia principles until this concept is further tested by the courts.

Family Offices

Family office is a privately held company for management of wealth, asset and legal affairs of families. There are two types of family offices: single-family offices (SFO) and multi-family offices (MFO).  SFO is relevant when the assets of one single family are in question whereas MFO is used to pool the assets of multiple families.

DIFC, ADGM and Dubai Multi Commodities Centre (“DMCC”) have provisions for SFO. The applicable regulations are DIFC Single Family Office Regulations 2011, DMCC Company regulations 2003 and ADGM Companies Regulations of 2015 regarding restricted scope of companies.

A key requirement of SFO is that it must be wholly owned by the same family. Generally, a family is considered as a single family when all of its members are bloodline descendants of a common ancestor or their spouses, widows and widowers. Minors, step children and adopted children are also recognised in the single family under most regulations.

The jurisdictions differ with respect to the minimum share capital and investible funds requirement. ADGM does not have a minimum share capital or investible funds requirement.  DIFC requires a minimum of USD 50,000 as share capital and minimum of USD 10 million as investable assets. DMCC requires a minimum of AED 50,000 as share capital or AED 10,000 per shareholder and a minimum of USD 1 million as investible or liquid asset.

Foundations

FBS are typically run by one or two family members who run the business and some who play a passive role resulting in members having varied assumptions about their role in the business. The rights and obligations of members of the FBS therefore often remain undefined leading to disputes relating to succession, management and ownership. In order for the FBS to grow, it is recommended that the management powers are moved from family members to professional leadership.

Under a foundation, a founder will pass on its assets to a foundation which will hold those the assets in its name separate from the founder’s personal wealth. Foundations are managed by a foundation council and may be supervised by a guardian. Foundations have its own legal personality and can hold assets in its own right, unlike trusts.  The founder may retain control under the by-laws by nominating himself as one of the council members or a beneficiary which is an advantage of a foundation in comparison to trusts.

In the UAE, FBS have options of setting up foundations in ADGM under ADGM Foundation Regulations 2017, in DIFC under Foundations Law No.3 of 2018 and in Ras Al Khaimah under RAK ICC Foundations Regulations 2019.

Family Business Law

Despite the fact that UAE business market is widely dominated by FBS, there had, until recently, been no legal framework governing FBS. His Highness Sheikh Mohammed Bin Rashid Al Maktoum issued Law No. 9 of 2020 regulating family-owned businesses in Dubai (“Family Business Law”) to bridge this lacuna.

The provisions of the Family Business Law applies at the request of the family members, who are joined by a common property and applies to movable or immovable property, shares in commercial companies, civil companies and assets of sole proprietorship except public joint stock companies.

The Family Business Law regulates the articles of the family ownership contract with respect to disposition of shares, formation of board of directors, appointment of a manager to manage the family property and functions and obligations thereof. The family ownership contract specifies the share of each partner in the family property and is initially valid for a period of 15 years which can be further renewed for a similar term subject to the agreement of all the concerned members. A well drafted family ownership contract should ideally address both business and family interests.

Succession planning is a continuous process, and it is recommended to start early with an agile approach as there is no one-size-fits-all model which caters to all families. FBS are increasingly using specialist advisors such as legal and financial advisors to facilitate succession planning. Decisions should be taken in context of the wishes of the family patriarch, nature of assets and the business requirements to ensure long term sustainability of the FBS.

family business

Abdullah Z. Galadari

Galadari Law
family business

Manish Narayan

Galadari Law
How to deal with disputes in the family business?

How to deal with disputes in the family business?

Sound Management and the Family Business

A Family business is the pillar of family assets. A special attention should be given to it in a Family Charter. Who manages the Family Business? Family members and/or others? They may be assisted by consultants and advisers. How are Family directors and officers appointed? Are they remunerated? If yes, what is their legal status? Are they employees of the Family? How to remunerate them? The Family Charter should provide answers to these questions.

An intricate matter not to be ignored when drafting a Family Charter, is to clarify and set out the management roles of Family members and of non-Family members. Who will manage the Family Business? A Family member? An outsider? What are the prerequites for a Family member to sit on the Board of the Family Business? Are young Family members admitted to play a part in the management of the Family Business? On what conditions? How are the Family Business managers and/or directors remunerated? How to evaluate their performance? How are shares in the Family business transferred?

The easiest way to approach these matters is to assimilate the Family to a legal or a corporate entity, having its own existence and interests independently of its members. The reason for this approach is to set a tested framework for the purpose of managing the Family and its assets in the most professional and businesslike manner. Ultimately, the Family members shall benefit from such an overall unbiased management. Consequently, and as a result of such simulation, a Family may have a number of bodies to manage it. The Family Charter shall provide for a structure which may comprise of the following bodies:

  • A Family Assembly: It comprises of all direct Family members. Its operation and decision-making process follow the pattern of a general meeting of a company.
  • A Family Board: This board is the executive management arm of the Family. It runs its affairs. Its members are appointed by the Family Assembly from amongst Family members or non-Family members. As a matter of fact, the independent executive Board members play a crucial role within the Board, as their input and contribution are made without any outside influence or pressure.
  • A Family Council: It is the body that comprises of Family members elected by the Family Assembly. In families, with a large number of members, it is more practical and more efficient to have a Family Council. In its capacity as the Family’s representative, this Council deals with Family matters on behalf of all Family members. The Family Charter shall set out the role and powers of the Family Council. Its most important role is to inter-act between the Family Assembly and the Family Board.
  • Family Committees: These are specialized committees comprised of the Family members who share common interests. Relevant matters of concern to the Family may be submitted to them for perusal and issuance of related recommendations.
  • Family Office: This appointed body runs the Family day-to-day affairs. It implements the Family Board decisions. Typically, it consists of administrators, legal counsels and fund managers. Family Office executives are recruited on the basis of their education, skills and experience. Their main task is to tend to the needs of the Family and its members in all respects. Family Office services range from concierge services to the provision of highly technical financial and legal advices and opinions, which cover current or contemplated investments of the Family.

Mismanagement

A family business, just like any other business, is exposed to the mishandling of its affairs, and the mismanagement by those who have been entrusted with the same. Such mismanagement may materialize in a number of ways, and may be attributable to a number of factors: a Family officer acting intentionally, or negligently, or simply omitting to act when his/her action is required; or to the lack of skills required for the job.

The easiest way to assess the performance of a Family business directors, officers and executives (hereinafter “a Manager” or “Managers” as the context dilates), is to assimilate such business to a corporate business. The duties, in particular the fiduciary duties, laid upon a Manager are no different than those laid upon their counterparts in corporate concerns. Governance, in its widest sense, is equally required in Family businesses.

Family Office Managers are similarly bound by the duties of care and loyalty. Their fair dealings, on behalf of the Family, is not a virtue, but a genuine duty. They should exercise generally recognized best practices, in good faith, using sound business judgement at all times. The fact that a Family Office Manager is at the same time a Family member, elected, or designated, to assume a managerial function, does not exonerate him of such duties.

  • Liability and Accountability: We are inclined to consider a Family member, who is in charge of managing a Family business, more at fault when violating governing regulations, in-house or otherwise, such as laws and official directives, than if “strangers” to the Family perpetrate the same wrongful act. The blood and “next-of-kin” bond with those the wealth of whom have been put in a Manager’s hands, creates, somehow, a type of a personal charge that does not exist in concerns managed by people who do not have such relationship. As we know, a court of law, looking into a matter brought to its attention, may very well award damages to the Family resulting from the misperformance of a Manager. In the event of criminal wrongdoings, such member may, in addition to the payment of a monetary fine, be sentenced to confinement in jail.
  • Disputes with a Managing Family Member: Is a dispute that arises between a Family member, who holds an executive function in the Family Office, or in any other concern owned or controlled by the Family, and the managed entity considered a Family dispute? There are two possible ways to look at this intricate matter, which occurs quite frequently in Families, let alone in Family businesses. If we consider the dispute as a Family dispute, in some cases, other Family members may take sides and support the Manager whose performance is being questioned, against other Family members who challenge such performance. Some of these disputes end up creating cleavages among Family members, and may result in deadlocks that are detrimental to the Family business and could threaten its continuity. The more reasonable approach could be to consider the dispute as being simply a professional dispute; the route cause behind it should be assessed in an objective way, as if the Manager in question was a total stranger to the Family. A common wrongful act by Family Office executives, who are members of the Family, is what we refer to in corporate law as “self-dealing”. This type of dealing consists of the Manager causing the Family business to transact with a related party, thus creating a conflict between the interest of the Family and the personal interest of the Manager. A typical illustration of this conflict is when a Manager reaps financial, or reputational benefits, on the account of the Family business and, consequently, the Family members.

Family Finances

The Family Charter provides also for the management of Family funds, as well as for the rules governing their spending and distribution. The Family Board sets the strategies for the achievement of the Family financial objectives within guidelines normally set by the Family. It also provides for the regular financial reporting to g members (annual, quarterly, monthly). This reporting helps keep all Family members abreast of the performance of Family liquid and non-liquid assets and help them plan their own individual finances and investments.

Settlement of Family Disputes

Disputes among Family members are inevitable, especially when they share the ownership, and/or participate in the management, of a Family business. A well thought Charter addresses all possible controversial issues that may arise within the Family and is, in this respect, a mitigator of Family disputes, and a reducer of their frequency. It helps settle such disputes to a large extent. These disputes normally arise as a result of unclear situations. All members of a Family may not agree on the way profits realized by the Family are to be disposed of.

A Family Charter usually addresses financial matters, such as the acquisition and preservation of valuable assets, the maximization of the return of such assets. If the management and disposal of these assets are regulated, the occurrence of disputes over them is automatically reduced. Having said that, neither a Family Charter nor any other type of documents may prevent or help avoid acute Family disputes.

It is only the will and determination of at least one, or one clan, or one branch of the Family members who are in dispute, that are likely to minimize the adverse consequences of the non-settlement of the disputes, not only between or among them, but mainly on the Family as a whole. This may require concessions to be made. These concessions will prove to be precious gifts to the Family.

The Charter sets out a whole procedure for the settlement of the Family disputes: how to initiate the process? Who, or which body, to submit the disputes to? Arbitration by an arbitration panel? Private arbitration? Or, in a worst case, litigation before a specific court? https://lb.linkedin.com/in/saba-zreik-13122a18

family business

Saba Zreik

Manal Consultancy

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