Transitioning your family business to the next generation

Family businesses make a significant contribution to the Singapore economy. According to the government enterprise agency, SPRING, these businesses are mainly small and medium enterprises (SMEs) and form 99% of all enterprises in Singapore. They employ seven-in-ten workers, improve innovation, and contribute over 50% of national gross domestic product. Ensuring the continuity of these businesses is vital to the Singapore economy.

However, I have come across a number of patriarchs/matriarchs of family-owned businesses in Singapore and across Asia who struggle with the challenges and common questions related to succession -- Who should I groom to take over my business? Should I groom the most fair or the most smart? Will my child/children run the business without compromising its core values? Will my son or daughter be interested in joining the business and take over from me, in the first place?

To judge what is fair and what will be effective and enable a legacy to be sustained are extremely difficult decisions. So how do you ensure the continuity of a family-run business given these dynamics and family-related issues?

While there is no "one size fits all" solution, I feel that the establishment of a family governance structure well in advance, regardless of the size of the business or family, will significantly improve the chances of successfully transitioning the business to successive generations.

The reason is that Family Governance provides a formal framework that facilitates open discussions and efficient decision making amongst family members in an organised manner while keeping the family values and business interests in mind.

In many ways it is moral suasion. It may or may not be legally binding but it is clearly ethically binding. It defines the family members' roles and responsibilities, and their interaction with the family business. The components of Family Governance include defining family values, establishing a family charter and council, formal meetings, drafting conflict resolutions, etc.

A survey done by CPA Australia and KPMG across over 40 Singapore family businesses spanning various industries (chemical, energy, healthcare, etc.) showed that 88% of the families considered governance structures an important element of their business while only a third considered their business to be exit- or succession-ready.

While 56% said that family values have a significant impact on their family business and are communicated informally, only 12% are done formally and 64% informally.

Some families are reluctant to discuss the concept of Family Governance as they feel that their family structure is "simple" or their wealth "is not sizeable". However, the concept of family governance is independent of one's bank balance or complexity of the structure of the business/family because the concerns mentioned above are common for all families, whether they are family-run businesses or large inheritances derived from a very successful professional run.

Starting early discussions with the younger generations regarding the value system of the family, vision of the business, understanding their interests and aspirations, etc., and establishing a governance structure around these themes can help address the questions raised above, effectively manage conflicts that may arise, and help grow the family business in a sustainable manner.

This will ensure the continuity of Singapore family businesses which play an important role in Singapore's economy.