When the Next of Kin is Not Keen: Navigating the Challenges of Family Business Succession

Tai Lai Kok

Family businesses are the unsung heroes of many economies around the world. They form the backbone of our economy as significant contributors to the country’s culture of innovation and competitiveness and are the driving force behind many great achievements and legacies. Their ability to be such powerhouses is derived from the unique feature of combining family and entrepreneurship together – but it may also confront them with unique challenges if left unmanaged. 

Leadership succession is inevitable for most family businesses. As such, one of the top-of-mind concerns amongst family business leaders is the passing of baton to the next generations. Unfortunately, in the succession planning process, far too much attention continues to be paid to the technical component (legal structure, tax implications, etc) with far too little attention given to the people or non-technical component (family dynamics, communication, competencies, etc).

While there is no doubt that these technicalities are important elements in the succession planning process, it is the effective management of the family component that will ultimately decide if the succession proceeds in a sustainable manner. 

Here are some of the guiding principles to address the family component in succession planning:

Everyone plays a role

Engaging the next generation is a perennial family business question, and one that is even more crucial when it comes to succession planning. The current generation can take the lead in this exercise – by setting clear expectations and equipping the next generation with the right skills and knowledge, with guidance provided early to ease the transition process. Otherwise, the successors may find themselves overwhelmed with a series of responsibilities they might not be prepared for.

At the same time, the next generation needs to be proactive in building business acumen and technical capabilities as well as develop and maintain positive stakeholder relationships. Leading a business and simultaneously preserving its legacy is not an easy feat. Therefore, it is best for the next generation to be made aware of this so that they are able to anticipate the level of commitment and grit required to grow beyond the founders’ initial aspirations.  

Establishing a fair evaluation system

Evaluations can be a sensitive matter and prove challenging; parents may lose their objectivity when evaluating their own kin and non-family employees may be hesitant to provide negative reviews of family members. However, these challenges do not make them any less important.

For starters, a formalized set of metrics to measure performance objectively can be considered.  Using a performance review process that includes numerical performance criteria ranking scale, along with a self-assessment component to encourage two-way communication, would be a good start in determining the most capable successor.

Elliot Chaw

Communicate, communicate, communicate

Of all the leading practices, effective communication is critical for succession planning. A family that communicates effectively will have an easier time navigating the succession process as informed decisions can be made when the need arises. For smooth transitioning, the communication channels must include non-active family members, minority shareholders as well as joint venture partners.

While we recognize its importance, discussions with family members in the business are much more difficult to do in reality. A delicate touch is needed, as personal sensitivities must be taken into the equation. In some cases, this is one key area that isn’t addressed appropriately and has often led to disruptions to family dynamics and relationship disputes.

We should recognize that succession and ownership transfer in family businesses should be a process that requires advanced planning at an adequate pace for all parties involved. It should not be a one-off event nor initiated by a sudden trigger point. Ultimately, the act of sustaining a family business goes beyond economic contributions and should also mean the preservation of a family heritage for the next generations to anchor their future successes on. 

By Tai Lai Kok and Elliot Chaw, KPMG Private Enterprise – Family Business Services, Malaysia

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