SMALL and medium size enterprises (SMEs) account for more than 96 percent of enterprises in Asia and they make up close to 80 percent of family business owning firms. In China alone, the SMEs comprise 99.8 percent numbering more than 18 million businesses. Although perceived as small, the SMEs’ combined contribution to any economy is significant. Despite being a major engine of growth, family firms face a number of specific challenges, largely related to corporate governance and a lack of robust succession structures. These challenges when unchecked can limit growth and reduce a company’s lifespan. It is a fact that most family businesses do not go beyond their founder’s stage and just 30 percent of family businesses make it through the second generation while a significant 95 percent of family firms do not survive the third generation of ownership.
In a survey my firm W+B Family Advisory conducted recently, we asked business owners, big and small, “What issues do they consider of greatest importance and greatest difficulty?” And their responses validated our previous research.
* Commitment of the next generation to continue
* Estate planning
* Commitment, harmony and trust
* Unified family ownership
* Clarity of roles
* Ownership structure
* Multi-generational unity
* Alignment of family vision and business vision
Other major issues that will predictably cause conflict
* Transition from informal to a more formal structure
* Conflict resolution among family members
* Clarifying roles and imposing accountability
* Managing generational conflict (First Gen and Second Gen and Third Gen)
* Formulating a succession plan
* Developing a strategic business plan
* Sharing of power between founder and children
* Developing a retirement and estate plan
Succession consistently appeared in all phases of the family business life cycle. Like it or not, a transition will take place, whether planned or unplanned. It can be caused by death, disability, health challenges, family disputes and other life events. Unplanned transitions generally are marked by problems that often prove devastating to the business, family relationships and the family wealth. That is why planning well in advance is critical and non-negotiable.
Succession is a long-term complex process, not a one-time event. And the process can be likened to that of a franchise business—where everything is structured replete with systems to the point that a new franchise owner can step in at any time and operate a new store with very few complications. If new franchisees are required to understand the franchise manual from cover to cover, family-owning businesses must have a succession plan as a powerful guidepost which invariably includes a successor development plan.
However, the similarities end there. Succession planning (including family governance) can be quite a challenging process. It covers a lot of social and technical facets ranging from psychology, management and leadership plus the highly sensitive human dimension that is embedded in the entire transition process.
Based on my experience helping family-owning businesses transition to the next generation, I have seen too many faulty successions because the founder or key business leader only identifies the successor when it’s too late (usually triggered by an event like death or incapacity) and merely updates his estate plans. Critical issues about ownership, governance, organizational development, financial and retirement planning and business strategy are ignored.
To borrow a quote from Prof. Josep Tàpies of IESE Business School, “All companies are subject to risks, but family companies, because of their very nature, can more easily succumb to a series of mistakes. The succession process is a key issue that the family company must confront. It is a long process that requires planning and collaboration with outside advisors. A well-prepared succession requires the intensive training of one or several different successors. It also requires you to establish conditions that will regulate relationships between shareholders, managers and corporate personnel in the future.”
The Family Governance and Succession webinar event on Saturday, Aug. 30, 2020, drew more than 350 local and international high net worth business owners and their family members! Thank you to my co-speakers Steve Legler, Josh Baron and Richard Eu. The audience was absolutely thrilled and inspired! I would also like to take this opportunity to thank this paper for supporting the event, Icon Executive Events Asia, the organizer and my consulting firm W+B Family Business Advisory.