Markets are changing, global economies are faltering. The challenges facing family-owned businesses today are enormous and many business leaders (baby boomer generation) who rose to prominence and wealth as a result of their hard work are no longer capable of reversing the tide of declining revenues. The cause of many entrepreneurial failures is primarily due to major risk factors and these are intense competition, disruptions and foreign exchange fluctuations, among others. While these risks are external events, there are real dangers that family businesses can predict and manage. These are family, business, ownership, wealth, and succession risks and they form part of the transition plan that every business owner must address before it’s too late.
According to MIT Family Business Senior Faculty Dr. John Davis, “more problems in families are due to their lack of governance and leadership. In the governance area, family members are not clear about the family’s mission or core values; or they lack adequate rules and policies to guide behavior; or maybe they haven’t developed a forum and process to discuss important issues and mediate differences among family members fairly. In leadership, they lack a clear vision for the future; or they haven’t accepted the need to change in order to adapt to the environment; or they are uninspired.”
In a survey conducted by ExCeD Institute Asia, an executive education firm specializing in training family owner-managers with the right strategic and functional skill set, less than 25 percent of business leaders in the Association of Southeast Asian Nations region have some form of transition plan. And there lies the danger. When these business leaders die or become incapacitated, the business suffers a hit and most often than not becomes irreversible.
Running a business without any form of transition plan is like heading to the jungle without compass and water. It can be chaotic for your family, children, employees, partners, and the business itself – a completely avoidable mess that you put yourself into! When your business goes on a decline because you did nothing but procrastinate, you should not expect to be remembered fondly. So, why do I need to have a transition plan? Fundamentally, having a plan is the right thing to do! I am sharing a laundry list of issues that a business leader can use as reference.
Family and business issues
- Succession plan and timeline
- Employment rules of family members, spouses and in-laws
- Compensation and benefits for family members
- Role of current generation of owners during and after the succession
- Communicating the transition plan to family (active and non-active), executives and employees
- Conflict resolution process
- Preparing for another round of transition should the anointed successor fails
Ownership issues
- Ownership succession timeline
- Shareholders Agreement consistent with the transition plan
- Who can own shares, the active, non-active, immediate, or extended family members?
- How will the shares be acquired (method and funding)?
- Will the ownership transfer be immediate or in phases?
- Is the ownership succession aligned with leadership succession?
- Expectations of present owner during and after the ownership succession
- Compensation for the owners when they transition to retirement
- Exit Plan and mechanism for exit (the fairness principle)
- Expectations on minority shareholders
What if a key business leader dies?
It is not only scary but too daunting to imagine a likely scenario where the founder or patriarch dies without planning and leaving the future of the enterprise hanging by the thread. In a recent family business coaching session where I regularly meet high net worth Asian entrepreneurs and plot their vision for the future, the specter of death of the business leader is always a hot topic among owners and senior executives. There are times, owners are dumbfounded and shocked when an unexpected death happens./WDJ