While it might seem counterintuitive to build in mechanisms that anticipate the sale of your family business or the departure of a family member, doing so can ultimately aid the continuity of your family’s wealth.
For family businesses, longevity is often a key goal. They want to sustain their successful family enterprise from one generation to the next, united behind a common vision.
But in any family business, change and transitions are inevitable. Even those that have endured for generations will need to adapt in order to secure prosperity amid changing circumstances.
Whether it’s a family deciding to sell the family business, or a family member departing, having a plan at the outset for these sorts of transitions – and managing them well via good governance mechanisms – can be a valuable process that helps solidify the foundations of the family business and support the longevity of family wealth.
Thinking of the future
For some family businesses, an exit is planned – it is the goal from the outset to sell the business or spin it off under a strategic partnership or joint venture. For others, it is a natural transition after many years, or a matter of circumstance: the result of a family situation, an issue between business partners, concerns about future prospects for the business, or even an unexpected offer for the business. And, of course, in the event of a family member passing, particularly if they were an owner, the family may have to decide whether to continue the business.
Selling the family business can be a positive experience: an opportunity to embark on the next phase of an enterprise, generate liquidity or take a step in a new direction. It can also be an emotional time; when a business has been built up through generations of the same family, letting go can be especially challenging.
Any way it occurs, exiting requires preparation and planning from a business perspective and a personal one. Taking a step back and reflecting on what matters most to you and your family will allow you to put in place the necessary steps to realise your plan.
“You need to get the basics in place, such as knowing the value of the business and what you would sell it for,” says Russell Prior, Regional Head of Family Governance, Family Enterprise Succession & Philanthropy, EMEA at HSBC Private Banking.
Clarity as to why an exit is happening and what the family wants to gain from it is vital, Prior notes. “There will often be things in family businesses that can muddy the waters, such as whether it’s a clean exit, what happens to employees, if your name is on the family business and so on.
“All of these can lead to confusion if you’re not clear as to why you’re doing it.”
Bringing in all generations
Any transition process should include all the generations and family branches that might be affected by a planned or unplanned exit. While some families are open to including the younger generation in these discussions, others can be more reluctant.
It can take time for elder generations in particular to adjust, says Amy Lau, Director of Family Governance Advisory, Wealth Planning and Advisory at HSBC Private Banking. “Early communication and planning will make it easier for the family to disengage from the business and get the most out of process as a whole.”
Lau notes an example of a Philippines-based family that took almost 10 years to agree on the valuation of family assets attributable to various family branches. In contrast, it took a Hong Kong family less than a year to realise their shares to support an emigration plan, because agreed-upon rules and objectives were in place.
There are post-exit contingencies to plan for too, including exit procedures and managing share sale proceeds. For instance, deals can be structured to permit family members to stay involved in the business: remaining on the board, for example.
And, as Lau points out, there can sometimes be a lot of money coming back into the family after an exit. “In that case, we are able to discuss with the family how to best use it and whether it can be put into another line of business.”
Putting the right protocols in place
Separate from a sale, family businesses may encounter a different sort of exit – one in which a family member or family branch departs the family business. They might want to carve their own path or have a different view about the direction or strategy of the business. They might be emigrating, making their involvement impractical.
There are a number of governance mechanisms available to families that can ensure these transitions are smooth.
In the US, for example, a buy-sell agreement dictates the terms, rights and duties of the different parties when one or more business owners want to exit. A family agreement or constitution can provide similar details for family businesses in Asia.
“One very common term is that if a family branch wants to exit the business, the other branches have first right of refusal to buy the asset,” explains Lau.
There might also be mechanisms to account for situations when a younger generation family member chooses to pursue opportunities separately from the family business, and later seeks to bring their new expertise back in.
Planning for a variety of scenarios
While there will be times when any form of exit seems unlikely, preparing for the different possible scenarios can prevent significant disruption further down the road, says Robert Nemzin, Senior Wealth Planner at HSBC Private Banking.
“Families are all unique and have different levels of interest in the business. That’s why discussions in advance and having an exit strategy can deal with challenges that might pop up,” he says.
A key part of managing an exit from a family business is meticulous planning and open dialogue. HSBC Private Banking can support family businesses during the planning and execution of important transitions. For more information, contact us or your Relationship Manager.