Here is another an extract from our complimentary booklet,
“The 9 Most Common Mistakes Family (& Non-Family)Businesses Make That Prevent Them From Achieving Their Full Potential… And How YOU Can Avoid Making Them“
Mistake #5: Lack of Exit Strategy, Estate Planning or Partnership Agreement, Leaving the Business Vulnerable to Unexpected Situations
“I am very worried about my business, Linda said. I am the partner who run the business, I own 30% shares in the business while my brother who put up the initial capital own 70%. He is planning to retire next month. We did not have a prior agreement regarding distribution of shares and the last I heard, he plan to distribute it equally to his two children. That will make both of them 35% shareholders in the business. While my brother has given me a free hand to run the business, I am very worried what will happen if the children decide to get involved in the business. I don’t know how to discuss this with my brother as he was the one who helped me get started, I don’t want him to feel I am ungrateful to him.”
“I can no longer get along with my partners. When we started the business together, everyone has the same objective, now that we are more established, we start to have different ideas where to take the business next and some are not carrying their own weight…. If only we had proper agreements in place before we started…”
It is quite common for a family business not to have exit strategies for members who wish to sell, retire or otherwise walk away from the business. In more traditional Chinese Family Businesses, sometimes estate planning is considered a taboo as it involves discussing the eventualities of death and misfortune falling upon family members.
(Non-family businesses without clearly defined Partnership Agreements in place face the same vulnerabilities as family businesses.)
With no clear exit strategy and proper estate planning, the business is vulnerable when the unexpected happens.
Consider these scenarios (substitute ‘family member’ for ‘partner’ if you are a non-family business)…
- A family member passes away, does the shares revert to surviving partners at an agreed upon formula for calculating market value, or does it get distributed according to deceased’s will?
- A family member decides to retire and transfers his shares to his children. This increases the number of shareholders in the business overnight, affecting the composition of management team, decision making and the running of the business.
- Family members get into dispute and cannot reconcile their differences, but each refuse to sell his shares to the other.
- A family member with little interest and poor qualification to run the business could end up inheriting a controlling stake in the business.
The interest of the business and the next generation is not necessarily best served by passing on the business to them. Ownership should only be passed on to those who are active in the business and able to contribute. Other assets may be distributed to non-active family members. This is the only way to ensure continuity of the business while avoiding conflicts.
For non-family businesses, partnership agreements should be put in place.
Need a little help with formulating a step by step plan to exit your business ?
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The Familybiz Works Team
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