Family Business Succession



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For the founder/owner of a successful family business, ensuring that his legacy lives on after he is gone must surely rank as a prime concern.

The founder of a family business has spent years working hard to build up a healthy, profitable and successful business that he wishes to make the foundation of his family wealth to pass on to his future heirs. While enjoying his own success, he may also seek to contribute to society by helping others who are less fortunate. Will this honourable and enduring legacy of the head of a family business live on after he is gone?

 Nature of the Business

A family business plays a significant role in the lives of members of that  family and their financial well being. It can influence careers, aspirations and lifestyles of family members across the generations. A successful family business brings pride to the family and enhances its status in the community. As such, the business has inherent challenges regarding the family’s role in ownership and management, particularly in the areas of finance, brand management, human resource management, leadership, and other organisational issues and strategy.

In addition, a family business which generates most of the family income raises concerns over its wealth management given that the business is a major source of value and carries with it both risk and opportunities in the family’s total wealth calculation.

 

Across Generations

Perhaps to some business owners, the succession issue is simple. They may think that since their children are working in the family business, it is a simple matter of giving the children an equitable share each after the founders are gone. However, besides money, true family wealth should include family harmony, physical well being, reputation, integrity, spiritual growth, intellectual capital and the happiness of each family member. Thus, the question to the business owner is: what do you really want? What is most important to you? Do you want to leave a legacy that will be gratefully praised across generations or  are you going to be leaving a time bomb that could destroy the family wealth and harmony. This is the true definition of family business succession: it is about identifying and preserving the things you hold most dear through time and across generations. For this objective to succeed, all elements of strategy for family wealth management need to be developed from a multi-generational forward perspective.

A family business can give identity and common experience to the family as well as create substantial opportunities for wealth creation or destruction. It is the force that keeps a family together across many generations. Therefore, family business succession planning becomes a complex issue that needs to be well structured to preserve the family business history, values and ownership. It must include governance and management, heir conditioning, professionalism and policies to opt out from ownership of the business. Most importantly, a well-planned family business succession must be designed to preserve family harmony.

Managing the Wealth

The importance of a family business to the family does not only encompass the career path, governance systems and operational outcome of the business itself. It plays an integral part in the family’s wealth management plans.

The business may provide asset value growth, capital gain, dividends, wealth engineering, and other commercial and financial activities. Therefore, the business – whether public listed or privately owned – requires a wealth management perspective in addition to the important family heritage role.

An operating business carries a set of related risks,  for example, competitive and operating risks, interest rate risk, cyclical exposure, geographical risk, regulatory interference, political or currency risks. Therefore, a broader approach to business risk management may be implemented for managing the overall family wealth. This means that family wealth should not rely solely on the family business to avoid single asset concentration risk. The family wealth should be managed in a portfolio that consists of  the family business and other investment assets; the key is diversification to prevent the family wealth dissipating in the event of a financial or economic crisis.

 

Although challenging and multi-dimensional, family business ownership contributes substantially to the preservation and growth of family wealth across

generations. Some of the oldest businesses in the world are family businesses. This shows the resilience and sustainability of a family business that could only happen if properly managed within and across generations. An example is Cargill, an international producer and marketer of food, agricultural, and financial and industrial products and services. Cargill, a family business founded in 1865 and currently in the hands of the fourth or fifth generation, has revenue of more than US$50 billion and employs nearly 142,000 people around the world. Another example is Faber-Castell, the world’s oldest and largest manufacturer of pencils, pens and stationery. Founded in 1761, the business is currently headed by eighth generation Anton Wolfgang von Faber-Castell.

Research and analysis show that there are different performance groupings, depending on the generation of family management in control. In any first-generation family business, the founder was the prime mover and had the highest level of performance on return on equity, revenue growth and income growth. This may set a high

benchmark which the next generation finds difficult to match. Generally, the second generation may perform slightly above average. When family businesses are handed down to the third generation or beyond, traditionally they encounter difficulties in performance. Hence, it is essential for a family business to have strategies and guiding principles for succeeding generations to follow to ensure that the business can continue to grow and prosper even in the face of new challenges and competition.

 Strategy for Future

A family business’s future and the financial future of the family are highly correlated. Individual family member’s career plans, family business finances, future acquisition and merger, family governance, philanthropy, and wealth management all need to be decided in a systematic manner that will optimise these complex and interrelated issues.

As such, the strategy for family business

succession will need to be addressed across the full array of issues concerning both the business and the family’s role in the ownership, governance, and business and risk management.

In the next few issues, we will look into each of these important concerns and suggest how they can be resolved to ensure a viable family business succession plan.

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