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Preserving Your Business..Biggest asset that brought you to who you are today (Part 2)

Preserving Your Business..Biggest asset that brought you to who you are today (Part 2)

In our last volume, we spoke about succession issues for various types of business and its ownership and leadership challenges faced by the founders.

Business Succession Planning challenges consist of both Non Family and Family Business Succession Planning. Although fundamentally they posed similar challenges, both of these characteristic has its own uniqueness when come to planning.

Non Family Business Succession Planning

The most common set up where resources, expertise and capital investment of each non family related partners are combined to form a business entity. Such partnership requires either through a formation of Partnership or a Sendirian Berhad (Private Limited) type of business in Malaysia.

From the Asset Protection and Preservation perspectives, the most significant differences between the two are that the former posed an unlimited liability while the latter poses limited liability circumstances.

Some major lookouts for protecting and preserving your interest in a Non Family Business Succession Planning are as follows:

 

If you’re running a successful Partnership type, perhaps its time to consider changing it to a Sendirian Berhad type. Apart from being a limited liability entity, it gives you the succession flexibility, credibility and accountability to put forth your company for the next generation to manage

Time flies, looking back 10 years with current partners. Perhaps it’s high time to be ON the business and plan for succession while the sea is still CALM.

As we age, we gain more wisdom. When the average age of all partners is 45 years old, it’s time to call for a Corporate Will arrangement amount the partners.

When was the last time, the partners had a boardroom tussle? Since then, things have not been like before. The partners have tried many times to rekindle but to no avail.

Your partners had numerously hinted to you that he would like to have his son work in the company and take over his position. You felt that it is not to your advantage.

Your partner is a Muslim  and at a retiring age. Health is deterioting and you are worried about the Syariah Law of distribution when he passes on. You have no intention of partnering his family upon his demise.

Many offers have been made by many potential buyers for your business but there has been no success as yet. Worry on how and when to exit is a challenge among the partners.

 

The list can go on and on. Obviously the ideal situation here is to have all the above issues planned out even before the operation of the company. Such attempts may be impractical and may be redundant too. The magic word is “Critical Thinking”. Only with “Critical Thinking”, one will develop a basic instinct of “Preservation”, preserving all that have been achieved and further accumulate it to the next phase of life. As the saying goes “If it’s Worth Striving For, it’s Worth Preserving”

Family Business Succession Planning

Too many family firms go from rags to riches and back again. All too often businesses thrive on the energy of founders who make no plans for  the future. When they retire, the new generation of owners may be totally unprepared or unsuited for their new responsibilities, or just not interested. As a result, a viable business may be sold at a hostile sale price to a competitor or may drift from growth to survival to failure. Loyal employees’ jobs may be lost; many of the best will see the warning signs and leave, taking key skills and knowledge with them. Any investor examining a business plan will include succession planning in the risk assessment. Why should an owner manager give the same issues lower priority? 

In year 2002, on the K.L. Stock Exchange (KLSE, now known as Bursa Malaysia), families controlled about 40% of the Publicly Listed companies. The top ten families own a the quarter of market capitalization and out of the top 10 firms on the KLSE, 3 are family controlled i.e. Genting, Resort World and YTL. The rest are Government Linked Companies.

Planning business succession cannot be a secondary priority. It is as important an element of business strategy as the identification of markets or the development of products and has just as much influence on success and failure. The term “family” can be applied loosely and many of the issues considered apply in any small business that is informally managed.

The successful entry of a new generation into the top jobs is not a single event, but a long-term process. When talent is identified and nurtured, couple with long-term support among its owners, employees and the family members, the business endurance level can be tolerated and manageable in order to secure a successful change.

However, a successful 1st tier transition from Founder owned businesses to Siblings owned businesses does not necessarily guarantee a successful 2nd  tier transition from Siblings owned businesses to Cousins owned business. The most challenging transition lies in the 2nd tier where the challenges do not only comprise  of  the  leadership role but also the ownership role where shares of the company are further fragmented resulting in further dissection of control, power and rights.

Yet even when plans have been made for the future, clashes of family and commercial priorities can set the business in the wrong direction leaving the siblings strife around the wreckage. The harmony and thus, the success of family firms pivot on the melding and contradictions of family and  business values. Succession is just one important issue in the family melting pot.

The management of family communication, concord and of personal agendas is as, if not more, essential to the process of generational change as any technical issue relating to tax, funding or valuation. The psychology of the family firm and the impact of the inevitable clash of families and commerce on succession are important aspects of this guide. The approaches suggested and used, are from our experiences, when advising our clients or any business owner.

Corporate Will – the least you could do

Whether you are running a Family or Non Family owned businesses, the word “Corporate Will” suggests the existence and continuation of the company after the demise of the owner. It is another form of agreement that you must have with your partner. Some say that it is a Shareholder agreement but we say it is an extension and a comprehensive coverage among partners that extend beyond death.

Such planning enables us to see the Holistic picture of every angle of a complex situation. Firstly, it consist of the Risk Management ideology bearing in mind the strategies by understanding their existing Shareholder’s agreement (if any), the Company’s Memorandum & Article (M&A), determining and formulating the right strategy to achieve their ultimate goal.

Secondly, the formulations look into the perspective of death of either of the partners. Will the deceased family succeed the ownership and be allowed to resume as the Director or will the surviving partners buy over the shares from the deceased family (shares can be liquidated instead of holding a paper value of the shares). Must the deceased sell to the surviving partners? If not what are the recourse to such distressing issues.

Thirdly, what are the mechanics that would supervise such a transaction between the deceased family and the surviving partners so that both parties’ interests are taken care of?

Fourthly, is there a funding mechanism that would enable the surviving partners to fund the terms of payment to the deceased family?

Fifthly, what will be the reasonable and customarily purchase price? Judging from the usual fact that the buyer will want to buy at the lowest possible and the seller wants to sell at the highest possible, is there a valuation formula pre-determined by the shareholders.

Lastly, there is a need to study the tax and accounting implications to achieve tax efficiency for the benefits of the company, surviving partners and the deceased family.


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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

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