How people go about partnership business succession



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When it comes to the topic of business continuity and succession, the long term value of a business matters the most.That is why another term coined for this is business value protection. This is especially crucial in the early to mid-growth stage of any partnership or private limited (Sdn Bhd) businesses where the owners are still the key persons who make most, if not all business decisions. It is likely that every owners will specialize in one or more key functional roles critical to the business operations.

In the late growth stage of a business, some of the shareholders may not play a major role in making day to day business decisions but they still hold substantial stakes.The decision makers would be their younger next of kin, if it’s a family business or existing partners in the business.

Does this apply to you? Read on below on how common business succession works.

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GROOM A NEXT OF KIN TO INHERIT-TREAD WITH CAUTION 

This is a no brainer but look at the suitability of family succession objectively. For many, it involves their children. If the next generation has shown an interest in the business or possesses an aptitude for the type of work you do, this strategy works perfectly. Else, it is risky to assume that interest or aptitude will develop over time once they reach adulthood.

If it looks like your children won’t eventually have the skills to run the business, it’s probably better to look outside the family.

Having said that, timing can be a significant factor. If children are brought into the business too early, they may lack the work experience, persistency and vision you once had when you started the business. Naturally, you will feel reluctant to place them in a position of responsi- bility, which may lead to slow development and possible job frustration. On the contrary, if you bring them into the business too late, they may have carved their niche in another career which they are reluctant to give up to inherit your business.

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GROOM A SUCCESSOR – COULD BEABETTER CHOICE

Most business owners would confess how lucky they feel when they found a mentee whom they can groom to be a successor to their businesses. Are you such a person? Sometimes, this would turn out to be an even better choice because it is likely this person has been identified from inside your organisation. He or she have clearly shown the capability and people skills which makes them a “rockstar” employee. It is likely you have seen a part of yourself in them when you were at his or her age.

Ar.Abu Hassan Salleh ofAHS Architect Penang Sdn Bhd is one such person. He is grooming a successor which he anticipates will be ready in 3 years to take over most of his professional architectural firm operations.

 SELL IT TO AN OUT- SIDER – MORETHAN MEETSTHE EYE

For any sole proprietorship enter- prise, selling is not an option. Mr.Au TaiYeow ofT.Y.AuArchitect remarked that he prefers to “remain small in the belief that design quality and principles will be diluted the bigger a firm becomes.” He has no plans to sell his business or having someone else takes over from him – which is why his practice is still a sole proprietorship business.

However, even if you are in a partnership or Sdn Bhd business, you should not rest on your laurels either because it is a fallacy to believe your business can be sold easily with a fair valuation. Finding a willing buyer for any business is rarely just a matter of hanging up a “for sale” sign.  Buyers are not necessarily prepared to wait until the time is right in a business’s life cycle before making an offer.Also, keep in mind this outsider may not be aligned with your values and principles in doing business, and your business branding forms a huge part of your identity. So it might be disheartening for you to see your business brand- ing being used by someone who doesn’t do business the same way you do. When this happens, you are back to square one – that is, winding it up seems to be the best option. And how to we define fair market value for you anyway?

Although the general definition of fair value is – “The price at which an asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.”, the reality is, what the buyer feels as a fair value may not appear fair to you, and vice-versa.

It could be a seller’s market or a buyer’s market. In business succes- sion planning, timing is either your ally or your enemy.

 SELL IT TO A PARTNER – AN IDEAL ARRANGEMENT

Only a few savvy SMI/SME owners have the awareness on this matter, like DrAnthony (not his real name), a GPwho runs a clinic with his partner in Kajang.

A good friend of mine, Dr Anthony had this concept of business continuity in mind when he started his practice 10 years ago.Although not as polished as the proper business buy-sell arrangement we normally do today, both of them bought sufficient insurance to payout to their respective families in case of any unfortunate incidents.That is to ensure the surviving partner could continue running the clinic without interference from the other partner’s family members. I advised that such an arrangement could be better refined by entering into a proper buy-sell agreement with power of attorney in place.

The advantage of such an arrangement, especially for professional businessmen like doctors, dentists, pharmacists or architects, is that the willing buyer already has the competency and qualification to run the business. Most importantly, since he or she is already your business partner, he is also very much in tune with your business values compared to an outsider.

Don’t leave things to chance In a nutshell, the most important thing is to kick start a business buy-sell arrangement with a succession plan which ties in with your retirement income needs, when your business is profitable and growing.

During the good times, you have many ways to skin a cat, so to speak. Wait until the more chaotic, uncertain and expensive succession planning occurs post-mortem, and the choice would no longer be yours.

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