Monthly Archives: December 2015

You are not my real brother…you’re just my half-brother!

MANAGING a family business is already a complex affair. “Family” and “business” are intertwined into a mix of so many challenges, from business to family values and generational differences.

In coaching family-owned businesses, I usually pay close attention to the family issues that are often carried over to the business. By default, the founder, the spouse, the next generation successors and grandchildren will continue to be relatives after the transfer of the business. Adding the issue of strong emotional experiences (both positive and negative) and it quickly becomes obvious that in most families the relational dynamics far outweigh the financial or business issues.

Governance and succession in a family business are perhaps the most critical elements among the many unique challenges of family businesses. Many marriages end in hostile separation or divorce, and many adults have children from their first marriage. Many of these parents will remarry, perhaps adding new children to the marriage, creating a blended family. A blended family can include half-siblings, step-siblings and children from the current marriage.

Managing a blended family can be a key moment for the survival of a family business, especially when families procrastinate, are unprepared, lack the strategic perspective or are caught up in emotional issues.

The do nothing or ‘bahala na sila’ attitude

A KPMG study highlights the need for an extra space to be made for complicated family trees, which may involve children from a previous marriage, offspring from an extra-marital affair, adopted children, or some other form of half sibling. Because of the potential for emotional upheaval, some owners avoid the issue entirely, adopting an attitude of “Let them figure it out when I’m gone.” This mindset to me is a dangerous setup and will have dire consequences.

Sibling rivalry is a very real problem even in “regular” families, so it is even harder to imagine the extent of competitiveness and jealousies between adopted, half- and step-siblings.

The children of a family business owner’s ex-wife, for example, may feel left out, but the children of the new wife will now have more “say” in the family business. The permutations of the family setup are numerous, but the insecurities and jealousies triggered as a result of these blended family members can manifest into a full blown conflict if left unresolved.

If the business owners/parents are not clear on explaining things, everyone can feel confused. This can breed jealousy, insecurity, hurt, competition, and significant loyalty conflicts.

Extra-marital children have rights

Legally, extra-marital children do indeed have inheritance and other rights, and any inheritance claims – provided paternity can be proven, for example – will be favorably awarded by the courts.

When incorrectly handled, the dividing of an estate or family assets can get acrimonious under such circumstances – and it could well negatively impact the future success and sustainability of the family business.

To mitigate drama and in-fighting down the line, or when you are no longer around, it’s in the best interests of both the family and the family business to ensure that the family unit is a cohesive and strong one.

To promote harmony between siblings, step-siblings and half-siblings, you can start the process of initiating governance starting in the family and then as they reach employment age transition to the business governance. The following are some tips that you can immediately implement:

  1. When they are still below the age of majority, you must start assessing the children’s preferences and determine their individual strengths, skills and talents.
  2. Initiate and create a forum where a family business adviser will facilitate discussions between siblings and half-siblings about the roles they would like to or expect to play in the business.
  3. Strongly discourage a sense of entitlement – insist that everyone exercise humility and treat each other with respect. This includes respecting the non-family members working in the business.
  4. Start the process of aligning ownership as it gets complicated when your children starts having families of their own and you reach retirement age.
  5. Create a formal sounding board – like a family council – where grievances can be aired and resolved.

Jack Ma: China’s richest billionaire

“Today is difficult. Tomorrow is much more difficult. But the day after tomorrow is beautiful.”
-Jack Ma, Alibaba founder

THERE will be a lot of problems, yes, but people should not lose hope. Alibaba founder and chairman Jack Ma shared this philosophy in doing business.

Ma says he never thought he’d someday stand in front of the world’s finest minds to talk about his dream. He did just that in Manila last Nov. 18, where leaders of 21 countries and executives of Fortune 500 companies gathered for the Asia-Pacific Economic Cooperation Summit. To round off his luck that day, in a last minute change of plans, he was even interviewed by no less than US President Barack Obama.

Part of their discussion had Ma telling Obama how he thinks government and businesses could work together to help young entrepreneurs. “Government is simple — just reduce the tax, or no tax, for these guys,” Ma said to rousing laughter at the summit, as reported by Reuters. “You got a lot of cheers from your fellow CEOs,” Obama said in response.

Ma also shared how Alibaba has been investing 0.3 percent of the company’s total revenue into climate change solutions derived from young minds and other environmental issues over the past six years.

Ma further said at the summit that he is an optimist, “You should always have hope. Try to make sure that it’s not only in the movies you see ‘Mission Impossible’. In real life you have to make mission possible.”

Drawing from his own experience in building a business empire from scratch, Jack Ma is the kind of exceptional and talented leader who redefined the path of success. Defying the odds, Ma spearheaded e-commerce in China. As the executive chairman and founder of Alibaba Group, China’s leading Internet business entity, he is among the topmost Chinese entrepreneurs who made it to the coveted Forbes list in recent years.

Ma deviated from conventional methods to give his country the benefits of Internet-based commerce. He lacked any technology and computing background, and that makes his success even more astounding than the likes of Mark Zuckerberg and Bill Gates. When he started his career as an English teacher, few could have predicted he would become an Internet mogul.

Fresh off the biggest IPO in history, Ma is now the richest person in China, worth an estimated $25 billion, which includes his 7.8 percent stake in Alibaba and a nearly 50 percent stake in payment processing service Alipay.

Ma is a true rags-to-riches story. He grew up poor in communist China, failed his college entrance exam twice, and was rejected from dozens of jobs, including one at KFC, before finding success with his third Internet company, Alibaba.

He was born and raised in Hangzhou, in China’s Zhejiang Province, born Sept. 10, 1964. His zeal to enhance his aptitude and acquire new skills was evident from childhood. As a teenager, he started communicating with foreign tourists to enhance his English skills. He entered the Hangzhou Normal University and completed graduation in English. Later in his life, he attended Cheung Kong Graduate School of Business in Beijing.

How many people go off to college and university then find themselves not even needing the qualification they studied for by their mid 20’s?

Ma recalled how he and 17 others who started Alibaba in his apartment years ago knew nothing about the Internet.

“Until today, the only thing I know about the computer is how to receive and send emails, browse, and watch videos.”

What he is most interested in is how nations can use the web to help small businesses grow across the world. He said in China, Alibaba has helped 12 million merchants sell to customers online.

If free trade across physical borders is hard to resolve, Ma said it’s better to start online. He recalled how technological advancement brought about the first and second world wars. He said today, technology should be used to fight a third world war – the one against poverty, climate change, and disease.

“We have to build a world that is more transparent, a world that is more inclusive, a world that cares about others and empowers others.”

According to him, most of the innovation will come from the Internet generation or those who were born after the 1980s.

And with innovation, he said the world will be even more connected. Globalization, he explained, helped pump up the world economy but it was mostly developed nations that benefited from it.

Ma is now venturing into film production. A visionary, Jack Ma is an inspiration to an entire generation.

Is there a property bubble?

AS A precursor to my Cebu real estate talk on Friday, Dec. 4 at Harold’s Hotel, I would like to digress from my usual family business column and focus on educating my dear readers on what exactly a “propery bubble” is and why businessmen have this innate fear of an impending bubble that may soon burst.

Knowledge is power and as a real estate practitioner for close to 28 years (long before I became a family business coach) and former advisor to major property players in the region, it is incumbent upon me to share my knowledge about the industry and continue to espouse real estate best practices in an era where competition has become so intense.

For starters, let’s define what a property bubble is.

A real estate bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in global or local real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline.

Investopedia defines a property bubble as a run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand, in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases, or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.

Housing market indicators

The questions of whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomic significance are answered differently by schools of economic thought. The financial crisis of 2007–2012 was related to the bursting of real estate bubbles around the world, which had begun during the 2000s.

In some schools of heterodox economics, notably Austrian economics and Post-Keynesian economics, real estate bubbles are seen as an example of credit bubbles (pejoratively, speculative bubbles), because property owners generally use borrowed money to purchase property, in the form of mortgages. These are then argued to cause financial and hence economic crises. This is first argued empirically – numerous real estate bubbles have been followed by economic slumps, and it is argued that there is a cause-effect relationship between these.

In attempting to identify bubbles before they burst, economists have developed a number of financial ratios and economic indicators that can be used whether homes in a given area are fairly valued. I will highlight two indicators due to the limited space.

Housing affordability measures

The price to income ratio is the basic affordability measure for housing in a given area. It is generally the ratio of median house prices to median familial disposal incomes, expressed as a percentage or as years of income.

The deposit to income ratio is the minimum down payment for a typical mortgage, expressed in months or years of income. It is especially important for first time-buyers without existing home equity: if the down payment becomes too high, then those buyers may find themselves “priced out of the market”.

Despite periodic reminders by the Bangko Sentral ng Pilipinas to banks to be mindful of their lending activities to property concerns, my observation is that lending practices have relaxed, allowing greater multiples of income to be borrowed. Some speculate that this practice in the long term cannot be sustained and may ultimately lead to unaffordable mortgage payments, and repossession for many.

Banko Sentral intervention

Our central bank announced it will enhance oversight of real-estate lending this year to help curb speculation and improve its ability to prevent a property bubble from forming. It ordered banks to further tighten their lending standards for commercial real estate loans and provide more details on collateral requirements and loan covenants, including real-estate disclosure on investments in stocks and bonds that fund property ventures and loans to developers of low-cost homes. Closer monitoring will encourage banks “to exercise more self-restraint,” according to Deputy Governor Nestor Espenilla.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said in an interview that it was a preemptive move. “We don’t see at this point signs of strains in the market but we don’t want to wait for that. That’s the trick with asset bubble; when you see it, that means it has formed and you’re too late.”

Recognizing when a bubble may occur becomes easier with the ability to spot red flags in the areas of lending, spending and employment.

Together with the head of research of Jones Lang La Salle Mr. Claro Cordero, I will do a full diagnostic and recommend solutions so property developers can manage growth should an event like a property bubble happen.