Family business succession - legal insights
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Forward-looking family businesses have demonstrated remarkable resilience around the world, empowering them to weather market volatility and commercial shifts. These enterprises have not merely survived but thrived.
A common trait among these businesses is the founders’ foresight for strategic, long-term planning. This includes diversifying revenue streams and segregating business operations to facilitate efficient succession by future generations.
Such planning allows subsequent generations to maintain the founders’ core values and continue their legacy. It also lays a foundation for future generations to not only preserve the family wealth, but also expand the business.
Mabel Lui, Head of Greater China Commercial at Withersworldwide, an international law firm, says that a family enterprise’s key feature is ‘by the family, for the family.’
In addition to this ‘divide and prosper’ approach, business diversification and modernisation are also crucial. Diversification involves expanding operations into various areas to broaden income sources, tap into high-growth potential, and reduce reliance on the original industries, thereby mitigating the risk associated with a single or limited revenue stream.
Resilience is another common trait among successful family enterprises, often fostered through business modernisation. To stay competitive and relevant, they adapt to new trends and opportunities, which may involve diversifying products, penetrating new markets, or leveraging new technologies.
Before succession becomes a necessity, these enterprises will start preparing the next generation to take the reins. This approach ensures a seamless transition and allows ample time for training and mentorship. Nearly all family enterprises in Hong Kong have implemented early succession planning. This strategy results in the second or third generation participating in and receiving training from the family business, eventually assuming leadership.
Lui notes, “Many successful businesspeople involve their children in the family business while maintaining control, offering business guidance and oversight, and instilling the family’s core values and culture. Even after passing the baton, they continue to provide advice and support, ensuring a smooth leadership transition.”
Governance, legal enforceability and tax
It’s recommended that a family enterprise establishes a family governance structure before approaching succession. The governance framework signifies the shift of decision-making from the founder alone to a collaborative and collective process among family members, according to Lui.
Family members should be briefed on shared values, a common mission, and a collective vision for the future. Family governance helps manage wealth, define roles, set boundaries, and balance competing interests.
The framework addresses roles, rights, and responsibilities of family members, formalises business relationships, and creates policies for family employment, development, and compensation. She notes, “It also provides a forum to resolve conflicts, preventing potential dissolution or sale of the family enterprise, destruction of family wealth, and breakdown of family unity.”
