Navigate the Challenges Faced in Family Businesses [By Josephine Tam]

By definition, a family business is a business organisation in which two or more family members are involved and the business’s majority controlling stake lies with the family. Given its nature, family businesses can be consider the oldest form of business organisation.

In a recent global family business survey, approximately 40% of respondents agreed that professionalising the business is the key challenge for business continuity, yet only 16% of family businesses have a discussed and documented succession plan in place. How is this landscape different in Singapore? A recent study conducted by Singapore Chinese Chamber of Commerce and Industry (SCCCI) and Price Waterhouse Coopers (PwC), noted that Singapore’s family businesses demographic tend to be younger. Of a total of 120 family businesses that participated in this study, 33% were in their first generation and 54% in their second generation. This represents a significant issue – the longevity of Singapore’s existing family businesses depend, to a large extent, on what they do now. In line with global findings, Singapore’s family businesses are similarly concerned with two main issues. Namely, they are concerned with the professionalising of the family business, while maintaining family ownership and succession planning – passing the baton on to the next generation.

Professionalising ‘Family’ Business

As one of the oldest forms of business organisation, family business has its strengths and weaknesses, all of which lie in the name “family”. Without a doubt, working with parents, siblings, uncles/aunties and cousins (known as a “Cousin Consortium”) can generate a high level of synergy, trust and commitment but it can also lead to tension, resentment and conflict. Professionalising a business can be difficult, but professionalising a family business is even harder because it involves decisions of the ‘heart’.

Professionalising the family business simply means putting in place infrastructure to govern the interactions between the family and business. For instance, members of the Qian Hu Corporation, a public-listed company on the Singapore Stock Exchange, have to follow a set of stringent corporate governance requirements. Besides regular Board and Management meetings, the family has family meetings to discuss informal subjects that matter to the family.

Facing a tougher business environment, family businesses must adapt and innovate, and become more professional in the way they operate to remain competitive. For example, iwa Design’s governance regime has been described as strict and strong. The company is now automating and improving its internal processes to support its decision-making, in preparation for the unlikely event that the second generation leaders are not around. Additionally, iwa Design has also implemented management policies, a CRM system, and HR processes and procedures.

Succession Planning

The topic of “passing the torch” has always been a challenging yet urgent matter for family businesses to address. This is especially true in the Asian context, in which it is culturally insensitive to discuss retirement and mortality. To make the conversation easier on all parties, the leader or current generation leader of the business should ponder:

  • “Who should I pass the business to? Should it be based on entitlement or merit?”
  • “Should I bring in external professionals to manage the business while family members remain as shareholders?”
  • “What is the qualifying criteria to become the leader in family business?”

There is an old Chinese saying that, “wealth does not surpass three generations” – in fact, the transition from the first generation to the next one is often the trickiest one. As the family continues to grow and the business continues to expand, succession only gets progressively harder, giving rise to the need for a more demanding structured succession planning. A well-thought succession plan should be addressed, documented and communicated to key stakeholders early on, so they have time to make any necessary adjustments.

Singapore’s family businesses form a major component of Small Medium Enterprises (SMEs), which are the critical backbone of the Singapore economy. They have seen great shifts in the past decade, moving forward, the Singapore’s family businesses will need to make tough decisions on the way forward for their businesses, whether to keep it within the family, bring in outside expertise or map out the owner’s exit strategies.

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