Question:
Hi, I’m Richard, a 60-year businessman who has been manufacturing tissue rolls in a factory in Melaka. The business is currently managed together with Jackson Lee, a partner who co-founded the factory with me 25 years ago. We have been through thick and thin together and over time, our company, Soffie Sdn Bhd has grown to be one of the top 5 suppliers of tissue rolls in Peninsula Malaysia.
Presently, I hold 60% interest in Soffie Sdn Bhd. Jackson has the other 40% stake in the company. Overall, I’m in charge of production of tissue rolls while Jackson is into their sales, marketing, logistics and distribution. As I write, Soffie Sdn Bhd owns a plot of freehold land, a factory, a warehouse, 10 production lines, a fleet of 100 trucks, inventories, and around RM 2 million in cash balance.
Personally, I wish to leave behind my shares in Soffie Sdn Bhd to Ronnie, my son. How should I go about it?
Answer:
Richard is a classic example of a successful entrepreneur who had started, built, and grown his business to become one of the leaders in his industry. The whole journey, together with Jackson Lee, is anything but easy as it takes courage, grit and character, especially from the founders, to take their business to where it is presently.
In his case, Richard wishes to leave behind his legacy which he has already used 25 years to build to Ronnie, his son. Understandably, it is possible for Richard to have a big portion of his wealth tied up in his business under Soffie Sdn Bhd. As such, Richard intends to pass on his baton to Ronnie so that his son would then be able to carry out his legacy in the future.
But often, business succession is not as simple as passing on shares to heirs in a simple will document. A lot more needs to be considered in advance in order to secure your children’s interest and to protect the value of your business.
In this article, I’ll share 5 key things that Richard should consider before passing on his shares in Soffie Sdn Bhd to Ronnie, his son.
#1: Interest
Is Ronnie interested to take over the business?
Does he have the passion to run it, manage it and take it to the next level?
If Ronnie has the interest and passion to run the business, then, the answer is a resounding yes to him inheriting shares of Soffie Sdn Bhd from his father. But, if Ronnie is pursuing a different career path, life goals, or other interests, it would not be suitable for Richard to hand over his stakes in Soffie to Ronnie for he will not have the same aptitude as his father to run the business.
#2: Skill
Is Ronnie currently working with Soffie Sdn Bhd?
Is he being groomed to take over the business by Richard, his father?
As stated above, Richard is responsible for production and is the main person in charge of operating the factory. This would include sourcing and procuring for a list of raw materials, operations and maintenance works of plants, machineries, and equipment, administration, finance, and so on and so forth.
If Richard is absent, could Ronnie be able to step into the shoes of his father, do his job, and ensure that the production of tissue rolls is not disrupted? If he can do so, that is great because the business can be run smoothly. But here, what if Ronnie inherits Richard’s interest in Soffie Sdn Bhd but has no ability to manage the plant smoothly? In this case, Jackson Lee, Richard’s partner will have a hard time as he may have to help Ronnie out in production until Ronnie is capable.
This will result in loss of sales to Soffie Sdn Bhd as Jackson, who is into the sales and marketing of Soffie’s products, could not focus on bringing in new sales.
#3: Vision
Soffie Sdn Bhd is successful today because of its founders, Richard and Jackson. They built their business together from ground-up and had been through tough times together. In essence, the value of Soffie Sdn Bhd lies in the founders, how strong their partnership is, and not really on its tangible assets such as its land, factory, warehouse, plant, trucks, inventories, monies, … etc.
So, the next consideration for Richard is this.
Can Ronnie work together with Jackson Lee after Ronnie has inherited his stake in Soffie Sdn Bhd from Richard, his father?
Do they have a similar vision and direction for Soffie Sdn Bhd and can they both work out their differences?
Here is the thing. If Richard passes on his stake in Soffie Sdn Bhd to his son, this would make Ronnie, a young adult, the larger shareholder of Soffie Sdn Bhd. He has more shares than Jackson Lee, an older person who had accumulated more practical experiences in running Soffie Sdn Bhd.
I don’t know about you but I can see many potential conflicts that may arise for both Ronnie and Jackson Lee as they have many differences to overcome when deciding the policies and future directions for Soffie Sdn Bhd.
#4: Leadership
This is a common issue among inheritors of an established business.
Some employees may not give the same respect to these inheritors. In essence, the employees may be loyal to Richard, for instance, but not to Ronnie.
There are many reasons for it. It could be from the employees or it could be the doings of the inheritors themselves. For example, Richard passes on his interest in Soffie Sdn Bhd to Ronnie and a large portion of its employees are made up of staff that had been with Soffie for 10+ years, it is possible for the employees to not work well with Ronnie because:
a. Ronnie has attitude problems and is unpopular among employees.
b. The staff thinks Ronnie is an incapable leader as he is not business-savvy.
c. Ronnie is ambitious and forward-looking but the staff is not.
and the list goes on.
#5: Cash Out
Shares of Soffie Sdn Bhd are unquoted shares and hence, do not have definitive market value. This is because it is not a public company.
So, what if Ronnie, after inheriting the shares, wants to dispose of it for cash?
To whom Ronnie could sell his shares for? Is it to Jackson Lee or to a brand new third party buyer? What price could Ronnie fetch for his shares and what would be the basis of its valuation?
Conclusion:
The five above are just some potential issues which would crop out if Richard fails to consider them and passes over his shares of Soffie Sdn Bhd to Ronnie. In this case, it is possible for Richard, despite his good intentions, to fail to pass on his legacy and interest to Ronnie and to protect the value of his business.
The best way to go about it is to consider the five above and craft out a suitable business succession plan to safeguard the interests of your loved ones and also to protect the value of your existing business.
Personally, if you are a business owner, it is likely that your situation would be a lot more complicated than the above and as such, requiring a qualified estate planner to craft out an effective succession plan. Here, if that is you, you may begin by filling up the details below to book yourself a 30-minute consultation session with our estate planning consultant:
