Private business and succession planning – why it is important

Family plan: An aerial view of Kuala Lumpur. A fruitful succession plan will need dedication from both sides to take the family business forward. — AFP

IT is inevitable. Every leader must one day be replaced.

Most busuness owners, especially those of private or family-owned companies, desire successful continuity from one generation to the next, while there may be those who are unable to accept reality and believe they will be around forever.

Research has shown that most private businesses are unprepared for handing over the reins. is.

In this article, the salient matters of succession planning to offer context on the value of selecting the future leaders of your business is raised.

Fragile and uncertain

Life is unpredictable. We know that organisations face various uncertainties on a daily basis. Businesses attempt to put in place structures and safeguards to mitigate these risks and to capitalise on opportunities.

However, if recent events have taught us anything, it is that the uncertainties in our daily lives may reach extreme limits and the existing structures in place may collapse.

The Covid-19 pandemic served as a wake-up call for individuals and businesses alike to not be complacent with the existing safeguards.

Such safeguards are put in place to address foreseeable uncertainties, instead, one needs to be agile in life and succession planning, looking ahead not just for a few months, but for years to come.

When it comes to private businesses, this becomes clearer due to their exposure to risks in the light of extreme uncertainty and inherent risks, particularly for smaller businesses that do not have the buffer of capital and scale.

Planning ahead

Are private businesses, however, ready for these extreme uncertainties? One of the major uncertainties of private businesses is the handover of leadership, at the right time.

There is still some resistance to the discussion surrounding succession planning, because the subject is seen as taboo.

But succession planning does not have to mean mortality.

With a well-thought-out succession plan, family businesses will be in a better position to deal with unforeseen circumstances such as crisis, illness or death.

It is a crucial process that must be followed by the leaders of family businesses to ensure business continuity for multiple generations.

So how do businesses plan ahead?

Next generation

While preparing the next line of leadership, consider their readiness to assume the roles and responsibilities that come with it.

Studies show that many succession failures are caused by inadequately prepared heirs.

Frequent communication to convey the expectations of handover should be held and this should start early.

Ensuring that the future leaders understand the basics of the family’s business activities, values and the general performance, as this is crucial to providing them with an idea of the landscape of the business that they will be taking over.

Educating them in leadership and people skills, business acumen, fundamentals of running a business and crisis management are also important in ensuring a smooth transition.

In the same way that current leaders are transferring their knowledge to the next generation, they must also be open to accept that the next generation may implement new ideas, in line with the latest trends.

Processes, structures and methodologies that worked in the past may need to be enhanced or even replaced.

A fruitful succession plan will need dedication from both sides to take the family business to new heights.

Where family members are based internationally, an opportunity for global expansion may be explored if a global footprint isn’t already in place.

Awareness and understanding of the tax and regulatory landscape outside of Malaysia are vital, particularly in relation to matters not common in Malaysia, such as inheritance tax and capital gains tax.

Consideration must also be given to the possibility of the next generation’s lack of eagerness to take over the family business.

Today, there are a lot more opportunities for young people and an abundance of career and entrepreneurial paths to choose from.

In this age of digitalisation, some even have the ability to monetise their passions.

Professional management

A Plan B could mean bringing in a seasoned hire at management level, for example, an experienced chief executive officer or chief operating officer.

Bringing in professional management does not mean the owner is relinquishing control of the business.

Professional management could be a temporary measure, while the leaders are preparing the next generation to take the lead.

Other matters

While the owners of family businesses are crafting their succession plans, it is important that they do not lose sight of the changing tax landscape.

For example, from Jan 1, 2022, foreign-sourced income received in Malaysia by Malaysian residents, will be subject to tax.

Following an extensive consultation process with various parties, on Dec 30, 2021 the Finance Ministry announced that certain types of foreign sourced income of Malaysian tax residents will continue to be exempt from Malaysian income tax even if received in Malaysia, subject to conditions.

This exemption will apply to the foreign-sourced dividend income of companies and limited liability partnerships, and all foreign-sourced income of individuals (except individuals carrying out business in Malaysia through a partnership).

The tax exemption is effective for five years from Jan 1, 2022 to Dec 31, 2026 and will be subject to conditions to be issued by the Inland Revenue Board.

Businesses must also carefully consider the opportunities and tax considerations arising from the Budget 2023, which will be announced on Friday.

Bernard Yap is the Malaysia Private Tax Leader and Partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.

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