‘Trust fund syndrome’ is gripping family-owned businesses and forcing many of them out of family ownership after two generations, warns Smith & Williamson
Family businesses are struggling to pass on the company to family members who can demonstrate aptitude, enthusiasm and merit, according to research by Smith & Williamson, which found only 13% of such businesses make it to the third generation.
The latest Smith & Williamson family business survey, based on around 70 interviews, found of these such businesses believe their children have an automatic right to succession, and are most concerned about ensuring they have a family member with the ability and inclination to take over.
While 80% of owners believe it is important for family members to be involved in the business, 78% said it was important that they have business or professional qualifications if they are to enter an executive role. Respondents were keen to reduce feelings of entitlement in their children, instead involving them when they had demonstrated capability and an interest in the business.
Rupert Phelps, partner, family office services at Smith & Williamson Investment Management, said: ‘Parents running their own business are conscious of “trust fund syndrome” and are making sure their children earn their place in the business – if that’s what they choose to do.
‘Instilling a sense of responsibility and family values in the next generation remains integral to preserving family heritage and wealth for generations to come. There’s an increasing emphasis on the next generation to have experiences outside the family business, both for their own personal development and the benefit of the business.’
On legal status, governance documents such as a mission statement or family constitution can be an effective way of handling succession planning, but the survey found that only one in four (27%) of respondents had created one.
Additionally, 19% of respondents said that the business will need to be sold if the right family member cannot be found to take over management of the business. Statistics indicate that only a small minority (13%) of family businesses last through to the third generation.
It is important to business owners that their children show an interest in the firm before considering their involvement, the survey found. While 78% felt it was important to encourage the next generation into the business, the possibility of taking them down a career path not of their choosing and the pressures of family expectations was also of high concern.
Although 52% said that engagement should begin before age 18, the majority said the next generation should only start receiving income at or after the age of 25. The most common methods of encouraging business awareness included mentoring and internships with non-family companies; this was followed closely by internships or apprenticeships within the family business.
Separately KPMG has launched an online assessment to enable families in business to uncover insights that will help them to grow. This is a confidential online self-diagnostic tool that evaluates the respondent’s opinion on how important an issue is to the family and/or business and how capable they feel as a family and/or business about addressing it.
After completing the assessment, and potentially inviting other family members to do so, a free personalised report helps the family to assess its capabilities across six key areas; growth, people, wealth, transition, risk and governance. They will also be compared to other family businesses around the globe. It is available to families in business regardless of whether or not they are KPMG clients.
Tom McGinness, who leads KPMG’s family enterprise practice, said: ‘We created this tool to help families in business gain further insight into the capabilities needed to support their goals and to offer them comparisons with other family businesses globally with similarities such as industry sector and generational span.
‘We envisage it being particularly useful for the family in crystallising their thoughts about how to handle succession planning and family governance.’