The old Chinese saying, "Wealth Shall Not Last Three Generations” has a deeper context: The end of life is primarily cause by the lack of a transition plan and the unexpected death of the leader.
No owner should lose his or her business by default. As a matter of fact, he or she can beat death by designing solid agreements and preparing them (Family Constitution, Code of Conduct, Shareholders, Trust Agreements, Wills, Estate and a Succession plan) way ahead of an unplanned demise. By future proofing the business, the grandchildren can be assured of a brighter future free from the hardships the founder went through.
There are several scenarios that can happen when the founder suddenly becomes incapacitated. Without a formal action plan and the reluctance to effect succession, the business will face rough sailing with unintended consequences.
What are the unintended consequences?
Surely, your family will honor your last wishes, but they can’t do that if they don’t know what your wishes are. The same holds true for those not appointed as successor. Without any plan, confusion among family members will escalate to conflict and the family members will be left with no other choice but to sell the business.
When death happens, creditors will become frantic and will instinctively demand for settlement of any outstanding debt. In short, to appease worried creditors, the family will have no other choice but to honor its obligations. Consequently, the business will end up yielding to internal pressures and the multitude of stakeholder claims.
Amidst the rising tension and likely family feud, the selling option becomes the most convenient way for everyone to exit. The family's decision to dismantle a business that had taken the leader one or two generations and 30 to 60 years to build is now gone. I am painting a doomsday scenario as I have witnessed first-hand seeing dozens of businesses in Asia ripped apart all because the owner unexpectedly died without a plan.
Investors and Active Partners
How about partners and friends who invested? How will they react with the unexpected death? The choices are very few. They can choose to either buy and take over or sell their stakes to the heirs. This means that the parties have to agree on a price with the deceased partner’s family. The sticky issue is in the valuation and the discomfort it brings when parties cannot agree on the sale price. It’s a tough situation for all parties involved, often causing more heartbreak than resolving the already difficult situation.
Picture a very uncertain future for loyal employees when the owner suddenly dies. The consequences of unplanned death are grave and it does not prevent the family from selling the business to other parties. Whoever assumes ownership can do whatever they want – including letting employees go. What about demand letters coming from suppliers, creditors and regulators? This is a grim scenario that is tragic, unfair and hard to imagine for those whose shoulders rest heavily the very survival of the business.
Planning Ahead is Key
The key is for the owner, who represents the central source of competencies and capabilities in the family business, to plan the transition ahead.
To borrow an inspiring old Chinese proverb: "The best time to plant a tree was 20 years ago. The second best time is now." Early transition planning ensures the continuity of these intangible assets (management, goodwill, operations efficiency and retention of clients), from the owner to the next generation leaders in the event of the owner’s death.