Chinese business owners reluctant to bring in outsiders

Date: 24 Nov 2016

Bumblebee Design

Daniel Ugur, partner at Gowling WLG, also says patriarchs like to retain control which limits learning in the next gen and makes children apprehensive.


What do Chinese families do when the next gen’ don’t want to take over the business?
There are two considerations. One is shareholder ownership and the other management of the business. Often the two go hand in hand and the patriarchs expect, or at lease hope, their children will take over both. Dealing with the ownership of shares is more straightforward than dealing with management, as the shares can be held in structures that can be set up for the benefit of the family going forward. This means if the second generation don’t want to take over the ownership of the business directly, the business doesn’t need to be sold. In reality, most Chinese patriarchs do look to put the ownership of their business into some form of structure to protect it.   Management is more difficult to deal with. I often have discussions with patriarchs as to whether family members should be involved in the management of the business and it may be best that third party individuals take the management forward with the family enjoying the dividend and growth of the business. There may be a number of valid reasons why the management of the business should not be retained by the family, for example they don’t have the right skill set. However, Chinese business owners are often reluctant to bring in outsiders. I do advocate the second generation being involved in the discussions though. To ensure the decision is going to be supported by the second generation.

Are the second gen’ Chinese interested in their family businesses?
Yes Chinese businesses are in so many varied sectors that it is not a rate limiting step. The ‘sunset’ or declining industries have mostly been diversified or at least are starting the process.  Therefore, it is not right to say that the second generation’s unwillingness stems from the nature of the businesses. The wider problem is that patriarchs generally, and especially in China, like to retain control and therefore the next gen’ don’t always feel they are given an opportunity to develop in business matters or hone their skills. So when the patriarch passes away they may be apprehensive in taking over because they were not given the opportunity to learn during their parent’s lifetime. The second generation also have a different skill set to their parents, but this can be advantageous in developing an existing business in different ways. They key point for the parents is to develop these skills and engage the second generation early.
Tell us about your clients.
One of my clients is involved in the energy business and has two sons. This is a good example of how the second generation has got involved and developed the business. The patriarch has actively got them involved without pushing them and they are now driving the business forward. One of the sons is in the energy business and the second has developed a separate business in leisure. Although this is a different route, he is still supported by the patriarch and is seen as contributing to the family. Another of my clients has a real estate business. The second generation is not engaged in the business so the ownership has been placed into a structure.  The patriarch has put this in place so that the children can enter the business and work alongside non-family managers. There are also provisions for a potential exit of the business if that doesn’t happen. 
Tell us about selling Chinese family businesses.
I think it is rare for a patriarch to sell the business although not impossible. Patriarchs often want the business to be retained for a future generation, as their legacy. However, I always talk to my clients about exit strategies. These will often involve a sale, but this is commonly after the patriarch’s demise and only if the second generation decide they don’t want to take the business forward. As patriarchs are keen for the business to be retained within the family unit, an exit may in the first instance involve a sale within the wider family.

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