Articles

Preserving Your Business..Biggest asset that brought you to who you are today (Part 1)

Preserving Your Business..Biggest asset that brought you to who you are today (Part 1)

Crisis and changes in management is always almost possible due to circumstances like slow down of business, retirement,serious disability or death. At this stage, business owners would rather not consider any planning. Being ON the business at thisstage requires more efforts and resources as the crucial issues determine the continuation of the business. Business owners areusually on the look out for hostile takeover by others at this stage. 

Succession planning is important for all businesses, no matter how distant the actual succession may seem. It is like any otherplanning that you have done for the progression of your business. A succession plan is a formal process that determines how abusiness will be transferred during the lifetime or even upon death, outlining the steps necessary to prepare for feuds amongst thepartners and during the transition for the new owner. Such a process is called Business Succession Planning.

Defining Business Succession Planning

 

The process by which a business owner plans for the successful transition of their business investment in order to maximize its valuethus, maximizing the return on investment for the largest component of one’s personal assets, estate, and life’s work. By planning forsuccession, its liquidity and marketability will be increased. However, preparing such a plan at the earlier stage is important, even ifyou do not plan to retire for years to come. An unforeseen event may suddenly make it impossible for you to continue your business.

Typically, the Life Span of a business is very much dependent on its founder. The following diagram shall enable us to develop somecritical thinking.

Image

The T-junction SYNDROME

 

The above diagram shows the Founder’s business cycles of a company and  the chronology of succession when reaches its Peak inhis/her career either due retirement or exit from the company. The T-junction signifies the options of which routes will the founderundertakes. Some common questions forwarded to us by our client are as follows;

 

  1. What will be the best time frame in order to avoid the implications of the T-junction syndrome?
  2. What if I decided to take the right turn but my family members are not ready to take my role?
  3. I do not wish to sell my business unless being forced to. How do I prevent a forced sale of my business?
  4. During these business cycles, what are the parameters I should look upon in order for me to have a smooth succession?
  5. What happen upon my death? How does it implicate my business further?


Succession issues for various types of business

 

Let us explore the 2 categories of businesses in Malaysia. They are;

 

  1. Sole Proprietor/Partnership
  2. Sendirian Berhad (Private Limited)

1. Sole Proprietor/Partnership business

Simplicity and cost effectiveness are some of the factors why many chose to be in this form of business. It comprises bothprofessional and non professional businesses. However they both pose similar risks when it comes to Asset Protection andPreservation planning for their hard earned wealth.

For instance, as a Sole Proprietor you will have two challenges when it comes to Business Succession Planning, which is Leadershipand Ownership circumstances whereas in a Partnership set up, the demised of a partner shall automatically dissolve the Partnership unless there’s a legal arrangement between the partners as to how the Leadership and Ownership circumstances should be dealt with.

Furthermore, since both of these set ups posed an unlimited liability at the personal level, in the event of a lawsuit, their hard earnedwealth owned in their personal name shall be subjected to claims by their creditor. For example; you are a licensed professionalrunning a successful engineering firm. For the last 10 years, you have accumulated lots of wealth from the practice but do not forget,you have also accumulated much of the unlimited liability too. Your current Professional Indemnity insurance of RM 500,000.00 maynot be sufficient to withstand your current liability. However, you have regularly requested for an increase of your ProfessionalIndemnity insurance but to no avail. Therefore, this called for Asset Protection Planning where there is a need for segregation of yourpersonal wealth from your name whilst maintaining control of the wealth can be one part of the solutions.

Leadership Planning

 

Have you ever thought of who shall succeed your business in the event of premature death? Are your family members capable ofreplacing you? Have you ever thought of finding a successor and groom him/her to take over your business should you decide to call it a day? Finding a suitable successor is never an easy task. Perseverance and endurance are some qualities that a candidate must possessbefore taking over the helm. Owners often find it difficult in figuring out the best possible ‘carrot’ and incentives to keep quality people.Consistent mentoring, coaching and monitoring require lots of patience too. Having said than done, we believe that planning for suchtransition requires at least a minimum of 5 years.


Ownership Planning

 

Most Sole Proprietor’s/Partnership’s businesses are very much individualistic in nature. It is often difficult for any takeover or sale toanother. Inadequacy of infrastructure like lack of internal work processes and operating procedures, marketing and acquisition make italways almost impossible for new successor to take over. Therefore successful firms of this nature would rather wind up voluntarily or beforced to on his/her death. Please be reminded that the unlimited liability nature of a Sole Proprietor and Partnership will be furtherassessed through the process of Estate Administration where liability, if any, shall be deducted from the Estate. Therefore to circumvent  this, perhaps the Sole Proprietor/Partnership should consider converting it into a Sendirian Berhad.

However, in a Partnership Act, should one predeceases the other, the partnership would automatically be dissolved unless there is a mutualagreement between the partners during their lifetime. Should the surviving partner continues to run the firm, he or she shall act as thetrustee holding the interest on behalf of the deceased’s family. Any profit thereafter will have to be shared between the surviving partnerand the deceased’s family but any loss incurred will have to be borne by the surviving partner.

2. Sendirian Berhad (Private Limited Company)

It is the most common business set up in Malaysia. The registration is governed by Companies Commission of Malaysia under theCompany Act 1965. One of its best characteristics is the Limited Liability where the Shareholder is not exposed to any Liabilityincurred by the company. However, below are the frequently asked questions:

 

 

Are you ON or IN your Business? Are these your concerns…?

 

  • I’m a shareholder and director of the company. Currently, my company have taken a RM 5M loan from a Financial Institution andI’m required to provide a Director Guarantee on the said amount. Will the limited liability of a Sendirian Berhad protect me from such liability in the event that my company defaults the loan?
  • My business is picking up, how to prevent greed amongst my partners and plan for a Corporate Will?
  • How do I plan to exit and still have a consistent income after that? Will my partners allow it?
  • My partners are older than me, they will probably leave the business first. What would happen to their shares? I do not wish for hisfamily member to succeed him and become one of the partners
  • I plan to start up business with my friends. What kind of agreement should I put in place to prevent any misunderstanding in future?
  • Will my partners continue to pay the same amount of perks (that I’m currently enjoying) to my wife upon my death? How can Imake sure that my surviving partners do not shortchange my wife?
  • How do I protect my company against death and disablement of the Key Person in my company?
  • I have Muslim partners in most of my businesses. What are the implications if I don’t plan and upon their demise, how would theSyariah Law of Distribution affect me and the business?

  

The above shall always remain anonymous if one does not develop the critical thinking of their current situation. Only throughcritical thinking, would one develop the basic instinct of Preservation. To further develop the mindset and for better understandingby our client, we have enclosed our sample of Business Succession Planning Health Check.

In our next newsletter, we shall cover Business Succession Planning or both Non Family and Family businesses on their distinction andchallenging issues.

Image

Alvin Yap is the Principal Consultant and Group Managing Director of A.D. Financial Sdn Bhd (“ADF”). Under his leadership, ADF has expanded its footprint in Asia by establishing offices in Singapore and Hong Kong to provide consultancy for high net worth clients from Singapore, Indonesia, Vietnam, China and other countries. Besides that, he is highly sought after to speak in regional and international family wealth planning seminars. His expertise in Business Succession Planning has led many business owners and founders of listed companies to seek his advice on their complex business continuation and personal wealth matters.

Alvin is currently devoting his Practice to Multi Family Office Advisory for high net worth Individuals in structuring their complex wealth matters with a view to preserve their hard earned wealth. A strong believer of “Preservation First, Accumulation Second” and “Distribution Last”, Alvin’s expertise injects a fresh perspective on how wealth and family values can be preserved for many generations in Asian families.


If it is worth striving for, it is worth preserving

SOCIAL SHARE

Share This
© 2021 A.D. Financial Sdn Bhd. All Rights Reserved. Developed by CrunchyFrogPro