Family business: How to talk succession and legacy with your parents

Over the next several years, many first-generation entrepreneurs in Asia will start passing down the business to their children. With family business representing more than half of all large companies, a vast proportion of the next generation will find themselves at the helm of their parent's company.

In Taiwan, nearly three-quarters of companies pass down their business to close relatives, while 69 percent of companies in Hong Kong do the same.

Succession planning discussions will be initiated across the region, but in most cases it won't be the beneficiary who will lead the talk – it'll be the father who started the company. “In Asia, kids don't talk about business or money," explains Cynthia Yeow, director with RBC Wealth Management in Singapore. She says the family patriarch is expected to lead those conversations.

Commissioned by RBC Wealth Management, The Economist Intelligence Unit (EIU) undertook a study of 1,051 high-net-worth individuals (HNWIs), including 220 respondents in parts of Asia (mainland China, Hong Kong, and Singapore), from March to May, 2018. The new face of wealth and legacy survey explores how the meanings of legacy and wealth are being redefined across regions, genders and generations.

According to The new face of wealth and legacy research, an overwhelming number of Millennials and Gen X respondents in Asia (92 percent) believe a successful family business has a strong succession plan.

Over time, the idea of the all-deciding patriarch may change. The younger generation, and especially Millennials, aren't as afraid to speak their minds, says Yeow, which means more succession conversations may be led by the children, who are set to take over the business. “People 35 and younger are very willing to speak up to their parents and their company's bankers," says Yeow. “They demand a lot of rights and don't always agree with the parents."

In fact, The EIU research found the majority of younger generations surveyed in Asia (79 percent) want to take the reins. A successful succession plan for a family business, with all parties at the table, will ensure a smooth transition of values, beliefs and new ideas.

Why a business succession plan is critical

Still, for adult children, telling their parents they'd like to run the family business differently, or don't want to take over the company, can be a challenge. In many cases the discussion is a family affair – with parents, siblings and potentially others, says Yeow. If someone wants to start their own business, or wants to change the direction of a company, they should craft a plan to present to the family. This is especially true if family money will be required to finance a new venture. “They'll have to show they can do things better with their money," she says.

For children who want to talk about their careers with their parents, it's important to be calm and open, says Vivian Kiang, head of wealth planning at RBC Wealth Management in Hong Kong. She too says the heir will need to present a plan around how they might change the company, but both parties need to be as dispassionate as possible and take a few days to ponder the ideas. That's difficult for entrepreneurs, as they're often emotionally attached to their business, she says.

It helps if family members already have a close and open relationship, but children should still expect some pushback if the idea is one the parent may find hard to understand. “Both sides will have to take some effort to make this work and the parent shouldn't just reject the idea as soon as they hear it," says Kiang. “Sit back and think about it and have some reasons for why not instead of 'I just know the business.'"

Work in the business first

In some situations, there won't be much of a discussion at all. Children often work in the family business when they're younger, in part, to see if they have an interest in taking over. In many cases, it becomes clear the second generation can't handle the rigours of business ownership or they don't have an interest in the company. If everyone knows the expected heir isn't taking to the business, it's easier for them to tell their father they'd prefer to do something else, says Kiang.

Still, the parent may be a little upset. “There's always some disappointment with the parents,” Kiang adds. But doing what's best for the business could mean taking a different route. “Millennials have their own mindset – and many don't want to use old ideas.”

Most parents do come to terms with the fact their business may end up outside of the family – they have other options, like selling to a private equity firm, taking the company public or handing it over to someone else – but it helps if the child can tell their parents that they want to become a doctor, lawyer or join another profession. “They want the children to participate in the business, unless the child is into arts or professional studies," she says. “A profession will be respected by the parents.”

Ultimately, the next generation needs to be upfront with their desires and be truthful about the future they see for themselves and for the family business.

“(Parents) are more willing to embrace the ambitions of their children," Kiang says. “Some do realize what was lucrative in the past may not be lucrative right now."

The margin of error on the total Asia sample is 6.6 percent with a 95 percent confidence level.