By Prof. Enrique Soriano
The pandemic is still here and is not slowing down. Variants have moved to the Delta stage and we are experiencing markets changing and global economies faltering. The challenges facing businesses today are enormous and many founders and 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 are 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 other 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.
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% of business leaders in the ASEAN 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 it becomes irreparable.
Running a business without any form of transition plan is like heading to the jungle without a 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? I am providing a laundry list of issues that a business leader can use as reference. Death is a thief in the night so the key is planning for the future!
Family and Business issues
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- 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
Ownership Issues
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- Ownership succession timeline
- Shareholders Agreement consistent with the transition plan
- Who can own shares? Active, non-active, immediate, 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?
- Expectation of present owners 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. Before COVID-19 struck, I would regularly meet high net worth (HNW) Asian entrepreneurs and plot their vision for the future and 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. Sadly, they are not alone though. In a Wong + Bernstein Advisory internal research initiative, fewer than 30% of business owners have a succession plan in Asia! You can prevent losing all that you worked so hard with a good and enforceable transition plan.
The key is preparation! Founders including next generation leaders always think of themselves as superheroes and take the inevitability of death lightly until one day he or she discovers something that will forever change his or her perspective about life and living. And then in a blink of an eye, the mortal faces death and reflects on the family and the family business and the “what ifs” and the “what should have been done”. But in all likelihood, it will be too late. Thus, it is no surprise that the Chinese saying, ” Wealth Shall Not Last Three Generations” will continue to consume and haunt families in the event that death suddenly occurs in the family.
