Passing on a family business can have emotional, psychological and structural challenges. But those challenges can be crippling if not addressed.
According to the most recent1 PwC Family Business Survey, nine out of 10 families in Hong Kong, China and Singapore have yet to formulate a robust plan to transition their business from the first to second generation.
It’s a daunting prospect – to compress the history of something so complex, something so riddled with working parts, into a transferrable blueprint that can be used by future generations. And simply put, some owners don’t want to do it, as they aren’t certain they even know how to transition or craft a succession plan.
“When you’ve built your business from scratch, you’ve had to make every decision – from how many paper clips you need to order, to massive commercial multi-million dollar questions. It’s a more difficult and complex process than you think to let go and hand that control on to the next generation,” says Mike Reed, head of distribution strategy, RBC Wealth Management Asia.
To Reed, there is no singular approach to succession planning. Instead, it’s a spectrum of solutions ranging from building a simple will to crafting a plan years in advance of stepping down. Unfortunately, an overwhelming majority of family businesses in Asia veer towards the bare-minimum approach.
Ninety percent of the family business owners surveyed by PwC say they have no succession plans in place. It was also found that business owners in Asia hold back when it comes to open dialogue about inheritance, with just 32 percent comfortable sharing the details according to the RBC Wealth Management 2017 Wealth Transfer Report.That’s a statistic that could be improved with a little illumination surrounding the succession-planning process.
Here are some tips to help family business owners plot the transition from one generation to the next.
Knowing when to start succession planning is one of the biggest challenges. While elements like ailing health or offers to buy the business often trigger an exit strategy, there are arguments for starting to lay the groundwork now so the plan can be enacted the moment the business owner starts thinking about moving on.
The long lead-in allows for a step-by-step approach with the incumbent owner working alongside the incoming executive to really examine and grasp the finer details of running the company.
“They can start to learn to manage the money, learn the management skills, or appoint external professional managers if you need (them) to make this business work beyond the lifetime of the founder,” adds Reed, “One client supplemented his board of directors with complementary advisors meant to fill the knowledge gaps his daughter had.”
For big business families with complex affairs, a family constitution is also a helpful tool.
“They tend to be a mix of legally-binding and non-legally binding elements like mission statements or family objectives,” explains Reed. “For example a long-term goal could be to ensure that this business stays in the family as long as possible to benefit (future) generations,” says Reed.
In addition to the structural elements, family business owners should also focus on the psychological or personal effects of the transition.
“The chief need is to deal with emotions alongside a rational planning process and not let them get intertwined – the fears of incoming and outgoing generations need to be addressed sympathetically, while the rational planning process unfolds at a pace people can handle, with good handholds along the way as people feel their way into their new roles,” says Reed.
“It must be forward looking; celebrate the past so as to let go of it, and move with positivity and confidence towards the future.”
One way outgoing owners can manage the handing over of control, says Reed, may be to set up a trust. A trust is a legal relationship created when the ownership of certain assets are transferred to another person or company (the trustee). The trustee then manages and administers those assets in the best interests of those involved.
Using a trust and choosing a trustee may be just one part of the succession planning process.
“You may well need asset and wealth managers, you will most certainly need good accountants and lawyers,” says Reed.
A solid advisory team can help develop and assess different strategies, weigh scenarios for selling and allocating assets, if this is the direction a family business owner is going, and support the former head of the business through the emotional elements.
In the case of many family businesses, the succession planning team will include relatives.
“You can only bring the best advice if you’re properly sitting down to make a plan for how the succession is going to work,” adds Reed.
If the business is to be valued, the advisers will have to think not just about a dollar figure, but look into how the timing of the transfer will affect the company’s worth; they may even need to consider a disposal in the event the next generation doesn’t want to move forward together.
“Not every business is going to neatly enable itself to transition to every generation,” adds Reed. “Sometimes there are no mechanisms and the best thing to do is to achieve a good sale at the right time.”
Perhaps the most critical element to keep in mind when setting up a succession plan is to see it not as static guidance but an evolving blueprint for transition, one that should be documented at every stage.
“You can’t do this exercise once and leave it,” says Reed. “If you’ve got a big, complex business family you have to – at least every five years – come back and check and make sure it’s still meeting your goals.”
1 The PwC Family Business Survey was published in 2016.
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