Bringing in the new generation is a major threat to your business and your personal wealth.

Only 30 per cent of businesses make it to generation two, while perhaps 10 per cent make it to generation three. Many of those pondering handing over the firm decide that an assumption of immortality is far easier than doing anything.

Nearly a quarter of the owners of family businesses have not written a will and nearly half have done nothing to identify a successor.

Why do so many businesses fail to make it to the next generation? For a family business, the family and its ownership of the business is what distinguishes it from every other family business if it has problems.

There are seven ways for changing generations:

• The crown prince ñ one heir;

• The sibling partnership ñ roles to each sibling according to their talents;

• The cousin consortium ñ wide family ownership;

• The stop-gap manager ñ holding the fort until the next generation are ready;

• Family ownership but professional management;

• Management buy-out;

• A market sale.

Doing nothing is the eighth approach, but whatever you do you need to start early ñ it takes years to get the next generation ready.

Encourage inter-generational teamwork. Develop a succession plan which has a timetable. Make sure you involve the family and colleagues in your thinking. Take advantage of outside help ñ not just on the tax and legal issue, you may need a friend to sort out the family. Establish a training process ñ heirs must learn the ropes. Plan for retirement, decide on a retirement date and a stick to it.

THE SUCCESSION PLAN

The succession plan ties together the family's hopes and aspirations.

It must contain a statement of the distribution of ownership; the identity of the new leader(s); how all the new leader or leaders are to be trained for their role; a definition of the role of other key family and business members during the transition; the mechanics for the purchase or sale of stakes in the business; tax and legal considerations; retirement proposals; a procedure for monitoring the process and dealing with disputes and a timetable.

In a new leader you are not looking for technical skills, but the management judgment and people skills to lead. You might look for seven competences in the chosen heir:

• Conscienceñ ethical behaviour;

• Credibility ñ earned respect;

• Coaching ñ can teach;

• Capability ñ the talent for future business and personal growth;

• Commitment ñ to business and family interests;

• Competence ñ to run the business;

• Communication ñ can exchange information.

TAX ISSUES

Tax considerations will vary enormously and will require tailored professional advice. Inheritance tax is the main threat to your wealth, but capital gains tax may also be an issue if assets are being disposed of to fund retirement.

What if you do not wish to keep family and business together?

The sale of any assets for cash which is then passed to the next-generation will give rise to an inheritance tax charge when the estate is passed on to the next-generation and may well give rise to a capital gains tax charge on the sale of the assets in the first place.

There are a number of tax-planning mechanisms that can be used to minimise the charge to tax, often using trusts.

Trusts can enable a business or other assets to be passed to the next generation in a tax-efficient manner. The terms of trust also achieve family objectives, such as providing life interest incomes or to benefit grandchildren.

Finally retirement, what about you? There are two approaches to building the security necessary for retirement, cash from the business as you go along or use the business as the source of cash at retirement. Generally the former approach is preferable if the business is able to stand it as it allows the entrepreneur to spread risk.

The secret to securing your family's financial future and to securing the business is good long-term planning. Family harmony is the other key factor pointing to success. You will need, trust, an openness to generational co-operation and mutual respect to succeed.

The statistics demonstrate that the smoother the process of passing the baton on from one generation to the next, the higher the return on equity, net profits and growth in sales.

Effective management of succession and retirement not only sustains the family name in the family business but also has a direct pay back on the bottom line.

David Harvey, chief executive, Society of Trust and Estate Practitioners