When SME owners delay succession planning, their business and family pay the price

WHAT happens when a business owner dies and no one knows who’s in charge? For many small and medium-sized enterprises (SMEs), the answer is chaos. Without a clear estate and succession plan, a business with strong earnings and loyal clients can go into limbo and may even die with the owner.

A recent survey revealed that 55 per cent of family business owners in Singapore have no succession plans. Yet 81 per cent said they want to preserve their business’ legacy.

As many older SME owners approach retirement, they may hope for continuity yet lack a succession plan.

When a business owner dies without succession in place, the company’s wealth can vanish if there is a lack of liquidity or legal clarity.

A legal process called probate kicks in. The court will validate the deceased’s will, if there is one, and an appointed executor will distribute the estate, assets and liabilities.

Probate creates cashflow risk, as the authorities freeze the owner’s assets.

With assets frozen and operations stalled, probate can paralyse a business during a critical time. Some businesses may halt operations due to lack of working capital.

If a founder’s wishes are not clearly documented, disagreements among heirs and business partners may also arise.

After an owner’s death, there’s no guarantee that heirs or successors will behave as expected. Without a proper plan, the ambitions and actions of others may derail the founder’s vision of succession.

Why is succession so often neglected?

Why do responsible SME owners not plan for succession? One reason is that in Asia, topics of death and succession are still taboo.

In addition, differences in lived experience and philosophy between older founders and younger potential heirs can make succession a contentious topic.

This is further complicated in families with second marriages, blended households or estranged relationships, where navigating succession may bring up sensitive issues of fairness and inclusion.

Founders often avoid succession conversations to sidestep conflict.

Furthermore, SMEs are often cash and resource-strapped. Business owners are overwhelmed by the day-to-day concerns of the business and are left with little headspace to think about succession.

Proper succession planning also involves legal and financial training that SME owners may not have.

How can SME owners prepare?

SME owners should consider using financial and legal tools to safeguard the future of their business beyond their own lifespan. Securing cashflow is crucial, especially during the probate period.

Buy-sell agreements can be used to pre-determine share transfers and thus ensure smooth succession in the event of death or incapacity.

It is critical to fund such agreements through insurance, so that there is immediate liquidity for the purchase. Without funding, partners may not be able to afford the deceased’s shares, resulting in forced sales or an external takeover.

Getting key-person insurance can also protect the company against the loss of the founder’s contribution. This provides the business with a financial buffer while it searches for a successor or buyer.

Beyond liquidity, the structures around how funds are disbursed are crucial. Trust and estate structures allow smoother transfer and shield assets from creditors or disputes.

For global businesses that are exposed to multiple tax jurisdictions, owners can structure trusts to choose jurisdictions with favourable tax regimes and incentives.

The owner can also include provisions such as staggered distributions and education milestones to support future generations in stewarding the business wealth.

Owners should appoint professional trustees to follow their documented plan. This facilitates a prompt succession, and prevents conflicts between family and business interests.

But beyond tools and structures, transparent communication within the family is just as essential.

Holding succession dialogues early, with both family and non-family potential successors, helps to secure buy-in, reduces uncertainty and gives everyone a seat at the table.

Good succession plans should honour the desires of rising-generation heirs, especially if they are looking to pursue different careers.

Documenting contracts, contacts and operations also enables smoother continuity or closure.

Succession planning is not just business; it’s also looking out for family. It reduces tension among family and partners in a time of uncertainty and grief. Beneficiaries know what they’re inheriting, who’s in charge, and how decisions will be made.

No matter if the business is sold or continued, what’s important is that successors preserve and reinvest the business wealth wisely. The goal is not just to pass on a business, but to pass on stability and opportunity.

Older SME owners should make speaking with a succession and estate planning adviser a priority today. When your succession and estate structures are planned with intention, your life’s work doesn’t end with you, it compounds across generations.

The writer is associate director at Finexis Advisory