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Seller beware: buyers look for unprepared family businesses

Date: 24 Nov 2016

Bumblebee Design

 

Philip Marcovici, principal at Offices of Philip Marcovici in Hong Kong also says the tradition of passing a business to the eldest son can be problematic 

 
What issues do Chinese family businesses face today?
 
One would be the tradition of having the business pass to the older son, where there is more than one child. This can work, but can also be problematic where the younger generation are westernized, given their education and peers. In these cases, the older son may not understand the traditional role of responsibility for the entire family. 
 
Do Chinese millennials want to work in their parents businesses?
 
Less and less. I am finding that it’s common, that the younger generation do not want to be in business at all. However a more entrepreneurial member of the younger generation will focus on how to use the strength of the family business to convert it into something that is more aligned to what they want to do.
 
Is the lack of succession planning in China fuelling growth in private equity buyouts?
 
Yes but it is not only in China that a good number of family businesses come onto the market because of a lack of succession options within the family. It is now an area that private equity firms focus on to find target opportunities.
 
How do Chinese families cope with multiple mistresses, ‘gold-diggers’ or ‘toy-boys’?
 
As I wrote in my book The Destructive Power of Family Wealth (Wiley £29.99), I am often asked by families I work with about the risk of in-laws or others being gold-diggers. This is not a difficult evaluation to make, and my answer is always “Of course your son-in-law or daughter-in-law is a gold-digger.” This is not because everyone is evil but because money comes into every relationship, if not at the start of the relationship, at some point in future. I always advise families to hope for the best, but plan for the worst. Mistresses, ‘toy-boys’ and other relationships all too often move into situations of blackmail. One golden rule is to never give a lump sum of money away because before long, they will be back for more. It’s better to use a trust or annuity that is designed to make payments over a lifetime, but conditioned on him or her being discreet.
 
 
What issues are there in family business succession generally?
 
If the younger generation are well prepared, some families are able to successfully make the transition to having the younger generation become effective owners of a family business. What this means in practice is, the family need to help their younger generation obtain the skills needed to be a competent shareholder and board member, hiring and supervising the right outside professionals who can run the business. Of course, the other alternative, if this doesn’t work out or you have a reluctant successor is to sell the business, but a lack of careful planning in relation to management of the business will impact price: there are buyers who keep an eye out for family owned businesses that have not prepared themselves well in for ongoing succession and governance.
 
 
What other reasons are there for the sale of family businesses?
 
A sale may be needed to help the family diversify their holdings, or to take advantage of opportunities in new sectors. And where there are multiple children, dividing cash from the proceeds of a sale is much easier than dividing a business.

 

This article was published in Citywealth Weekly, our mid-week roundup of topical news and exclusive expert comments. Sign up here to start receiving the Weekly in your inbox. 

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