"Anyway, my father is still the boss and my feelings are that he still wants to keep everything under control. Maybe he's right or maybe not. I just can't do anything about it."
As the first generation of Chinese entrepreneurs accumulating wealth, they are also facing the challenge of how to pass on family fortune or business to their offspring smoothly without costing an arm and a leg. Little Xue's is not the only one who has this kind of trouble in the country's private sector that has been thriving in the past three decades, thanks to the reform and opening-up policy.
In the most recent Forbes Billionaires List, the number of Chinese mainlanders increased to 122, up from 95 a year before. However, aging creates the biggest problem for these wealthy Chinese. According to Forbes, the average age of mainland billionaires is now increased to over 50. In this case, succession starts to rise up their agenda.
According to a survey conducted by Chinese Academy of Social Sciences, first generation of Chinese entrepreneurs is aged between 55 and 75. The survey showed that more than 3 million private entrepreneurs in China have to face the issues of business succession in the next five to ten years.
Russell Flannery, a senior editor and Shanghai bureau chief of Forbes magazine, noted that when it comes to succession, mainlanders are usually different from Hongkongness and Taiwanese, where many business founders have already passed the torch to second or third generation. For instance, a sauce maker from Hong Kong named Lee Kum Kee is now passed onto the fourth generation of family operation, and their business is better than ever. In other instances, however, poor transitions could lead to public embarrassments. An example of that is how a Hong Kong based real estate company called SHK Properties was once devastated by the squabbling among the founder's family.
Flannery, the person who compiles Forbes China, Hong Kong and Taiwan Rich List, said on his blog on Forbes.com that "the mainland is unique among the three regions of Greater China because virtually all of the leaders of its most important private-sector companies are founders. In addition, many don't have a large selection of offspring to choose from as a successor. Those that do may have more than one spouse, complicating matters."
Xue's hometown Wenzhou represents the success of China's campaign to boost its private sector. However, a growing number of smaller businesses, especially those in China's eastern costal regions, have difficulties in choosing second-generation business leaders. According to Zhejiang, Chamber of Commerce research, about 80 percent of private enterprises face succession problems.
"I think the biggest challenge for those private firms is that children of the first-generation entrepreneurs don't have big interest in taking over the family business," said Chris Feng, general manager of consulting firm V-Sun Co. "Even they agree to do so, they often have different ideas of running a business. Besides, they are likely to face other challenges such as intervention by other relatives or their determination to overcome difficulties amid economic downturn."
Stephen Luo, one of Xue's best friends, also faces the headache of taking over a textile company from his father. But 35-year-old Luo is hoping that he can open a car-repairing factory with financial support from his family.
"That's where my interest lies in," said Luo. "My father wanted me to expand the textile facility, but I don't think the business has a bright future. I am not ready to take over that. I just want to do my own business just like what my father did when he was young."
Luo mentioned that one of his biggest concerns is that his father still wanted to have a say in business decisions even after handing over the reins. Another concern is that his uncles and aunts also expected to intervene the business as they have shareholdings in the business.
The first-generation businessmen will not agree to this, however. Although they do think it is important for their children to take over the business, they also fear that the younger generations, who usually grew up amid affluence and are used to lavish lifestyles, are unable to endure hardship and take full responsibility for the family business.
"As parents, we don't mean to discourage or control them," said Lei Changfa, a Zhejiang native who owns a furniture factory and had his son and daughter involved in the business at the age of 60. "I trust them. But they need guidance and help when starting off."
Nowadays, a small number of rich families started to introduce some outsiders to help them arrange business planning and assets succession for the next generation. The so-called family therapists or planners are tasked with drafting the most suitable structures for family businesses resulting to a smooth transition when passing to the next generation.
Kevin Zhu, an independent investment adviser and former consultant with Bank of Communications, has recently helped one private entrepreneur in Zhejiang to work out a plan to let the younger generation take over the reins of family business.
"In the West or advanced markets in Hong Kong, the concept of involving family therapists in business succession is very popular," said Zhu. "But in mainland, only a few people started to accept this as they used to keep their family issues away from outsiders."
Zhu noted that the biggest issue under a family succession plan is to clarify the interests and responsibilities of the parties involved, and thus reach a consensus in how to develop their family business in the future.
Zhu's job is to communicate with all members of a family to see their concerns and expectations over the business before working out a structure that could benefit all parties to some degree.
"What I do is telling them stories I've heard and encountering myself about succession planning and lessons," said Zhu. "Then I participate in their discussions and help them draft a solution together."
The main conflicts during the asset succession procedures is whether or not to introduce outside shareholders, or to invite professional managers to help out and what tools the family should use to pass on wealth.
But among all the issues need to be discussed, the first thing family members have to agree on is ownership structure, Zhu said. The ownership structure could have a deep impact on how the business decisions are made and how profits are distributed.
"In many private enterprises, the founder, usually the father of a family, makes the final decision with absolute power over the business," said Zhu. "He passes his power to the eldest son most of the time. Such kind of inheritance structure could sometimes cause problems as other family members, especially male members, feel that they are sidelined and may not be entitled to their desirable benefits."
Therefore, the second-generation leaders have to communicate with shareholders or other family members in order to ensure the business is on the right track after the first generation pass away.
Michael Wang is a 34-year-old Zhejiang native who owns a large bakery business in Shanghai and about to take over the business from his father. But his sister is also expected to take a large stake in the business although she does not have any management power over the company.
"The first thing I learned from my father is that you should be accountable to the people that matter the most to you," said Wang. "If you hope to preserve the wealth of the family, the best solution is to make decisions together. Although I am the boss, my sister also has her say in this. I will choose to follow when she is right."
Wang said that open communications can avoid the breakdown of trust among family members. "I have to always remind myself that we work for the same goal toward making our family prosperous. My parents are the creators of wealth and we are the successors. We must ensure we have good family governance rather than conflicts. There will be no personal interests if the family is broken into pieces. We cherish this relationship."
For second-generation entrepreneurs like Wang, the first thing to deal with is whether or not to introduce shareholders or the management team from outside the family into the business they are taking over - a scenario their parents would probably be reluctant to accept. The question follows is that whether the private company should go public or not in order to raise more capital for expansion.
Although outside shareholders usually don't play any management roles, business founders, especially those in mainland China, were concerned that the new investors might threaten the family business in a long haul.
"The right way to run a family business for generations is to consolidate ownership within the family and introduce outside professionals at a proper timing," said strategist Kevin Zhu. "That's the way Japanese private businesses thrived in the past several decades. Chinese entrepreneurs can borrow the idea and develop their own solutions."
Zhu noted that it might be easier for rich Chinese families to accept managers from outside than shareholders in the initial stage. When younger generation with academic background from overseas universities starts to take the rein, they tend to be a lot more open to recruiting professional managers who have the real expertise to run the family business better.
Michael Wang has just hired two bakers with years of learning experience in France. "My father opposed the recruitment at first, but later he agreed. We need some employees with skills and ambitions. They can bring in new ideas and innovative products. I told my father we should also cater to the new generation of customers who are more used to cakes and bread in Western style. That would make our business grow in a sustainable way."
After inviting outside professionals to fill expertise gaps, there are other subsequent issues include how to expand the business, where to attract capitals and whether the company should go public.
For those who want to expand from small and medium-sized business, going public could help them establish a good governance mechanism and secure a fund-raising channel for future growth. However, there are still many concerns, like whether listing would compromise the family's control over the business or expose the secrecy of family members to the public.
"Going public seems to be the ultimate goal for many private firms. But quite a few businessmen with age of 50s or 60s fear that public listing may ruin the business," said strategist Kevin Zhu. "Some of them prefer to borrow from friends or through private channels instead of going public."
Although getting shares listed on China's Nasdaq-like ChiNext board could boost a company's image and influence, it also requires shareholders, directors and other related personnel to disclose their information in a detailed manner.
Xue, the successor of a machinery-manufacturing factory, said he never thought about public listing. "Even we grow bigger, we will not choose to sell shares publicly. That's a rare consensus among family members," Xue said. "I will introduce outside managers but not investors. We'd rather borrow money instead of giving out stakes. We hope to keep the business private to make sure everything is under control."
Instead, a lot of private merchants in China are now considering the possibility of setting up a family trust or foundation to manage their legacy. The concept of foundations and trusts has been gaining popularity in China in recent years. One of the milestones took place when Bill Gates invited China's wealthiest people to dinner, exchanging ideas about charity as the founder of Warren Buffett and Gates Foundation.
Trusts and foundations are important asset protection vehicles which are able to offer succession planning and ensure the continuity of the administration in the event of founder's death. Trusts hatched out from British common law while private foundations were first introduced in Lichtenstein in 1926. Trusts and foundations can help the transfer of family wealth into a legal structure while protect it against a wide range of claims, from bankruptcy to inheritance disputes and divorce. They are both widely available in offshore jurisdictions all over the world, where taxes are also significantly lower than online jurisdictions.
The assets of a trust are under the ownership of the entrusted trustee. Unlike trust, foundation is a separate legal entity that owns the assets managed by the Foundation Council. Therefore, foundations are more familiar to clients of civil law jurisdictions, like China, foundation acting as a separate legal entity is more easily understood.
"My suggestion is that wealthy Chinese should consider setting up family foundations in jurisdictions with sound legal environment and stable economic growth," said Kevin Zhu. "Businessmen are very sensitive to risks nowadays. Foundations allow family members to join hands to work for the family wealth, exert effective control over business operation via the Foundation Council and ensure a smooth succession of power."
Zhu said that a family foundation can be used as a shareholding parent group. Under such scenario, the ownership and operation of a family business is separated. As the power of a family is consolidated, the death of any family member is unlikely to have any big impacts on the business. Family members can also make better and faster decisions under a foundation structure, which eases up succession process without effecting business operation. Wealth accumulated over time under the structure of family foundation will not disappear even if the business undergoes bankruptcy, since beneficiaries may not be the owners of the property in the foundation, assets reserved for the protection of the living by family members are immune to the debt claims targeting the beneficiaries.
Bakery business owner Michael Wang agrees to the concept of trusts and foundations. He claims he will consider establishing an offshore foundation in order to avoid the conflicts of interest among family members.
"We need to plan for a longer term and apparently foundation is something we want," said Wang. "The only thing we need to do is to find a jurisdiction with solid economic background, relatively low tax, stable political environment, established legislation and free currency mechanism. We have quite a few options looking out to the world. But under current global uncertainty, it would take some time to make our final decision."
