Family-owned businesses are at the core of many Asian economies – especially in Hong Kong – hence cautious succession planning is crucial. In fact, according to research conducted globally, only about 30% of family businesses survive into the second generation.
Transitioning ownership and control is only one of the hurdles for many family business owners in succession planning. There are additional challenges of managing relationships within family members, while maintaining harmony in the values and canons they have worked hard to establish.
Strategic planning as a first step
Not everyone has the talent to become a business owner, thus not all second generations have the interest or skill level to run a successful company. When creating your succession plan, it is imperative to consider if it is best for the business in the long term for all family members to be treated equally or if particular members should be given great prominence. Businesses operating as a meritocracy have better chances of succeeding than those purely based on family relationships.
Defining and documenting what you expect of your descendants and the future of the company is a significant first step in succession planning. Perhaps they require additional training or mentorship before they are ready to lead. Retaining key employees or adding external management expertise will generally help smooth the transition. In any situation, understanding each family member’s strengths and weaknesses can assist in delegating and clarifying responsibilities in an efficient manner.
Establishing the right strategy in merging the reasons that made a business strong in the first place and the everchanging business environment situation is one of the secrets of success, while making sure that the company goals are kept in the generational transition.
At often times, mistakes are linked to the lack of a formal succession plan, or having an unfit management taking over, or not striking the right balance between equity and control, or not foreseeing tax implications.
Different options to consider
There’s no ‘one-size fits all’ tool that achieves a smooth generational transition of businesses.
In Hong Kong the most common ways used for succession planning include:
• Since Hong Kong does not have a capital gains or estate duty tax, then selling or transferring shares in any family-owned business to benefit a younger generation only has consequential stamp duty issues. This is contrary to what happens in other jurisdictions – e.g. the USA or the UK – where other taxes will apply on any such transfer.
• Setting up Family Trusts is one of the most widespread options regularly set up for estate and succession planning. They were traditionally established for tax purposes, especially in relation to estate duty planning. Although estate duty has been abolished in Hong Kong in relation to deaths on or after 11 February 2006, trusts remain rather common. Control of the assets is given to the trustees, who are duty bound to manage the assets for the benefit of the beneficiaries. We have already highlighted the most widely used forms of trusts in our previous article “Trusts Focus Week: Different Types of Trusts”.
• Succession planning through a Will is the most common and necessary tool, however in case of family business transition, it is advisable to integrate it with additional ways that can further strengthen the wishes of the family patriarch or matriarch for many generations to come. We have highlighted the importance of having a Will in a few articles, e.g. “Probate Focus Week: A Quick Guide To Writing A Will In Hong Kong” and “Proper Estate Planning: When There Is A Will, There Is A Way!”.
• Family office is especially advisable in situations involving very large families with a very big business, where they agree how the business will be taken care of. They offer a more comprehensive solution to managing wealth, including investments, charitable giving, taxation and wealth transfer. Generally headed by bankers, fund managers, lawyers and tax practitioners, some even provide overseas private schooling and travel arrangements as added value services. Many High Net Worth Individuals are favouring family offices as they get personalised attention and are able to have a stronger decisional power in their wealth management. Hong Kong even plans to introduce a new structure that will offer “more flexibility and choices” in setting up funds, including those managed by family offices, said a spokesman for the Financial Services and the Treasury Bureau.
• In some cases, a family might decide to also have a family constitution where a formal document sets out the rights, values, responsibilities and rules applying to stakeholders in the family business and provides plans and structures to deal with situations which arise in the course of the family business operation. This tool enhances the management of trusts or family offices set up to protect both the wealth and the transition of many family businesses. Family constitutions can have a high degree of being “emotionally-binding”. Given the family relationship, a family constitution acts on the conscience of those involved. There is a pressure on family members or other employees to comply with the constitution, as if they don’t they will appear to be departing from the family’s original vision and values.
Giving up and passing on a family business is a key, life-changing event with a series of complex issues and possibly tough choices. While it may result in family conflict – if planned properly – it can also be a great opportunity to realize business, family, legacy and philanthropic goals after years of hard work and sacrifice.
Our team at Hugill & Ip has extensive experience in dealing with wealth and succession planning – so if you need further advice on these subject, get in touch with us.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.