Driving family businesses into the next generation

Driving family businesses into the next generation

Data from a US-based Family Firm Institute indicates that family-owned enterprises are responsible for more than 70% of global GDP. However, family businesses seldom survive into the next generation beyond death of the founding member of the business. In fact, on average only 30% of family and (delete) businesses survive into the second generation, 12% into the third, and 3% into the fourth.

A key contributor cited is a lack of foresight in succession planning. This shows that, while death and inheritance is not a comfortable subject to broach with family members, it is in the best interest of the family business’ legacy.

Simply leaving this to the eleventh hour in hope that the remaining spouse, children or other family members will take ownership of the business is a risky and somewhat irresponsible decision that could lead to the demise of a legacy, according to Tertius Geldenhuys, National Head of Wills at Nedgroup Trust. 

“Without an appropriate estate plan and a legally executed Will, you are at a greater risk of leaving your family business – and your loved ones – powerless and in a vulnerable financial position upon death,” says Geldenhuys. 

“A Will can, for example, generate a Testamentary Trust to ensure business interests are managed property by experienced trustees,” explains Geldenhuys, who has extensive experience in the fiduciary industry. 

“This works particularly well when spouses are married in community of property – and leaves everything to the surviving partner who may not have the necessary business acumen to continue the business. The Testamentary Trust will ensure that the nominated Trustee will continue business as usual – and in that be able to ensure that the remaining partner remains as the income beneficiary of the business but not necessarily responsible for its day-to-day running.”

According to Geldenhuys, clients will often prefer to nominate their next of kin who are familiar with the business dealings, assets and liabilities of the estate, as the Estate Executor. Those taking this route should be aware of the process involved as the nomination will also need to get approval by the Master of the High Court to see that the nominee is qualified to administer the deceased’s estate.  

“It must be kept in mind that the deceased estate is quite a complex matter, therefore we would rather advise that multiple executors are appointed – such as co-Executors for the physical estate – to assist with this,” says Geldenhuys. 

Small business owners should also consider their business structure when developing a succession plan for their business. For example, in the case of a sole proprietorship, the owner’s assets and liabilities are inseparable therefore when the owner dies, the personal estate dissolves – one of the major disadvantages for SMEs.

However, if the business is structured as a Pty Ltd, Trust or NPO, it is recognised as a separate entity and therefore business as usual can continue after death. 

“It is therefore advisable that business owners relook their business structure carefully and determine if it is the correct one for them. Key to this is also knowing that there are capable family members who are able to keep the business operating and planning around this. If not, then businesses should take care to restructure their enterprise so that this is made possible,” says Geldenhuys. 

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