Key concepts

Structure

The structure is the way in which assets, liabilities, rights, people and rules are connected so as to sustain the wealth of the owner and the family.

Companies, shareholdings, properties, accounts, contracts, powers of attorney and unwritten arrangements are rarely created all at once. They usually accumulate over the years: a company for each new project, a property acquired in whichever name was convenient, a loan from a partner, an arrangement that everyone remembers but no one has written down. Each decision made sense at the moment it was taken. Together they form a structure, whether or not anyone designed it as a whole.

The concept does not apply only to the owners of enterprises. A person with properties and investments who does not run a business of his own also has a structure, as does a family with common property in several countries. The scale and the elements differ, but not the question.

The examination begins with a map of the connections: who owns, who manages, who disposes, who guarantees and who knows. The value of the assets is only one characteristic of the structure. More important is how the parts depend on one another and where a loss in one part may affect the rest.

Point of instability

The point of instability is the place in the connections between ownership, management, people and resources where the structure may lock or lose value when circumstances change.

It is rarely an obvious weak spot. It shows itself when a condition on which the structure relies, without its being written down or guaranteed, falls away: the presence of a particular person, good agreement between the partners, information known to only one member of the family. Sometimes the vulnerability is known but tolerated or postponed, because so far it has caused no problem.

Three concepts in this section describe the same event from different sides. If only the founder approves payments, that is the critical dependency. If, in his absence, no one can authorise a payment that falls due, that is where the point of instability shows itself. Tracing what will happen to payments in his absence is testing the structure.

The concept also has a reverse side. Protection taken to an extreme creates a point of instability of its own: control that paralyses decisions, rules that no one can comply with, capital locked up so that the heir cannot leave.

That is why every analysis on the platform ends with a part entitled “The point of instability”. The work with every owner begins with the question of where that point lies in his case.

Testing the structure

Testing is an examination of how the existing structure would function in a specific event: absence, conflict, a need for funds, stepping back or inheritance.

It involves two different examinations, which should not be confused. The first establishes how far the owner’s picture corresponds to the documents, the powers and actual practice. It is not unusual to find that a shareholding is registered differently from what everyone believes, that a power of attorney on which people rely has expired, or that a rule “everyone knows” was never adopted. It is equally important when the examination confirms that a given part is well arranged.

The second places the structure in a real scenario and follows the consequences step by step. Who takes the decision the next day? With what rights? Is there access to the accounts and documents? Where do the funds come from if they are needed at once? Who may object, and on what grounds?

Testing does not predict the future. The result shows what has been confirmed, what remains unverified and what needs to change as a priority. It is the second step in the work, after the first meeting and before the road map.

Actual control

Actual control is the real ability to take a decision and to ensure that it is carried out.

The percentage in the articles of association is only a starting point. Control also depends on the required majorities, rights of veto, agreements with creditors and partners, access to information, sources of financing and the conduct of the people who have to carry out the decision. An owner with a majority may find himself blocked. A partner with a small stake may hold the key if no significant decision can be taken without his consent.

The historical lessons offer clear examples. The LEGO family retains ownership but moves control from day-to-day management to supervision. The Hermès family preserves its independence by pooling a large part of its holdings in a common holding company. Porsche’s position in Volkswagen in 2008 included substantial economic exposure through options that carried no right to vote.

The examination compares what the owner believes he controls with what he can actually enforce. It covers the documents, the terms of financing, the people who carry out decisions and the information without which no decision can be taken.

Architecture of accountability

The architecture of accountability is the correspondence between the right to decide, the resources to act, the obligation to explain the result and the consequences of the decision.

When these four elements are separated, the organisation loses its ability to correct itself. A leader who answers for a result but has no right to change a deadline, a budget or a scope ends up explaining failures he cannot prevent. A partner who decides without bearing the consequences may take on a risk that others will pay for. A procedure with many signatures creates an impression of control without making clear who is watching whether the decision actually works.

It is important to distinguish who carries out a particular task from who answers for the whole result. The lawyer, the financial specialist and the operational manager may each do their part well, and the undertaking may still fail because no one has taken charge of the connection between them.

The examination traces several significant decisions from recent years: who took them, on what basis, with what resources and who bore the consequences.

Critical dependency

A critical dependency is a dependence on a person, information, a source of funds or an arrangement whose loss would block an essential function.

It is the condition on which the structure relies. When it falls away, the point of instability shows itself. The most recognisable form is dependence on the founder. A business may have experienced managers and yet the founder may remain the only one who approves significant payments, knows the key clients and settles disputes between the owners. At Reliance the prepared heirs ran their own lines of business, but after the founder’s death there was no lasting answer as to who sets the common direction.

The dependence is not always on a person. It may be on a single bank, a single supplier, a single permit, a single access or an oral arrangement that only one of the participants remembers.

Not every dependency can or should be removed. Where possible, a substitute is secured for the critical function: another person with powers, an accessible document, an alternative source. Where there is no substitute, a reserve, a limitation of the dependency or a plan for a temporary interruption is needed. Dependencies are described by function, not by personality. One possible test is to trace a period without the key person. For some functions even a single day is critical.

Risk boundary

The risk boundary shows how far the loss from a venture can reach and through which connections it can pass to the rest of the business and to family property.

It has two sides. The first is the bearable loss: the amount the owner has decided he can lose without endangering the core business and the family. It is set in advance and serves as a limit that the expected profit must not displace. The second side is the channels through which risk spreads: personal guarantees, common collateral, loans between companies, marital common property.

A separate company does not fully isolate risk when the owner has guaranteed its obligations with his personal property or with the properties of another company. Porsche’s experience shows how a structure dependent on favourable financing loses its freedom when the terms of financing deteriorate.

The examination does not ask only whether the venture is profitable. It asks what payments fall due in the event of an adverse development, which guarantees tie the new venture to the core business and what reserve remains.

Workable exit

A workable exit is an opportunity to step back, sell or separate for which there are applicable rules, a valuation, financing and a time frame.

The terms for entering a partnership or family ownership are often agreed in more detail than the terms for leaving. When a partner wants to leave, an heir needs funds or the owners reach a lasting disagreement, it may turn out to be unclear how the price is determined, who may buy, where the money will come from and within what time.

A workable exit answers these questions in advance, and it must be capable of being carried out. A promise of a buy-out that can be honoured only by draining working capital protects control at the expense of the business. A formally identical clause can put the less liquid partner at a disadvantage.

Separation is not necessarily a failure either. The Albrecht brothers divided the chain into two independent groups that continued to develop. The Dassler brothers parted after a deep conflict: the common enterprise broke up, while the two new companies went on to succeed separately.

Discoverability of assets

Discoverability shows whether the authorised person can find the assets and liabilities, understand how they are arranged and establish how to exercise the rights attached to them.

A right to an asset does not in itself provide knowledge of its existence or practical access to it. An heir may have an undisputed right to an account, a shareholding or a claim and still not reach it. He may not know that the asset exists, in which institution it is held, which documents will be requested or what the previous generation left unfinished. In some countries forgotten assets pass to the state after a long period.

Discoverability does not mean that everything should be known to everyone. It requires a clear and updated map of assets and liabilities, accessible at the right moment to the right person, while confidentiality is preserved during one’s lifetime. Particular attention is needed for assets to which access depends on a key, an identification or a specific procedure: crypto-assets, online accounts, bank safe deposit boxes.

The examination does not begin with passwords, but with the question of what must be found, by whom and in what event.

Succession

Succession is the ability of ownership, decisions, knowledge and responsibility to continue to function when people and generations change.

It is wider than inheritance. Inheritance is one of the events in which succession is tested, alongside stepping back, a sale, illness or a parting between partners. An inheritance may be impeccably distributed and succession still be missing: the heirs receive shares, but not an order for decisions, knowledge of how the business works or the authority needed to lead it.

Succession requires three rights that are often confused to be kept apart: the right to receive income, the right to take part in control and the right to manage. They need not pass to the same person. The lack of a willing heir for the leadership does not mean the lack of a future for the family capital.

Succession is prepared gradually: with a clear mandate for the new leader, with room for correctable mistakes within agreed limits and with the previous generation’s readiness not to overturn his decisions informally.