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Fighting Over Equity Distribution, The Importance Of Succession Planning

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The following story is based on an actual series of events with some names and circumstances fictionalised and any similarity to the name, character or history of any person is entirely coincidental and unintentional. Hopefully we can understand the importance of succession planning and make the necessary preparation.

Elder Tan put down his chopsticks, looked up and smiled.

His three sons and their spouses are seated together once again for a reunion dinner which the COVID-19 pandemic denied the family for two consecutive years. In the next table, the children are noisily tucking in their food and chattering away as well as occasionally peering into each other’s phones.

Tan was a picture of contentment. He has raised his children well to be successful in their own right. He is proud of his eldest son Seong who is doing a good job taking charge of the hardware business that Tan had built from scratch. Danny, the No 2, is head of the engineering department in a construction firm while Chye, his street smart youngest son, is doing well in sales in his father-in-law’s spare parts company.

“I want to tell all of you something…” Elder Tan interrupted the conversations at the reunion gathering.”

Succession Planning Is About Being Prepared

I want to retire and leave the family business to Seong,” he added. Seong looked at his father, beaming that he is getting just rewards for the hardwork that he had put in to run the business.

“I’ll transfer the shares of the company to all three of you equally,” Tan said looking at his three sons. The expression in Seong changed on hearing that. He looked startled as he had expected the lion share for all his sweat, literally!

“Equally with Danny and Chye! They didn’t lift a finger to help out in the business! And they now get equal share of the fruits of my toil? No way!!!” Seong now getting red faced with anger.

He rose from his seat and smart-mouth Chye stopped him in his tracks with his remark: “What, you’re not happy?”

The whole atmosphere changed as Seong lunged towards Chye. Danny stepped in between and after that, chaos broke out. A breakdown in family harmony over too-soon, unforeseen, unexpected equitable or inequitable distribution of family assets?

Tan’s desire to be fair and thus, the equitable distribution of equity in the family business probably blindsided him from the possibility of a family feud erupting from it. Estate planning and succession planning needs to be skillfully handled and prudently managed to avert any unwarranted situation such as a family feud.

Succession planning inevitably is critical for business, especially family-owned business. Business owners tend to underestimate and downplay its importance, ignoring possible downsides when they are no longer in charge. It holds true that failing to plan is planning to fail.

A pre-planned succession such as through a Family Business Trust or a Family Foundation would be a prudent way to lay down instructions on conditions for ownership succession, management succession and rewards and conveyed impartially and professionally by an independent third-party such as a trustee would avert family feuds over inheritance.

Three key areas need to be considered in setting up a business succession plan namely:

  • Ownership Succession. This will ensure that the shares of the family business will be protected and not likely to be fragmented over generations. The rightful heirs are clearly defined, thus enabling ring fencing against outsiders to own the family business
  • Management Succession. Successor is crucial for continuity of the family business. By having a capable candidate to be successor of the family business, it retains the goodwill of the family business and it improves the confidence of the investors, customers, and employees
  • Family Wealth Management. Proper planning and allocation of family resources effectively will maximise the benefit for each of the family members, such as in areas of financing family education, family medical and family reserves needs

Business succession planning is an essential part of the risk planning for the business.

About Rockwills International Group

Rockwills International Group, now in its 27th year, pioneered professional will writing in 1995 and has since evolved into the leading estate planning specialist in the country. It is today the largest provider of solutions and support services in the areas of trusts, succession, management and distribution of wealth. It has shareholders’ funds exceeding RM50 million. It has done over 280,000 wills and 15,000 trusts and hold more than RM25 billion in assets under trust.

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