Family Business: Is it the Business that Keeps the Family Together? Or the Family that keeps the Business Together?
Evanna Phoon wrote the below article and she is a Senior Franchisee of Rockwills. She can be contacted at firstname.lastname@example.org
On December last year, Malaysia SME organized its regular Business Networking Seminar (BNS), this session of seminar was very important that I specially took the time to attend Ms Lelainie Mohd Nor of University Tun Abdul Razak because I am interested to learn more about their project Successful Trans-generational Entrepreneurship Practice (STEP), which is of much relevance to my column on family businesses succession planning.
As all the audience listens to hear her interesting one hour talk, I was amazed at the research and work done by her to compile those global case studies on real life family business. The talk had indeed enriched my knowledge and at the end of the day, one impactful phrase kept repeating in my mind “Is it the Business that keeps the Family Together? Or the Family that keeps the Business Together?”
We went through the three circle family business model in the previous issues, the first circle is family, the second circle is business and the third circle is ownership. My line of work deals more with the ownership circle where we help clients to setup a family business trust to hold on the shares of family business to avoid splitting of the shares downwards to their descendant. This action is to protect and preserve the shares or assets of the family and to ensure that the dividends or income derived from the assets will be enjoyed through many generations and not touching the capital. We call this Asset Protection Structure.
If we do not have Asset Protection Trust structure put in place, what will happen is the company shares will be split downwards, let’s say to 4 children, each owns 25% of the company share, and their children’s children or great grandchildren will own maybe 4-5% of the company shares. Another worry is also on the ownership of the family business shares will fall into an unintended third party. I have a client who, during his lifetime has transferred part of his shares to his daughter and her daughter recently passed away. He worried now because his son-in-law now owns a portion of his daughter’s shares (which is his company’s share) and he is worried on what the son-in-law is going to do next.
Just imagine the Asset Protection Structure as the “hardware” of a successful succession of family business because with a Trust in place, it’ll takes care of the ownership portion, Is it enough? My answer is obviously a big NO. We’ll need the “software” part.
When the founder sets up an Asset Protection Trust, it is important to also think of family governance structure in place for the family to follow in case the founder is no longer around. It’s a set of family rules and family constitution. This is a very personal process depending on individual families and it’s a very fulfilling process when I spend most of my time with the client and their family members is to draft the family constitution or family charter. This is a indeed a very personal process.
They’ll talk about the background of the family and how the grandfather of the founder came and made his wealth and how the founder expanded the business. What are the unique family values and the traditions? What are the election processes to elect the family council or some call it protective committee to represent each family branches and make sure the family stays together in major decisions making process. Let’s take back the example of the above 4 children, when the founder is around to continue to make certain request to the trustee and tells the trustee how to go about with certain things, but when the founder is no longer around, if the trustee listens to one, the trustee might make the 3 other children unhappy. Or if the trustee listens to 3, it will make the one unhappy. We all know that family issues are sensitive issues that must be dealt with extra care. The proper family governance structure will now help these 4 children to give unified advice and put in place a process to help them achieve an agreed decision to give to the trustee. This is very important that a lot of Malaysia SME might overlook when planning for their trust.
A holistic and successful succession of family businesses takes time and effort to plan but it’s definitely worth the effort. From my experience, this type of planning is an exhaustively long and complicated process but I try to make sure that my article sharing in this column is simple to read and digest for the benefit of Malaysia SME community.
Statistic shows that many Malaysia SME businesses don’t survive more than three generations, we hope that by sharing in this column, we can see more Malaysia SME business thrive even after many many generations.
In the next issue, I’ll go more in-depth about the family governance structure … Stay Tuned.
About the Author:
Evanna Phoon is CEO & Founder of www.MalaysiaWills.com, Malaysia’s first online will writing service provider for Rockwills Corporation Sdn Bhd & as-Salihin Trustee Bhd. She can be contacted via email@example.com.