“Wealth lasts no longer than three generations” is an old Chinese saying. But it is by no means limited to China. In Europe, the US and Southeast Asia, people recognise that the inheritance of wealth is tricky – and often it’s all down to the failure of family business succession.

Kelin E. Gersick put the proportion of family-owned or operated enterprises among businesses worldwide at between 65% and 80%.

The PwC “2021 Global Family Business Survey – China Report” said the contribution of private businesses to China’s GDP was more than 60%, of which 85% came from family businesses.

These are businesses that are on average headed by sixty year olds – a cohort that must have handing on their business on their mind. (note: The entrepreneurs on the Hurun China Rich List 2023 were on average 59 (male leaders clocked in at 61 and female entrepreneurs at 57).)

Despite what should be some urgency, the majority of family businesses in China have no succession plan. Only 16% mainland Chinese family owned companies have formulated tentative succession plans, and just 3% of families have firmed them up. For Hong Kong the figures are similar (17% and 3% respectively). This leaves China far behind the global average (21% and 9%).

Unplanned inheritance is doomed to damage a family’s reputation, and fundamentally, a company’s prospects. And it is a sure-fire way to see a family’s wealth plummet.

Family business succession is all about building an effective governance structure for the business

Running a family business is more than about ownership: it is also a matter of control and management. The three factors are referred to as O-C-M, comprising the governance structure.

Family business succession, in essence, involves using a well-planned, systematic approach to effectively manage the relationships between the three key elements over the long term. This ensures the continued growth of the business and allows each individual involved to find their rightful place.

But let’s take ownership first. Does the family own shares? What is the relationship between family shareholders, and what are their respective demands? Among them, the demands of family shareholders may involve dividends, voting rights, and decision-making rights.

Then there is control, which entails control over the company’s direction by way of shareholdings, composition of the board of directors and management bodies. This is the ongoing factor of family business governance.

Finally, there is management. Does the family participate in management and to what degree? Who in the family is dominant in management and what decisions do the family participate in: strategic or operational?

In addition to the O-C-M elements of running family businesses, we should consider Value (V) and Succession (S). How is value created under the current O-C-M structure of the company? Second, can we optimize the O-C-M combination to enable the company to continue to create greater value? ”

“S” represents inheritance: Does the family want to pass on the management of the company to the next generation or to professional managers? What kind of inheritance plan can best keep the company going? Consideration of these questions helps determine the success or failure of company inheritance.

The founder’s family may not be the largest shareholder. Decathlon, a French sporting goods retailer, is owned by the founder Michel Rellec’s family, which holds 44.5% of the shares, but its largest shareholder is actually the Murrayets family, which holds 45.5% of the shares. BMW is owned by the Quandt family, which holds 46.8% of the shares, while the other 53.2% are publicly held. Both companies are still family businesses because the family has a greatest say in the operation of the business.

Kikkoman Group in Japan has a market share of more than 30% in soy sauce and related seasonings. In 1917, eight Chiba families joined together to found the company, sharing it equally. With the listing of the Kikkoman Group, these shares have been dispersed. Members of the eight families now only hold 3.41%, but they still hold control and management rights, which makes it a family business.

Generally speaking, if the family holds a majority of shares and is heavily involved in the business operations, it is certainly a family business. If the family holds a minority of shares (with the equity being dispersed) but still plays a significant role by controlling the management of the parent company and its subsidiaries, it is also considered a family business. Even if the family holds a majority of shares but delegates the day-to-day operations to professional managers, it remains a family business. However, if a company was founded by a family but now has low family ownership and involvement in its operations, it is considered a publicly traded company.

In China, private enterprises are not necessarily inherited by the family, but a large number are family-controlled and operated.

These various factors aside, all the types of companies above need to consider family inheritance. Behind all the key elements of inheritance, long-term planning is key. We are talking ten to twenty years or more.

So what does long-term family business succession entail?

Succession must embrace long-termism to succeed.

On one hand, a long-term mindset is essential when selecting successors, ensuring they are not only capable but also aligned with the values of the business and its founder. This alignment helps guide the business in the right direction, even in unforeseen challenging circumstances. On the other hand, succession should be seen as ensuring the long-term sustainability of both the family and the business, while continuously creating value for society. Only by meeting societal needs can a business maintain lasting vitality.

A long-term family business succession plan requires that successors should be selected and well trained before they take over. This involves cultivating their management skills and decision-making capabilities, influencing their business values, and improving their ability to handle a crisis.

Second, a business leader has to pick the right time for the succession. It is best to make the transition between leaders when an enterprise is on an even keel, rather than when the going is tough.

Third, leaders and their successors should see the direction of the industry and the overall economic situation as far forward as possible. For major changes, leaders and their successors both need to be prepared. Finally, whether it is the development of people or the operation of enterprises, unexpected events are inevitable. Successful inheritance requires systematic thinking, and that involves having a plan B too.

Challenges of inheritance planning

In addition to corporate governance structure, inheritance planning should consider a family’s special advantages: brand influence in the case of the Toyota family; managerial ability in the case of Ren Zhengfei at Huawei; innovative spirit when considering Steve Jobs and Apple; political and business relations, if you look at Li Ka-shing and Hutchison Whampoa.

Second, we have internal and external challenges: family disputes, the squandering of resources, conservatism, and recklessness have all imploded second-generation-led companies from inside. For many private companies in China today, the children are unwilling to take over, presenting an internal challenge to their companies.

External challenges are more complicated. Changes in the policy environment and industry cycles may lead to a development crisis for the entire industry, such as real estate, and education and training. The progress of science and technology may also lead to fundamental changes in the economic structure.

The ongoing fourth industrial revolution represented by artificial intelligence has already created huge wealth for some families, the most typical of which is the family of Nvidia CEO Jensen Huang. On the contrary, those who fail to seize the opportunity or blindly advance when the new round of industrial revolution comes may cause the family assets to shrink significantly. In some countries, inheritance tax is as high as 60%, a huge external challenge to the family business.

Another major challenge is unclear property rights (O-C-M structure). Behind the incident in mid-2024 when China’s beverage company Wahaha heir Zong Fuli resigned and was invited back, is the complex asset web and the intricate details of the Zong Qinghou family’s property rights.

In short, family business inheritance is to use a set of mechanisms designed in advance to ensure that the ownership, control, and management rights of the enterprise are properly arranged, helping the enterprise to continue to create value for society.

The more special advantages a family has and the fewer challenges they face, the more conducive the company is to being inherited successfully. The fundamental concept throughout is long-termism. A decent set of family values doesn’t hurt either.