Succession planning takes centre stage for private banks

Succession planning can be both emotionally and practically challenging.

Owners of family businesses are starting to realise they need to empower their children to take over, but need help from private banks to meet the succession challenge.

While most family business owners, who account for a significant share of the private banking client base, aspire to pass the reins to the next generation many delay addressing the complexities of succession planning until it is too late. This is where wealth managers and private banks can provide meaningful support, helping clients navigate this crucial transition.

For many founders, a family business is more than just an enterprise; it is a part of their identity, built over years of effort and sacrifice. Stepping back from leadership can feel like giving up a piece of themselves, making succession planning both emotionally and practically challenging. The difficulty grows when successors lack preparation, do not share the founder’s vision, or are seen as not ready to lead.

While some businesses are family-owned from the outset, many begin simply as entrepreneurial ventures, explains Philadelphia, US-based Benjamin Persofsky, head of the Center for Family Business at Brown Brothers Harriman. Over time, as successive generations take ownership, these enterprises naturally transform into “family businesses”.

But maintaining the family’s identity can become challenging as the business grows. By the third generation, there is often a natural distance from the founders. Without intentional storytelling and active engagement, the connection between family and business can weaken. Families then face critical tasks of how preserve the legacy and identity tied to the business.

Passing it on

45 per centof family business owners say the top reason they would not consider selling some or all their business in the next 12 to 24 months is that they identify with their business too much to give it up

91 per cent of private business owners say that it is important for their business to remain in the family for the next generation, but 29 per centare still struggling to pick a successor

Source: Private business owner survey (2024) – Brown Brothers Harriman

Reconciling trade-offs

A common misconception is that rising generations must take on operational roles, explains Mr Persofsky. For many successful multi-generational family businesses, this is not the case. The next generation might choose to remain active owners providing governance, vision and stewardship, rather than being direct managers.

“Family members can play critical roles as engaged owners, helping shape the strategic direction and ensuring the business reflects shared family values,” he says.

The influence of ownership values is the key difference between private family businesses and publicly traded companies.

Patriarchs and matriarchs must equip the rising generation with tools, values and insights to define their roles, whether as active managers or engaged owners, adds Mr Persofsky.

The foundation of this preparation is “fostering an affinity” for the business early on. Regardless of the industry, the younger generation must develop an understanding of the company’s value. This could mean showing how their products or services meet timeless needs or connecting them to the business's impact on customers and the world.

A significant number of family business leaders struggle to define roles for the next generation. While 99 per cent have taken steps to prepare the next generation to take over, three quarters say roles for the next generation are either not well-defined or not fully communicated, according to the recent BBH survey on US family business owners.

One challenge is reconciling trade-offs between familial loyalty and external expertise. “In a family business, you don't necessarily need to be the best qualified individual to be the most successful,” says Mr Persofsky. The emotional attachment of family members to the business, even if not the most experienced candidates, can sometimes outweigh external qualifications, he explains.

Family members may lack technical skills or experience required for a particular role, although they can surround themselves with professionals who complement their knowledge and strengthen the leadership team.

By contrast, external executives, while potentially more skilled, may lack deep-rooted connection to the business. Their focus is often shaped by tenure and compensation, which may not align with the family’s long-term vision.

While conflict is a natural part of any organisation, in family businesses the presence of close relationships and shared histories can make disagreements feel more dramatic, adds Mr Persofsky. "The key to managing conflict effectively lies in having a robust decision-making process, enabling families to weigh trade-offs, build consensus, or at least arrive at a workable outcome."

Next gen empowerment

Business owners, proud of companies they have built, typically want to keep them in the family. Seventy-eight per cent of entrepreneurs say keeping the business in the family and preserving their legacy is important, according to HSBC’s global entrepreneurs survey. While 77 per cent have complete trust in the next generation to maintain the business, they also worry about their ability to run companies. Forty per cent are concerned about finding a successor and 35 per cent lack confidence in the next generation.

“Business owners, who want to hand their firm to the next generation, often understand they need to empower their children, so they have the experience one day to take over,” says Russell Prior, regional head of family governance, family office advisory and philanthropy, Emea at HSBC Global Private Banking. “But they often find it difficult while they are still in charge.”

Business owners should recognise that “passing on the family business is not a one-time event”, , he adds, but takes time and can be broken down into phases: a management transition, an ownership transition, and a governance transition. In this way, the senior generation can both support and allow the next generation to have greater involvement while still maintaining control.

In addition, says Mr Prior, it is critical for the senior generation to have clear objectives. “Are they primarily interested in the continuity of the family business? Or are they more concerned with finding the right, next, family leader for the business? These are seemingly similar, but they are different objectives that can drive quite different approaches to family business succession,” says Mr Prior.

Many business owners recognise that keeping the business in the family may not be the best option (see chart).

“It’s often a double-edged sword when it comes to passing on the business to the next generation,” comments Christo Scott, managing director, UHNW at HSBC Global Private Banking. “Entrepreneurs want their children to enjoy the journey and successes that they have had but are acutely aware of the challenges that come with it and the personal sacrifices they will need to make.”

External experience

While every family business is unique, some best practices emerge across successful transitions. Encouraging families to support their children in gaining external experience not only benefits the business by bringing fresh perspectives but also helps individuals develop independence and confidence, explains Sara Montgomery, partner for family legacy services at Plante Moran, one of the largest audit, tax, consulting and wealth management firms in the US.

“When they return, they can contribute in a thoughtful and respectful way, enriched by their own unique voice and experiences,” she says.

However, external experience can also lead to the risk of successors finding a fulfilling path elsewhere, which some families view as a potential downside. Families which avoid defining roles early may find successors are either too established in their external careers or lack experience needed to take on leadership when the time comes.

Family values

Understanding and supporting the family business is integral to delivering high-quality financial advice, says Ms Montgomery. “For many successful families, their business represents not only their largest asset, but also a deeply personal legacy. If you're not in tune with what's going on with this large asset on your client's balance sheet, what it means to them and how they are navigating significant decisions over the course of many decades, then I think you're under-serving your client.”

Family businesses are inherently complex, with succession planning touching on everything from tax and estate planning to leadership and governance development. That is why assembling a team of experts is the best solution, believes Ms Montgomery.

“Not all families or businesses benefit from the same strategies. It is therefore important to tailor solutions to the family’s values, the business’s needs, and the capabilities of individual family members,” she says.

Organising peer discussions among business-owning families can also provide valuable insights and foster collaboration, helping clients learn from others’ successes and challenges, she says.

Supporting a successful transition strengthens trust between the bank and the client, explains Michael N. McGrann, managing director of BBH's Center for Family Business.

This trust can lead to revenue generation, through liquidity events when a business is sold, as well as by continuing relationships with successor leaders who generate ongoing wealth and remain clients.

“For many successful families, their business represents not only their largest asset, but also a deeply personal legacy," says Sara Montgomery from Plante Moran

Shifting mindsets

But private banks must avoid waiting for “crisis moments” ” before they step in, he warns. Early involvement ensures smoother transitions and better outcomes for all stakeholders.

Bankers can play a key role in shifting founders’ mindsets around succession planning. Founders often associate succession with negative connotations such as retirement or even mortality. Advisers should aim to reframe the conversation, presenting succession as a “transition up, not out”, and highlighting opportunities for growth and evolution rather than endings.

“There are many ways the senior generation leader can engage or contribute to the success of the firm without continuing their role as president. Leading a good board of directors is one example of such a role,” says Mr McGrann.

Advisers should help founders view succession as a strategic issue, recognise the knowledge and capabilities embodied in the current leader and plan to transition those assets deliberately to the next generation.

They should also help them utilise a formal advisory board to guide the succession process. This removes the burden from founders and avoids perception of favouritism, as decisions are made by a group of impartial professionals.

Bankers should also help business owner clients develop passions and interests beyond the business. This broadens their sense of identity and makes it easier for them to step away from day-to-day management. “If the entire identity of a client is tied up in the business, it can be very difficult to let go of the reins,” he warns.

Leveraging technology

Some entrepreneurs may find the technical aspects of succession planning overwhelming. More than a third are concerned about the true sale value of the company, while 29 per cent are worried about how to structure the transaction, according to the HSBC survey.

Technology can help advisers better service family business owners, according to Jason Early, founder and CEO of RISR, a US-based business-owner engagement platform. With an estimated 20m business owners aged over 50 in the US, and 2,300 retiring daily, demand for informed succession planning is more pressing than ever, he says.

Moreover, owners no longer plan solely for retirement but also for selling and reinvesting in new ventures. Effective planning ensures owners maintain control over outcomes, whether transitioning to family members, selling to private equity, or exiting to strategic buyers. “People trade in and out of businesses at much higher velocity, and they need advice. Unlocking of information is critically important to those decisions. Yet, many business owners struggle with disorganised or inaccessible data,” says Mr Early.

“This makes it difficult to make informed decisions about their most significant asset.”