How to prepare a family business for succession

Succession is the point where a family business is tested. It is a business problem and a family problem at the same time. If the business depends on you, your successor gets a job that is hard to do. If the family has not talked, your successor gets an argument.

Most owners I meet think of succession as a legal task: wills, shares, trusts. Those matter, and they come later. The first task is to make the business ready to be handed over.

I am a strategist, not a lawyer, accountant or valuer. I help you get the business ready. Your lawyer, accountant and planner handle their parts.

Why family business succession is hard

Three things make it hard. The founder is often the business. The family’s money, roles and feelings are tied to the same company. And the talk keeps getting put off, because it is uncomfortable.

In many Malaysian family businesses, the founder still makes most of the decisions. The next generation may have studied or worked elsewhere. Some want to come back. Some do not. Some want to, but the founder will not let go.

None of this is unusual. The cost comes from waiting. A handover planned over several years is calmer than one forced by illness or an accident.

Step 1Decide what you want

Before you talk to anyone else, decide what you want. There are three common paths.

• Keep it in the family. A child or relative leads, and the family owns.
• Family owns, professionals run. The family keeps the shares. An outside chief executive runs the business.
• Sell. To an outside buyer, or to your own managers.

Then ask yourself four questions. When do I want to step back? What income do I need afterwards? What happens to the staff who have served for years? What do I want the business to stand for?

You do not need final answers. You need a direction. Talk it through with your spouse or closest partner first. Then talk with the family.

Step 2Make the business ready to hand over

This is the step most owners skip. They go to the lawyer first. A lawyer can move shares. A lawyer cannot make the business safe to hand over.

Whichever path you choose, the business must run without you. If it does not, the successor takes over a job that depends on a person who is leaving.

Start with three checks.

• Can the business run for four weeks without you?
• Are the accounts clean and up to date for the last three years?
• Are contracts, licences and ownership papers complete and in the company’s name?

Our guide on how to make your business run without you covers the first check. Our guide on what lowers the value of a business in Malaysia covers the other two.

These are also the checks a buyer would make. So this work keeps every path open, including selling.

Step 3Find out who wants to lead and who is ready

Ask each child, and each senior manager who might lead, three direct questions. Do you want to lead this business? Why? What would you change?

Wanting and being ready are different things. Check both. A successor who wants the role but is not ready needs time and support. One who is ready but does not want the role should be free to say so.

Fair and equal can be different things. A child who runs the business and a child who does not will have different roles. Plan ownership and management separately. Ownership can be shared. Management needs one clear leader.

To build readiness, give the successor a real area with real numbers and real authority. Let them make decisions and own the results. Meet every month to review. Add more areas over time. Avoid handing over everything on one day.

Step 4Build the team around the successor

Your long-serving managers and staff matter. They know the customers. Some have worked with you for twenty years. They will watch how the successor is treated. If they feel pushed aside, they may leave, and customers may follow.

Talk to them early. Tell them the plan, what their role will be and how they will be looked after. Name a second line of managers, so the successor does not carry every area alone.

An outside adviser, or a small advisory group of people you respect, can also help. They can give the successor advice that a parent cannot.

Step 5Agree the family rules in writing

Write a short family agreement. A few pages is enough. It answers the questions that cause fights later.

• Which family members may work in the business, and what skills or experience they need.
• How family members are paid, at market rates for the role.
• How big decisions are made, and who has the final say.
• How shares may be sold or passed on.
• What happens if someone wants to leave.
• How the family will settle disagreements.

Meet as a family once or twice a year to review it. Keep business talk for these meetings, so family dinners stay calm.

Step 6Handle the legal and tax side with the right advisers

Now bring in your advisers. Each one has a part.

• A lawyer. Wills, how shares pass on, a shareholders’ agreement and the legal side of the transfer.
• An accountant. The tax effect of any transfer, and the state of your accounts.
• A wealth and succession planner. How your personal assets, insurance and any trust or hibah arrangement fit with the business plan.
• Your banker. Business loans often carry the owner’s personal guarantee. A handover has to deal with this.
• A valuer. If shares will change hands at a price, a qualified valuer can help set a fair figure.

If you are Muslim, or if some of your shareholders are, Islamic inheritance rules (faraid) affect how an estate is shared. Plan with an adviser who knows how these rules work with company shares.

Your will and your succession plan must agree. A will that gives shares equally to all children can undo a plan that gives control to one.

Step 7Hand over in stages

A simple three-year pattern works for many families.

Your business may need more time or less. The point is that the handover is a series of small steps, and each step is tested.

Decide your own role after the handover and write it down. Founders who stay without a defined role often undo the successor’s decisions.

Common mistakes

• Waiting. Illness or an emergency then forces the issue.
• Choosing by birth order alone. Check readiness as well.
• Handing over the title and keeping the decisions. The successor has the name and none of the power.
• Leaving long-serving managers out of the plan. They hold the customer relationships.
• Splitting ownership equally with no plan for who leads. Equal shares need one clear leader.
• Having a will that conflicts with the succession plan.
• Keeping the knowledge in your head. Write down how the work is done.

What I do, and what I leave to others

I work on the first part: getting the business ready, so whoever takes over receives a business that can stand on its own. I help owners see what to stop doing, build the second line of managers, and close the gaps a buyer or successor would find.

I work alongside your lawyer, accountant and planner. I do not replace them.

Questions owners ask

Kelvin ChongTransformation Strategist, Catalyst and Coach

I work alongside Malaysian SME owners so they spend their time on the business, not only in it. I help them decide what to stop doing and build a business that can be handed over. I am HRD Corp certified, a John Maxwell Team coach and a 10X Strategy Coach, based in Kuala Lumpur.

This guide is general information for business owners. It is not legal, tax, accounting or valuation advice. I am a strategist, not a valuer, lawyer or accountant. Speak to a qualified adviser before you act on any part of it.