Handing over the reins of a family business can be fraught with challenges. Putting a succession plan in place can help make the process easier.
Recent years have proved challenging for businesses around the world. Having navigated a pandemic, many business owners are now dealing with rising inflation, soaring energy prices and a race for talent. As a result, business continuity could be high on the agenda for many companies.
For family-owned or family-managed businesses, ensuring that the business keeps running (and evolving) is one thing, but continuity in the form of succession planning adds an extra dimension – one that may be fraught with emotions and conflict.
It’s a scenario that becomes even more complex when a number of generations are involved in the business and the company is one that operates internationally.
So it isn’t surprising that many family businesses put off succession planning in order to focus on everyday operations. Indeed, according to PwC’s Family Business Survey 2021, only 24 percent of family companies in Asia Pacific have a robust, documented and communicated succession plan in place.
The reality, however, is that there are many factors in play when it comes to family business succession planning. Quite often, families don’t take a proactive approach; instead, they consider succession planning only when there is a trigger event, such as the founder (or a family member) becoming ill or dying, or circumstances change, such as an unanticipated sale of part or all of the business.
Cultural traditions can also affect succession planning. “In Asia, especially for families that hold strongly to traditional values, there is an inherent respect for the older generation and talking about wealth transfer planning may be a difficult conversation,” says Alvin Chiam, a wealth planner for RBC Wealth Management in Asia. “This topic needs to be approached tactfully while keeping in mind that harmony and mutual respect are highly valued in the family.”
Failing to properly plan for succession, however, may create problems. For example, it may lead to conflict and disharmony, which can affect business performance. At worst, it may lead to the failure of the business.
Michelle Lau, a wealth planner at RBC Wealth Management in Asia, says there isn’t a one-size-fits-all approach to succession planning. And while the idea of creating a plan may be daunting, it is essential that one is put in place.
Here are some tips to help family business owners plot the transition from one generation to the next.
“It’s never too early to start planning,” says Lau. “There may be a lot of moving parts, especially if the business and family members are in various parts across the world. It’s important to get ahead of the game and not be left reacting if decisions around succession are suddenly forced on the business.”
The need to plan ahead becomes all the more evident when you consider how succession planning can be a very long and involved process. “It can take between 10 and 15 years to prepare and ready the next generation to effectively take over the family business, ” explains Chiam.
“With this timeframe in mind, every patriarch or matriarch could start putting succession plans at the earliest opportune moment.”
Starting early also means that a family is on the front foot if the head of the family suddenly dies or has to hand over running the business.
Families need to take a strategic approach to succession planning. Central to this is establishing who is going to be assuming which role. This can be critical when the family business is multi-generational, has operations across jurisdictions or there is a large number of family (and extended family) members already involved in the business or expected to take on new roles.
The aim is to ensure that the right people are in the right positions going forward. This can play a major part in assuring shareholders that the business will continue.
Identifying who will be taking on specific roles means those individuals can learn the necessary skills to make the business work beyond the lifetime of the founder. Chiam also believes that, it is important to be very open with the process when it comes to grooming the successor. Transparency in the process will help build a relationship with key stakeholders to ensure a smooth transition.
It isn’t uncommon for patriarchs and matriarchs to simply assume that the next generation is going to take on the running of a business. But it’s vital to find out whether they actually want to be involved and to what degree.
“As well as identifying who actually wants to participate in the family business, it’s also important to understand the strengths, weaknesses and interests of family members and deploy them in the best way possible,” says Lau.
Understanding who wants to be involved can create a springboard for your plan, including the need for any training or obtaining essential work experience.
Lau says that with this understanding, patriarchs and matriarchs can then determine if some aspects of running the business may need to be outsourced.
“Some families may implement a shadow family council as part of the succession preparing process,” says Chiam. Creating a shadow family council will allow younger family members to gain experience by observing board meetings and listening and learning from the existing board.
As important as it is to have the right people in place and start building a strategy for transitioning to new leadership, this has to be aligned with the family’s broader values and vision for the business.
Whereas the current leaders may have a view about the future, it may vary greatly from that of the next generation, who may likely to bring expertise and knowledge in technology and emerging consumer trends, as well as being far more attuned to matters such as equality, diversity and inclusion (EDI), and environmental, social and governance (ESG).
Chiam believes that, generally in Asia, family values may sometimes be placed on a higher plane than family vision.
And wealth planners may value add by sharing experiences of how other families manage their businesses and wealth transfer plans while assisting to ensure it aligns with their values, he says.
For example, weighing the pros and cons of selecting a successor via a meritocratic approach versus passing it down directly to the most senior family member in line.
Both Chiam and Lau believe it is essential to put a corporate governance framework in place so that there is a fair, clearly articulated and impartial process agreed upon by all parties involved. This can include ethics and a code of conduct, family member employment criteria, remuneration committees and much more.
Yet again, there is work to be done here, as only 61 percent of Asia Pacific family businesses have a clear or formal governance structure in place, according to PwC’s Global Family Business Survey 2023 .
Considering how the business may form a significant part of a family’s wealth, succession should be seen as part of broader wealth planning, including estate planning.
“In assessing a family’s broader wealth picture, there may well be business assets and financial assets,” says Lau. “Often these are intrinsically linked. Shares may be passed down, which can impact the running of a business, for instance. The founder may also want to sell parts of the business in order to create liquidity.”
As such, it’s important to think about what structures can be used to ensure the founder’s wishes are met, consider the tax implications and ensure business continuity. This can include any specific requirements in a written will as well as potential structures such as trusts and shareholder agreements.
Perhaps the most critical element to keep in mind when setting up a succession plan is to see it not as a one-off event but an evolving blueprint for transition. Regular reviews should be put in place – for example, every two or three years – and ad hoc reviews should take place if something happens that throws the plan or the business off course, such as a pandemic, geopolitical issues or a change within the family itself.
As we have seen in recent years, the world can change very quickly and businesses can be forced to rethink their everyday operations. When such a situation occurs, it is easier to review a succession plan that is already in place, rather than try to create one from scratch.
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