Creating a world-class SME

The title of the article is at the very heart of my advocacy talk in Cebu this coming Saturday, Feb. 18, at Parklane International Hotel. After a little more than a week of exchanging notes and doing collaborative work with eminent family business advisors based in the US and Canada, I feel I have much to share to my colleagues and clients in Asia.

Creating a best-in-breed family enterprise is definitely not a walk in the park. In a family wealth article penned by James Hughes, he highlights this very important conclusion:

“As families grow, the development of a family governance system becomes a critical component of the family’s plan for managing its wealth for the succeeding generations. Without effective family governance, many families are unable to preserve their wealth beyond the third generation. This unraveling of a family legacy tends to follow a familiar path: the first generation creates the wealth; the second generation preserves the wealth; and the third generation spends the wealth.”

Families grow faster than businesses

In most cases, the founders of the business keep everything to themselves and rarely share succession and ownership plans to the children until it’s a little too late in the game.

Over time, as the children join the business, get married and have families of their own, they will have varying and increasing personal and lifestyle needs. With more siblings having ownership stakes, the number of shareholders naturally increases.

At this juncture, share ownership becomes fragmented, which makes it harder for the family to make business decisions. At this time, the patriarch may have become semi-detached from the day-to-day functions of the enterprise.

Some family members may opt to suffer in silence on matters related to the “forbidden agenda” like ownership, succession, sibling rivalry or conflict of interest while others will openly show feelings of discontent.

In the end, the majority of family businesses in the region fail as a result of internal issues, rather than external or macro environmental factors.

I am sharing a list of questions that I use when I facilitate family governance sessions. Clearly, this will serve as any family leader’s wonderful guide posts for businesses transitioning to becoming a world-class SME.

Corporate and business goals: Wealth generation

1. What is the family business’ five-year goal? Do we have a compelling vision for the company?

2. What will it take to make the business reach an EBITDA of X amount from the current X amount?

3. What is our annual growth rate? What is the industry growth rate?

4. What kind of professionals/specialists do we need in driving the business forward?

5. Is the family business ready to embark on an IPO in five years? Family and governance goals: Wealth preservation 1. How will we preserve our family wealth? 2. How will we address ownership issues in the second (or third generation)? Is there a vehicle to transfer ownership to the next generation?

3. Who are qualified to own shares in the family business? Who are not qualified?

4. If there is conflict, who will be objective enough to make the final decisions?

5. Who are qualified to join the business? What are the rules for entry?

If you have no answers to the questions raised and you are at least in your 50s, then it is time to gather family members and let everyone commit to pursuing governance. Becoming a world class SME requires painstaking, collective work. The good news is there is still time.

Becoming a world-class SME requires painstaking, collective work. The good news is there is still time.