September 20, 2012 – Originally appeared in the Business Adviser column of TODAY Paper

I’m the second-generation owner of an SME and I have a young son who I’m thinking of grooming to take over. What are the pros and cons of handing over a business to a family member?

Succession planning can be challenging as the younger generation of family members may have very different working styles, lack the management ability to take over the business, or simply have no interest in the nature of the business.

Share dilution often happens in family businesses as new family members join, reducing the incentive and emotional connection among existing members.

Even professional managers frequently find themselves at loggerheads with the owners, whose motives may lie more with their legacy or protecting the interests of family members than with “hard” business rationales of performance and profit. This can result in conflict.

Solutions do exist for these issues. For instance, family businesses may form an owners’ council, to articulate governance processes that ensure systematic, fair, and aligned decision-making. Hiring processes, career paths for all employees and promotional standards can be crystallised.

I have observed some businesses that will only hire family members into positions of responsibility if they have first managed people or businesses in other companies.

Separate business units may also be carved out for family members or professional managers to run autonomously.

Calvin Chu Yee Ming, Partner
Eden Strategy Institute