Business SuccessionMarch 27, 2023by Finex & CoBusiness Succession, who is the right person to pass your business to?

It is inevitable that leaders will eventually need to be replaced. Many business owners, particularly those who own private or family-run companies, hope for smooth transitions from one generation to the next. However, some individuals may struggle with the idea of their own mortality and believe they will never have to give up control. Studies have found that most private businesses are not ready for the handover process. This article aims to highlight the important aspects of succession planning, in order to emphasize the significance of selecting the next leaders for your business.

Let me provide a scenario for better illustration and understanding – Jeffrey, a successful business owner running an established business of feed mills, that supplies stock feeds largely in the country. Said company’s structure is a Sdn Bhd, including him there are a total of 3 shareholders. Jeffrey holds 55% interest in his company whereas his other shareholders Ron holds 25% interest and Finn holds the remaining 20% interest. Personally, Jeffrey wishes to leave behind his shares to his son Caleb. What factors should be considered before passing his legacy that he has built from the ground up?

Passing on business shares to heirs through a Will is often not enough when it comes to business succession. There are various factors to be taken into account beforehand in order to ensure the protection of the business value and the best interests of the children involved.

This article will discuss five essential factors that Jeffrey should keep in mind before transferring his shares to his son Caleb.

  • Interest

Is Caleb interested in taking over the business? The business is well established with its own business structure, Jeffrey would have to consider if Caleb has the passion to run the business, manage it and grow the business to a higher level?

If Caleb exhibits a keen interest and passion to manage the business, then it would be a definite yes for him to inherit shares from his father. However, if Ronnie is pursuing a different career or he has different interests, then it may not be feasible for Jeffrey to transfer his ownership because he may not possess the same competency as his father to operate the business.

  • Skills

Where is Caleb currently working at? Is he already being trained to take over the business by Jeffrey, his father?

Amongst the three shareholders, Jeffrey is responsible in overseeing the production and primarily in charge of running the factory. His responsibilities include tasks such as acquiring and managing raw materials, maintenance and operations of the factory’s plants, machinery, and equipment, administration, finance, and various other duties.

In the event of Jeffrey’s absence, would Caleb be capable of taking over his father’s role and responsibilities to ensure uninterrupted production of tissue rolls? If Caleb is able to do so, it would be ideal for the smooth running of the business. However, if Caleb inherits Jeffrey’s ownership but lacks the competence to efficiently manage the feed mill plant, it could create difficulties for Jeffrey’s partners, Ron and Finn, who may have to guide Caleb with production until he becomes capable. This may result in a domino effect of other issues to the business.

  • Vision

After inheriting his stakes from his father, would Caleb be able to work together with the other shareholders Ron and Finn? Each shareholder plays an important role in the business running smoothly. The business is successful today it’s a collective effort and hard-work of its founders. The founders built their business from scratch and faced numerous challenges together. The actual worth of the business lies in the strength of their partnership rather than the physical assets it possesses, such as its land, factory, warehouse, plant, trucks, inventories, finances, and so forth.

So, does Caleb share the same vision and direction for the business? Would they be able to work out their differences?

The issue at hand is that if Jeffrey were to transfer his ownership to his son, Caleb, a young adult, he would be the major shareholder of the company. This would mean  Caleb would hold the largest number of shares compared to Ron and Finn, who are older individuals that have gained hands-on experience in operating the business. At face value, there are age gaps and I can anticipate many potential disagreements that could arise between Caleb and Ron as well as Finn because they may have their differences, particularly when it comes to decision making on the direction and policies for the business’ future.

  • Leadership

It is possible that certain employees may not extend the same level of respect to these successors. Essentially, the workers may demonstrate loyalty towards the founder, like Jeffrey, and not towards Caleb, for example. It is a common problem that heirs of a well-established business often encounter.

There could be various causes for this phenomenon. It might stem from the workers themselves, or it could be a result of the actions of the successors. For instance, if Jeffrey transfers his shares to Caleb, and a significant proportion of the employees have worked at the company for over a decade, they may struggle to work well with Caleb due to: a) Caleb feels entitled and has attitude problems, causing him to be unpopular amongst the employees; b) The employees perceive Ronnie as lacking the necessary business skills and therefore, not competent enough to lead the company; c) The staff may not share Ronnie’s ambitious and forward-looking vision for the business, the list goes on.

  • Cash Out

Given that the business is a Sdn Bhd, its shares are unlisted and therefore do not have a fixed market value. In the event that Caleb inherits the shares and decides to sell them for cash, it raises questions about who would be interested in buying them, whether it would be Ron, Finn, or an entirely new third-party buyer? If it is to an entirely new third-party, it would cause fragmentation of the business. Additionally, the valuation of the shares becomes a crucial factor, as it is not clear what price Caleb could expect to receive and what criteria would be used to determine the value.

In conclusion, the five issues discussed above are just a few examples of potential problems that could arise if Jeffrey overlooks them and hands over his shares to Caleb. In doing so, Jeffrey may indirectly fail to pass on his legacy and business interests to Caleb, potentially causing harm to the business’s value, despite his good intentions.

A suitable business succession plan should be crafted out to protect the interests of your loved ones and to safeguard the value of your existing business by considering the potential issues mentioned earlier.

If you are a business owner, your situation may be more complex than the scenarios mentioned above. It is advisable to seek the help of a qualified estate planner to create a successful succession plan. If you are in need of assistance, you can fill in the information below to schedule a 30-minute consultation with our estate planning consultant.

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