Passing on the family business

QUESTION: I run a successful business founded on solid client relationships and repeat business. Some of my children (aged 21-26) are involved in the company, others aren't. I am 47 and my thoughts are turning to how my business legacy will benefit my children without causing any disharmony. What is the best way to go about my succession planning?

ANSWER: Succession planning must always be treated as an ongoing process. Seek advice early and map out a plan years in advance. Even business owners in the prime of their lives must be prepared. Plans can be adapted, but if you have nothing, you are likely to run into trouble.

The family dimension of succession planning is extremely prevalent in the GCC. According to research by global management consulting firm Booz & Company, more than 90 per cent of commercial activity in the region stems from family-owned companies.

One of the main challenges a family business faces when it comes to succession planning is emotion. As the financial lifeblood of the family, the company's continuation is fundamental. If you have children, only some of whom play a role in your business, you need to anticipate arguments before they occur. Life Insurance or Family Takaful (insurance based on Sharia law) are useful tools here, and can help instill a sense of equity for the children who have opted to stay out of the business and may provide them with funds on the death of the parent. This way you can leave the business to the children who are involved in its running and life insurance to the children who aren't, helping to equalise things.

Depending on your circumstances, you can opt for two types of life insurance. ‘Term insurance' yields a lump sum paid out by the insurer, and is perhaps best suited to those starting out or with a limited budget or clear idea of when they wish to exit the business.

Since your business is successful, you should probably choose ‘whole life' insurance, which lasts as long as you live and continue to pay premium payments up until your demise. It is also a form of investment, as a policyholder can use it as collateral for a loan to fund short-term financial needs, provided the premiums are paid.

Choosing a life insurance policy is not easy, so make sure you do plenty of research and seek the advice of an independent financial adviser before you sign on the dotted line. It is also worth noting that the older you get, the more you are going to have to pay.

But simply getting all the paperwork done isn't enough to guarantee a smooth handover process. Inherited shares and power do not necessarily come with business ability, so you need to make sure your successor(s) are competent and able to run the business or you could end up losing clients.

Get your chosen ones involved with top level activity as soon as possible. While they may know the operational nuts and bolts, the likelihood is that they don't know how life at the top works on a day-to-day basis. Consider external training courses if you feel they lack the basics to succeed.

Family dynamics drastically vary from one situation to the next and, ultimately, there is no magic formula for succession planning. However, if you plan early and seek appropriate professional guidance, your business legacy will be assured.

Paul Bromley is commercial director of Nexus Insurance Brokers.