SMES’ BUSINESS SUCCESSION AND EXIT STRATEGIES
Family-owned SMEs should be encouraged as they play a pivotal role in the economy
THE Economic Census 2016: Profile of smalland medium-sized enterprises (SMEs) for 2015 conducted by the Department of Statistics (DOSM), which was released in late September, described that there are 907,065 SMEs operating in the country, representing 98.5 per cent of total enterprises.
The majority of the SMEs are micro enterprises which make up 76.5 per cent of the total SMEs, followed by the small-scale enterprises, which comprise 21.2 per cent of the total SMEs. Medium-sized enterprises are 2.3 per cent. The question that needs to be asked is: how many of these enterprises are owned by families? Even though DOSM has not given any information on this, we can assume that not less than 70 per cent of SMEs are familyowned.
Family-owned SMEs play a pivotal role in the Malaysian economy. Key issues faced by familyowned SMEs concern with growth, succession and continuity. The importance of succession and continuity in a family business is due to the fact that they contribute in maintaining the national level of entrepreneurship.
In 2015, we did a study for the Centre for Entrepreneur Development and Research (CEDAR), SME Bank, and the findings were published in a book titled A Study on Women and Family Entrepreneurship in Malaysia.
The survey instrument was designed to capture data on business succession especially from the group of respondents who have started their businesses and those who have been with their family businesses. This area was studied because we felt business succession helps to intensify growth of women-owned and family-owned businesses. There are two types of succession i.e. ownership succession and management The majority of small- and medium-sized enterprises (SMEs) in Malaysia are micro enterprises, which make up 76.5 per cent of the total SMEs.
succession. The former deals with the transfer of ownership, while, the latter looks at the transfer of responsibility in managing the business.
Close to 72 per cent who answered on ownership succession did not have any plan for it. The possible direct implication to this would be that in the case of death of the current owner, the business would be discontinued, especially if the businesses are sole proprietors and partnerships. On the subject of management succession, around 71 per cent of the respondents who answered did not plan for it. This implies that if anything happens to the existing owner-manager, there may be potential conflicts and disruption to the business.
Respondents were also probed about the challenges of business succession. Almost 41 per cent of total responses received showed that the respondents did not know how to plan for succession. About 20 per cent of total responses revealed that some thoughts had been made about succession but the desired successor was not interested in taking over the business. Approximately 20 per cent of the total responsed felt that there was a perception or feeling that the involvement of family and relatives complicated decision-making.
While not knowing how to can be addressed through training and education, other aspects of
succession planning involve the emotional and relationship dimension of business succession which may require third party involvement such as an adviser, or a mediator to communicate and resolve issues and prevent possible conflicts. There is also a technical dimension to business succession which involves documents such as a will and a trust deed, and, a family constitution in the case of a family business. These technical documents can be written or structured by professionals such as lawyers, wealth advisers, financial planners, will writers or estate planners.
There is also a misconception among SME owners that business succession is just about passing over to the family’s next generation. Hence, the founding or current generation gets frustrated when none of their children or next-generation family members is interested in the business. To achieve success in family ownership succession and exits, the founding or current generation may consider the following:
PLAN ahead (do not get caught out by assuming that the next generation wants to take over). Assess their intentions against your aspirations. Plus, aspiration alone is not enough;
AVOID simply leaving your business to all your children, in the name of fairness. Preventive measures should be in place to prevent sibling rivalry which is known to be one of the main causes for conflicts and discontinuity;
BRING in family members who are actively interested in the business. Each family member can play different roles and functions. Depending on the size and performance of the family business, family members can be empowered to own up to the role and function of managers, directors, advisers, employees or family or foundation council members;
CHOOSE a person with the right ability and aspirations to take over the helm. Do not leave this decision to chance. Preferably, groom, coach and test the next generation leaders before handing over the baton to them; and,
IF there is no suitable candidate within the family, consider non-family professionals to run the business or management buy-outs, employee buy-outs or even external or outright sale.
At Universiti Tun Abdul Razak, approximately 50 per cent of our undergraduate entrepreneurship students come from family businesses or family-owned SMEs. Interestingly, there are also many undergraduates from other Bachelor programmes whose parents are business owners. Observing this trend, we have engaged these students, not just through the courses offered but also through extra-curricular activities such as participating in the Family Enterprise Case Competition (FECC) at the University of Vermont, the United States, for several years.
These are some of the approaches we have implemented in nurturing next generation leaders and mitigating the misconception among SME owners about business succession and exit strategies.
A curriculum review is also underway to address and assist family-owned SMEs to navigate the concerns and challenges posed by the Industry Revolution 4.0, spearheaded by the government.