Succession planning vital for family-run firms

It was interesting to read that most of the corporate heavyweights in South-east Asia are family businesses and that in Singapore, only about 60 per cent of them have succession plans in place ("Leaving family business in good hands", Oct 4; and "How to avoid squabbles in family-run firms", last Sunday).

The retirement planning needs of the founding members are an important consideration in the succession planning puzzle.

As the family business is transferred to the next generation, the retiring founding members will want their retirement needs to be taken care of.

This can be achieved in a number of creative ways. One is the use of private annuity vehicles, where shares in the company encapsulating the family business are transferred in tranches from the founding members to the inheritors, in return for the consideration of a regular income stream from the company over the lifetime of the founding members.

This mechanism permits the inheritors to gradually gain control of the company in a calibrated manner, as they acquire the experience and skills needed to run - and eventually take over - the company.

Should there be any lengthy transition period between the founding members ceding control and the inheritors taking over, hiring of third-party partners to plug any skill and other gaps or to manage assets under trust also needs to be managed sensitively.

These third-party partners should be incentivised to grow the company and not see themselves as mere custodians to maintain the status quo. Incentives could be by way of deferred compensation schemes. Non-disclosure agreements, non-competition clauses and compensation clawback provisions could be employed to protect the family business' interests and trade secrets from any potentially renegade third-party partners.

As the article has rightly pointed out, succession planning for family businesses involves managing a broad range of financial and behavioural issues and can be stressful.

Given that family businesses are a major growth pillar for the Singapore economy, family business succession planning should be given more emphasis by the relevant government agencies in concert with the private sector, through public education and spreading greater awareness of the need for it.

Woon Wee Min

A version of this article appeared in the print edition of The Sunday Times on October 18, 2015, with the headline 'Succession planning vital for family-run firms'. Print Edition | Subscribe