Private business and succession planning – why it matters



It’s inevitable. Every leader must one day be replaced.

Most business owners, especially those in private or family businesses, want successful continuity from one generation to the next, while some are unable to accept reality and believe that they will be here forever.

Research has shown that most private companies are unprepared to hand over the baton. is.

In this article, succession planning highlights to provide context on the value of selecting future leaders for your business are discussed.

Fragile and uncertain

Life is unpredictable. We know that organizations face various uncertainties on a daily basis. Companies are trying to put structures and safeguards in place to mitigate these risks and take advantage of the opportunities.

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

The Covid-19 pandemic has served as a wake-up call for individuals and businesses not to settle for existing safeguards.

Such safeguards are put in place to deal with foreseeable uncertainties. Instead, it requires being nimble in life and succession planning, looking ahead not just for a few months, but for years to come.

With respect to private companies, this becomes clearer due to their exposure to risk in light of the extreme uncertainty and inherent risks, especially for smaller companies that lack the buffer of capital and ladder.

Plan ahead

But are private companies ready for these extreme uncertainties? One of the major uncertainties of private companies is the transfer of power, at the right time.

There is still some resistance to discussing succession planning, as the subject is considered taboo.

But succession planning does not necessarily mean mortality.

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

This is a crucial process that must be followed by family business leaders to ensure business continuity across generations.

So how do companies plan ahead?

The next generation

When preparing the next line of leadership, consider their willingness to take on the roles and responsibilities that come with it.

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

Frequent communication to convey transfer expectations must take place and it must start early.

Ensure that future leaders understand the fundamentals of the family’s business, values ​​and general performance, as this is essential to give them an idea of ​​the landscape of the company they will take over.

Training them in leadership and interpersonal skills, business acumen, the fundamentals of running a business, and crisis management is also important to ensure a smooth transition.

In the same way that current leaders transfer their knowledge to the next generation, they must also be open to accepting that the next generation can implement new ideas, in line with the latest trends.

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

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

When family members are based overseas, an opportunity for global expansion can be explored if a global footprint is not already in place.

Knowledge and understanding of the tax and regulatory landscape outside of Malaysia is essential, particularly in relation to issues not common in Malaysia, such as inheritance tax and capital gains tax.

Consideration should also be given to the possibility of a lack of willingness by the next generation to take over the family business.

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

In the era of digitalization, some even have the possibility of monetizing their passions.

Professional management

A plan B could mean hiring a seasoned executive-level employee, for example, an experienced general manager or chief operating officer.

Hiring professional management does not mean that the owner relinquishes control of the business.

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

Other topics

As family business owners develop their succession plans, it’s important that they keep an eye on the changing tax landscape.

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

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

This exemption will apply to foreign source dividend income of corporations and limited liability partnerships, as well as all foreign source income of individuals (except individuals carrying on business in Malaysia through the through a partnership).

The tax exemption is in effect for five years, from January 1, 2022 to December 31, 2026, and will be subject to conditions to be issued by the Inland Revenue Board.

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

Bernard Yap is Malaysia’s private tax leader and partner at Ernst & Young Tax Consultants Sdn Bhd. The opinions expressed here are those of the author.

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