It’s a rags-to-riches story that many people have heard about before: A penniless boy builds a business which eventually grows into a multi-billion dollar empire.
In between his wheeling and dealing, he marries his sweetheart – or many of them - and they have a family with multiple children.
The story is supposed to end happily for the patriarch, with his family surrounding him in his mansion as he closes his eyes and drifts away. At least, that’s how the movies usually portray it.
But in real life, the story continues, turning from a heroic epic into a tragedy as the patriarch’s sons and daughters fight for a piece of the empire after he dies. Eventually the infighting leads to not just the breakup of the business but a sundering of the bonds that once held the family together.
I have witnessed first-hand the crumbling of a business empire worth billions as a result of family infighting. Within just two years, a conglomerate disintegrated because the family members could not agree on how to divide up the remaining shares of the company.
Some will blame this sorry episode on greed. After all, Mahatma Gandhi once said: There is a sufficiency in the world for man's need but not for man's greed.
But while Gandhi said is true, a deeper problem lies in the lack of preparation, and the absence of a proper plan to prepare for the time after the credits start to roll.
Growing wealth without preserving it
The lack of proper planning is especially pertinent in the Middle East, where most of the wealth has been generated over the past 40 to 50 years as a result of the oil boom.
Private wealth in the region is expected to grow rapidly. According to the Boston Consulting Group, private wealth in the Middle East is expected to grow from US$8.1 trillion in 2016 to US$12 trillion by 2021.
Much of the wealth in the region is stored in businesses, and many of the founders of the company continue to work well into their 70s and 80s. Retirement is an alien concept to many of them. I know of a businessman who worked till he was 101 – he died at his desk.
The problems arise when the founder dies, especially if he does not leave clear succession plans for the next generation to take over.
To be sure, this is not a problem confined to the Middle East. Many family owned-businesses are prone to these problems.
According to The Family Firm Institute, only about 30 per cent of family and businesses survive into the second generation, 12 per cent are still viable into the third generation, and only about 3 per cent of all family businesses operate into the fourth generation or beyond.
But the situation in the Middle East is exacerbated by three factors, probably unique in this part of the world.
First, there are no established norms of passing wealth from one generation to the next, unlike in Europe and the United States. In the West, the concept of a will is very much embedded into the legal system.
In the Middle East, under Islamic law, there is the waqf system, which involves donating assets for Muslim religious purposes. But the concept of a will is much less common.
Second, few talk about death, much less prepare for it. Culturally, talking about death is simply taboo, which adds to the problem since eventually all men must die.
Third, Muslim men in the Middle East are allowed to practise polygamy – that is to have more than one wife at the same time, up to a total of four.
In cases where there is more than one wife, the family could be split into different factions, each led by one of the wives, with all of them fighting for the right to inherit the company.
This complex family situation makes any form of conflict resolution very challenging to achieve.
Planning and preparation
Does this mean that all success stories will eventually end up with an unhappy ending?
Not quite. I believe that the best way to do legacy planning is to prepare early.
Generally speaking, there are three options for businessmen look to preserve their legacy.
One is to hand over the business to the next generation. If the businessmen want their children to take over, they must get the next generations involved in the company early.
There also should be clear instructions on who gets what. This can be achieved with proper advice from lawyers and accountants, facilitated by wealth planners such as Bank of Singapore who has been in this region since 1996.
With one of the oldest trust companies in Singapore, BOS Trustee, under our stable, we have the right expertise and partners to execute the best form of wealth transfer to the next generation.
Second, the family can sell the business and divide up the assets among the next generation. This may be seen as wasteful; after all the founder spent his entire life building the business up.
But it could well be a logical choice especially if the family situation is complex. It could also be the most equitable solution.
The third option is for the family to continue to hold ownership of the company but appoint professional managers to run the company.
In this way, wealth continues to reside in the family but the business is competently run by professionals. The profits and dividends from the business can continue to sustain the family as the business continues to grow, preserving both the legacy of the founder as well as the family.
These are options, among many others, that can help one generation pass on their wealth to the next. No one option is perfect and each family will have to decide which suits them best.
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