Monthly Archives: April 2015

Part 1: When generations collide

LET me begin my column by personally thanking all the family members and participants who attended my Family Business seminar last Friday, April 24, in Cebu. I also wish to thank Octopus Strategic Branding led by Prof. Danny Barrenechea, Sun.Star Cebu and all the corporate sponsors for organizing and supporting a very important and timely seminar meant to equip visionaries, next-generation owners, executives, board members, and key personnel of family businesses with the tools necessary to ensure their companies and organizations’ success and survival.

With the seminar over, it is my fervent wish that participants will share with their family members key values related to governance and transition, including managing the challenges of ownership and management of their businesses.

We all know that while many businesses that are owned and managed by families recognize the importance of ownership and management transition, few know where and how to start developing a governance and succession plan.

I hope the seminar gave the participants a better understanding of the complexities of family-owned enterprises so they can now start the process of formalizing governance programs to ensure the sustainability of the family business.

The presence and active involvement of family members in the first, second and third generations will continue to inspire me to share my advocacy and passion in advising family business leaders in Asia. Thank you again for participating!

This series of articles summarizes what I shared in my seminar in Cebu last week. “Before the multinational corporation, there was family business. Before the Industrial Revolution, there was family business. Before the enlightenment of Greece and the empire of Rome, there was family business,” William O’Hara, executive director at the Institute for Family Enterprise at Bryant University in Rhode Island, once explained.

However, less than three percent of all family businesses survive past the third generation.

Those that manage to endure credit their longevity to providing essential products or services, adapting offerings over time, and forging strong succession plans and governance strategies for family members to work together. But beyond a superior product or service, it’s still the good, old-fashioned values and governance plans that define these enduring and stable family businesses.

When generations collide

In the Philippines, most companies are family-owned. They compose close to 80 percent of businesses in the country. Unfortunately, 70 percent of first-generation businesses fail to reach the second generation due to sibling rivalries, fights over ownership control and personality conflicts that can tear families apart.

Another reason is that the goals and objectives of the founding generation are rarely the same as of those of the succeeding generation. We often refer to this natural conflict as a collision course between generations. Indeed, succession problems are the greatest threats to the survival of family businesses.

Neglecting governance and succession can be a costly mistake of the senior generation.

Family business leaders, particularly the entrepreneurial founders, often neglect the issue of governance and succession because they are so protective of the business they started. Although they want their ventures to survive them and to pass the torch of leadership on to their children, they seldom support their intentions with a plan to accomplish that goal. They just dream of continuing the business long after they’re gone but take no steps to make that dream a reality.

Succession triggered by illness or death: It is also a very common sight when succession planning begins in response to an external event such as illness, accident, death, marriage or divorce. Planning should not be undertaken only as a reaction to a major health emergency of the family business leader/founder.

For then, everything might just be too late.

One of the worst mistakes entrepreneurs can make is to postpone naming a successor until just before they are ready to step down. Sometimes, founders avoid naming successors because they don’t want to hurt the family members who are not chosen to succeed them. Yet, both the business and the family will be better off if, after observing the candidates as they work in the business, the founder picks the successor based on that person’s skills and abilities, early enough.

The best way to avoid deadly turf battles and conflicts is to develop a governance and succession plan. Without it, family businesses face an increased risk of faltering or failing in the next generation. Succession planning reduces the tension by gradually “changing the guard.”

My second article will introduce 12 powerful and time-tested steps to ensure the growth and sustainability of the family business.

(Professor Soriano is an Asean Family Business Advisor and Chair of the Marketing Cluster of the Ateneo Graduate School of Business. He is a National Agora Awardee and author of “Kite Runner”, a book on family business governance and succession.)

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Liquidity problems: a successor’s nightmare

“Family businesses are constantly walking a tightrope. On one side is the need for capital to grow the family business. On the other side is a need to make family members happy via shareholder liquidity. As a family business matures, balancing the competing needs of capital and liquidity becomes a greater challenge.”

AS business matures, so does the number of shareholders.

Family businesses encounter specific problems that come along with growing and aging; not just of the business, but also of the shareholder base. Often these are liquidity problems originating from structural or incidental conflict of shareholder and business interests.

What is “liquidity”?

It is speed at which an asset may be converted to cash; being “in cash” or easily convertible to cash; debt paying ability; and distribution of dividends.

A liquidity problem in family business is a situation in which: a) one or more family business shareholders, with a significant influence in the family business, demand the business to change its policy on providing liquidity for shareholders, or b) the family business is unable to meet “outside” liquidity demands (like estate taxes) that are necessary to keep the business in the family.

The need for capital is the recurring problem of generating liquidity and dividing between growth for the firm and payouts for the family in the context of shareholder control. Family firms are reluctant to raise capital that might dilute their shareholder control. Some family firms are hesitant to take on debt. The result is a predictable cash problem that usually occurs in the Philippines and in Asia around Christmas time or Chinese New Year.

As defined in the “Family Business Liquidity” authored by M. Bruel in August 1994, liquidity in this context is not a measure of a company’s financial position, but cash or cash equivalents. The possibility for shareholders to obtain cash with the help of the company if they so desire is the liquidity flexibility.

The ability of the company to deal with financial emergencies is financial mobility. The kind of liquidity needs that arise (continuous or incidental, triggered by business performance or family affairs) will determine the kind of options that are needed and thus the nature of the problem.

There are many possible liquidity options, ranging from stock redemption plans to going public, from raising dividends to company-sponsored loan programs. Every option has a different effect on capital and control structure, so the willingness and possibilities to change those structures will determine how easily the problem can be solved.

Can an Estate Plan prevent my siblings from selling their shares to outsiders?

The estate plan can include provisions to deal with family members who wish to sell his or her shares. The board of directors (or family leader) may require the mandatory buyout of the shareholder’s interest, probably through share redemption when a triggering event occurs. In some family businesses where the majority of owners are not employed in the enterprise, an internal market of minority shareholders is established to facilitate independence and a prudent exit strategy, and there is often an annual sale/purchase event.

If a family-owned company is to endure and provide the maximum potential opportunity for future generations, it must plan for provision of both adequate shareholder liquidity and sufficient business capital. Many believe their options are limited: restrict money available to the family; sell the business; or go public.

There should be a clear blueprint (a shareholder agreement) in case of the separation (forced or by choice), retirement, disability or death of any shareholder, whether a minority or significant owner. This includes foreseeable expenditures such as taxes on the estate. In some situations, insuring for the value of the preference shares, rather than just for the tax, is a prudent option. Some people use permanent insurance policies.

The most critical step in preserving the assets of the principals is to avoid the forced sale of the company.

The departure, through whatever means, of a principal in a small, family-owned business can create sudden demands for cash to pay income taxes, family support or retirement income. Effective planning requires estimates of the family’s future needs, the means to provide for them, and the necessary liquidity to pay personal taxes. Rather than allowing financial pressures to destroy the family business, careful planning and sophisticated use of the growing collection of financial techniques can help the family retain business control and make wise choices among many available alternatives.

Three days to go before the Family Business Workshop in Cebu! Prof. Enrique Soriano is an ASEAN Family Business Coach, book author and Marketing Cluster Chair of the Ateneo Graduate School of Business. He will be conducting a one-day workshop, “Securing the Future of Your Family Business”, on April 24 in Cebu and April 30 in Makati at the AIM Conference Center. These workshops are organized by Octopus Strategic Branding and Family Business Asia. For inquiries, please contact the organizer, John 0947-5070869 (Makati) and Prof. Danny Wong at +639178900063 (Cebu) for details. Slots are very limited.