By Prof. Enrique Soriano
As we enter the new year full of hope and optimism reinforced by the re-opening of many economies, many founders and business owners that survived the pandemic are evaluating their continued day-to-day involvement with their businesses. In fact, since early 2021, when many countries gradually lifted COVID-19 travel restrictions, the first thing that my overseas clients did was to request an urgent face-to-face meeting. As early as February all the way to December, if my memory serves me right, I logged in more than 70 flights, and around 60% were overseas.
In my engagements with these demanding business leaders (many belonging to the first and second generation), almost all of them asked for my help in accelerating plans to transition ownership to the next generation. They have seen how family businesses with informal structures were mercilessly disrupted (many went bankrupt) because their owners either died or became incapacitated, with some totally giving up under the sheer weight of a lack of succession planning and intense family conflict.
When the sensitive topics related to succession and estate planning were discussed, practically 90% of these owners wanted their assets to be divided equally among their children. On the surface, this concept appeared to be “fair,” especially in Asia, where equality is welcome and rarely challenged. This “equal” mindset we inherited from the West is from a purely parental perspective which also symbolizes unconditional love. All too often, equal ownership also eases the guilt these hard-driving owners feel for not playing their role as nurturing parents. It goes without saying that they were never there when the children grew up, so showering them with material wealth (inheritance) can minimize or make up for their decades of being imperfect parents. It is also the culmination of a parent’s last act of enduring love. So, when it is time to divide their estate equally among their children, they profess and express their deep love to their offspring.
But is this the right way to do it? Is it fair to divide assets equally among the children? Is fair really equal?
This is pure nonsense! Is it “fair” to give two siblings equal shares in the family business when one has worked hard for 15 years, setting aside his personal dreams and aspirations of becoming a professional athlete by acquiescing to the demands of his parents to join the business, while the other decided to pursue her passion of becoming a writer and has no interest in the business? Of course not. I suspect that when parents think about their wealth, they rapidly retreat to equality because it at least has the appearance of being fair and is simpler than creating a meaningful division of assets.
The current generation of baby boomers must reflect and confront the age-old issue of “fair versus equal,” precisely the question of whether children who are not involved with the business should be treated equally to those involved with the company regarding ownership transfer or sale.
Do you have the same situation similar to the example of the two siblings meant to have different paths only to meet again under an equal ownership setup planned by their parents? What about children working in the family business, with some exhibiting passion, commitment, hard work, and talent, while the rest are just physically present out of a sense of obligation (but they get juicy compensation), yet indifferent, non-performing, and can even be considered a liability? Would you give all of them equal shares, knowing that when you are no longer around to shepherd them, the likelihood of conflict is imminent?
The question that begs to be answered is: “Is giving equal ownership really fair, or is fairness in the context of wealth transfer never equal?
For business owners, think hard before you initiate the wealth transfer to the next generation. This is one of the most important decisions you’ll ever make that will have a profound impact beyond your lifetime.