When and Why You Need a Family Business Succession Plan

What statistics say about family business succession? In Asia, family businesses are the foundation of many indigenous entrepreneurs. Many of these businesses have grown and flourished over the past century and into the current millennium. Unfortunately many of these family businesses have no clear family corporate directions and they do not plan for succession because the head of the family assumed that the children will take over the business. Such a situation potentially poses a problem.

One research jointly carried out by the All-China Federation of Industry and Commerce, Sun Yat-Sen University, Zhejiang University and renowned sauce manufacturer Lee Kum Kee, reported that of the 1,014 entrepre- neurs aged 50 and above being surveyed, more than 40% expressed the hope that their children would take over in the future, while only 35% of the younger family members confirmed their willingness to do so.

Another recent study of 800 family- owned businesses by Laird Norton Tyee, a wealth-management firm reported that while 80% of the older generation of family businesses wanted thebusiness to stay in the family, less than 30% had a succes- sion plan in place and 25% deemed the next generation incompetent to take over.

In the local scenario, the Malaysian stock market is full of stories of public listed companies where the controlling major shareholders did not have the foresight to provide for family business succession. The surviving family members fought and sued each other for management control, eventually resulting in the company being broken up or sold to outsiders and the proceeds divided among the hostile family members. Is this what the founder wanted as his legacy?

The Family Firm Institute, a research group in Boston, said only 30% of family-owned businesses made it to the second generation, 10% to the third generation, and 3% to the fourth.

“Lack of effective succession plans has contributed to the short lives of family businesses,” said Chen Ling, a family business researcher with Zhejiang University.
Li Huisen, a senior executive with Lee Kum Kee, said for many family businesses, to keep on growing a business is more difficult than starting one. Therefore, how to sustain business development and maintain family harmony for generations is a question that needs to be answered by all business owners.

 

When your siblings or children’s hearts start racing rapidly In general, most business owners think that they could resolve their business succession issues by writing a will. However in reality, the element of succession planning cannot be planned for successfully with a will. Although the will may cover the assets distribution and who becomes chairman, the human factor will get everyone stuck.

For example, some of these issues may sound familiar. Fathers practise favoritism. Siblings remember their rivalries. Sisters get furious that they are being given less shares than their brothers; brothers get irritated that daddy’s girl is being preferred and parents refuse to retire. Eventually business owners may end up with their hearts broken by prolonged family hostility even before they pass on.

 

 

What happens when there is no effective family business succession structure?
Should a family business stay in the family? The question is really academic since families seem to be in business to stay. However, when the management moves from one generation to the next, usually the transition is far from orderly.

As the company develops, there is a need for a manage- ment style that goes beyond survival thinking; as business challenges, which are market-driven, evolve over time. When an effective business succession structure is not in place, power struggle may emerge. In fact, sometimes while a power struggle is peaking, the outlook of the company may be sliding down.

On the other hand, when there is a structured succession plan in action, family and company transitions can be simultaneous. The older generation can make use of the flexibility and new ideas from the succeeding generation to plan the future direction of the family business.

Effective third party involvement may help to prevent irreparable family rifts and company stagnation. When there is a clear family vision and mission and a succes- sion structure that promotes unity rather than separation and rivalry, long term family harmony can be achieved along with growing the family wealth.


Securing your legacy
Wealth planning for the future of your legacy and for your heirs can be complex, the issues that need to be confronted are easier to avoid than to address. Effective planning can reduce the likelihood of family conflict associated with your passing.

For wealthy individuals, especially business owners, the succession plan is the roadmap from which a legacy will be established and implemented. By addressing your succession plan today, you are able to monitor its progress while you are living and make adjustments as new challenges arise. More importantly, current planning will provide you with a peace of mind knowing that decisive action has been taken.

There are many family business succession planning tools and strategies available to wealthy families.
The coming issues will offer an overview of important considerations for current planning such as 1) Which aspects of planning do wealthy families often
overlook? 2) How may you transfer assets during your lifetime but still maintain some authority and control?