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Protecting the Family Fortune

An exclusive excerpt from the US Trust, Bank of America Private Wealth Management/Campden Research study Protecting the Family Fortune

Because of their success, ultra high net worth family businesses will at some time face succession issues. Moreover, the family businesses in this study have already lived through a "passing of the baton" at least once.

Succession planning is the process of efficaciously transitioning the family business to other parties.

It's not only the UHNW family businesses that must be properly planned for, but the affluent family business owner as well. Nearly everyone is a candidate for estate planning. But for the wealthy who want to make certain their families and loved ones are provided for adequately after their death, decide how and to whom their assets will be distributed after their death while minimizing the tax bit, estate planning is a requirement.

Estate planning is the process of legally structuring the future disposition of current and projected assets.

There has been a great deal of attention paid to succession issues among family businesses. However, until now, no one has examined the matter with respect to the exceedingly wealthy. All of the UHNW family businesses in this study have successfully moved beyond their founders. Three-quarters (75.6%) are in the second generation, and the remaining quarter (24.4%) is in the third generation or later. Therefore, as a family business, these firms clearly have experience – good and bad – with succession planning and implementation. Still, as we'll see, many of these UHNW family businesses are not currently adequately addressing the succession issue.

The motivations of the affluent family business owners vary for deciding to relinquish family control. However, the appeal of "cashing out" dominates (81.1%). At the same time, 58.5% find they do not have suitable family members to take over the business. Fewer see relinquishing control tied to new business opportunities (35.8%), while only 11.3% see it as a way to downplay the role of family involvement.

The most likely way for the family to exit the business is by selling it to another company (64.2%). Less than one in five (18.9%) see an initial public offering as a possibility. A similar percentage (17.0%) is looking to stay involved while diluting their position by taking in outside investors.

Whether it's a matter of cashing out or passing the business down a generation, about three-quarters (75.6%) of the affluent family business owners have a plan. A succession plan is much more prevalent among business-focused firms (90.1%) than the family-focused firms (66.9%).

While succession plans are far from uncommon, we found that relatively few (38.3%) of the UHNW family businesses are actually implementing them. Whether the plans are good or bad is not in question. What is evidenced is that having a plan is not sufficient if it sits on a shelf collecting dust – the norm. The business-focused firms (53.7%) were much more likely to be taking action in contrast to the family-focused firms (25.6%), basically twice as likely.

About the Protecting the Family Fortune Study:
The study surveyed 242 second or third-generation wealthy business owners with business interests valued at a minimum of $300 million, and mean value approaching $730 million. The objective of this study was to examine the success rate of family-run businesses in the transition phase from one generation to the next, and uncover wealth planning issues that urgently need to be addressed.

All of the businesses in the study are controlled by a single family owning at least 60 percent of the business. All owners are senior officers within their respective family businesses with a seat on the board of directors and a personal equity share of 10% or more. All owners are considered wealthy for the purpose of this study, with a personal net worth of at least $5 million outside the equity stake in the business.

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