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6:00 AM 6th July 2020
business
Opinion

Navigating Covid-19 For Family Businesses

 
Martin Cuthbert, Head of Relationship Management, North East and Midlands at Julius Baer International looks at the effect Covid 19 has had on family businesses.

Martin Cuthbert
Martin Cuthbert
The current pandemic has focused many of our minds on the future and it’s fair to say that succession planning and the transfer of wealth form part of almost every conversation we have with family businesses. This is not a new phenomenon. In the last five years or so, there has been increasing recognition that the family business itself may not be the best preserve of family wealth for the generations to follow.

This is important not just for those businesses, but for the success of the wider regional economy.

The desire for wealth transition not just to the next generation, but for two or three generations to come, means that many family businesses may have to change their approach and look outside the family to increase that longevity rather than simply relying on the next generation inheriting the family business.

It may be that the skillset or appetite of the next generation to take on the family business simply is not there. Similarly, the values of the family business may not align with those second or third generations down the line. For example, the heightened importance of ESG principles in business has come to the fore, predominantly amongst younger generations. Different viewpoints on this topic can make succession planning difficult to manage if younger generations become disenfranchised by current or past practices of the family business.

There are also long term and more constant factors to consider such as the well-deserved sense of pride that founders or second-generation successors have for the family businesses they set up. This can make any succession plan difficult, as these figures struggle to pass on the mantle seamlessly.

In light of this, multi-generational plans and the formation of enduring legacies that will do well outside of the family are now increasingly considered.

At Julius Baer International, we believe it is increasingly important to consider moving from being a family business to becoming a business family. Diversification of risk is an important part of this. This means approaching the original family trading business as just one element of the overall family enterprise. One strategy to achieve this is by extracting capital from the business through private equity, sale or leveraging against future cash flows. This creates cash, which can be declared as a dividend, rather than reinvesting wholly into the trading business.

Such a strategy can be used to create a pool of liquidity distinct from the trading business but managed in tandem for the benefit of the wider family – whether or not involved in the trading business itself. Structured correctly, this fund can be used, amongst other things, as a source of venture capital in support the entrepreneurial and philanthropic activities of younger generations. It can also be used as a means of educating younger generations about financial markets and the importance of strong governance.

Through strategies such as these, the family business can create the means to preserve and grow wealth alongside the original trading business. This diversification away from the original trading business is most successful when combined with education and advice on alternative ways to grow and control wealth. In this new framework, it is not uncommon to bring in external management - at CFO or even CEO level - to protect the interests of the business. This helps maintain suitable focus on the trading business and the financials, whilst simultaneously opening up time for other family members to engage in a broader portfolio of interests and investments.

This also means that the management team of the trading business is more openly engaged. Discussions around the possibility of an employee buyout or a management buyout are able to happen ahead of time rather than at a later stage when it could be more damaging to the business.

Communication and governance are also critical elements when developing a business family framework. Family charters and councils are increasingly being used to set the purpose, maintain control and professionalise the management of broader family wealth. These councils also aim to remove the emotion and perceived negative aspects of the family dynamic from the successful implementation of a long-term strategy.

In more complex frameworks, we now also see legal, tax and wealth planning expertise working in partnership (almost creating a mini family office) around the business family. These advisers are instrumental in facilitating discussions, developing and implementing strategy and maintaining business direction. They report as a whole to the family council on an ongoing basis.

For family businesses, thinking long-term can feel impossible but it needs to be encouraged even in the early years and particularly during such turbulent times as we’re all experiencing now. Giving up control, diluting, taking money off the table and installing external management is not without risks and will change the dynamic from what would otherwise have been a pure family business. However, if the notion of a business family is embraced rather than sticking with a traditional family business, then opportunities are clear.

Read more about Julius Baer https://yorkshiretimes.co.uk/article/OnetoOne-with-the-business-Editor-Andrew-Palmer-talks-to-Martin-Cuthbert