Succession planning vital for family-run firms

Retirement provisions of founding members of family-run businesses are indeed an important consideration for succession planning ("Harmony vital to family-run businesses / 'A successful business is not just about bottom line'" and "Family or business trust may be set up for wealth transfer"; both published on Wednesday).

This could be achieved in a number of creative ways, including the use of private annuity vehicles.

This way, shares in the company are transferred in tranches from the founding members to the inheritors, in return for a regular income stream from the company over the lifetime of the founding members.

Such a mechanism allows time for the inheritors to be assessed as to their readiness and willingness to take over the business.

It also permits the inheritors to gradually gain control of the company in a calibrated manner as they acquire the experience and skills needed.

Should there be any lengthy transition period in ceding control to the next generation, third parties, including fund managers, could be hired to plug any skills gap or other gaps, or to manage assets under any trust fund.

These third-party partners should be given incentives to grow the company and not to merely maintain the status quo.

Incentives could be by way of deferred compensation schemes with appropriate vesting schedules where the pay-off is tied to the company's long-term financial performance.

In this way, these third-party partners do not become shareholders in the company, thus preserving control within the family, while at the same time, their long-term interests are aligned with those of the company.

Onerous covenants, including 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.

Given that family businesses are a major growth pillar for the Singapore economy, succession planning should be given more emphasis.

Woon Wee Min

A version of this article appeared in the print edition of The Straits Times on August 12, 2016, with the headline 'Succession planning vital for family-run firms'. Subscribe