Summary of Key Points
Chinese private enterprises are facing their first wave of collective succession: Over 80% of these companies are family-owned, and millions will undergo succession in the next 5-10 years. However, the challenge of succession is not merely about whether the second generation wishes to take over; more importantly, it depends on whether the company itself is capable of continuing to operate smoothly without its founder. The article suggests a shift from a focus on family inheritance to a focus on business continuation, and outlines various approaches such as passing the business to children, internal employees, professional managers, selling the company, or shutting it down. It also warns about the impact of the silent exit of small and medium-sized enterprises (SMEs) on the industrial chain and recommends learning from the experiences of Japan, the United States, and Germany in establishing a socialized succession system.
The Wave of Collective Succession Is Coming, but Why Is Succession So Difficult?
- Background: The first generation of entrepreneurs (born between 1945 and 1965) is now aged 60-70; 80% of private enterprises are family-owned, and two-thirds of them will face succession between 2017 and 2022. Millions more companies will enter this period in the next 5-10 years.
- Three Major Challenges to Succession:
- Unwillingness to Take Over: The second generation has often traveled abroad and seen new industries, viewing their parents' businesses as traditional, less profitable ventures with heavy assets and strong reliance on personal connections (the parents see the business as their life, while the second generation sees it as just an option).
- Inability to Take Over: They lack practical experience in running a company (they haven't dealt with customer negotiations, cash flow issues, or managing inventory conflicts), and they inherit a situation that has been built up over decades rather than a clean and efficient business.
- Formal Succession Without Real Control: Although they hold official titles, key customers and employees still recognize the old boss, making them more of "inheritors" than actual managers.
A Deeper Problem: The Companies Themselves Are Not Suitable for Succession
- Essential Difference: Many private enterprises are "boss-oriented companies," where the owner acts as the primary decision-maker in all roles. Without the owner, the company falls into disarray.
- Successful succession requires "organization-oriented companies" with established systems, teams, and data capabilities that can function independently of the founder.
- The Times Have Changed the Requirements: In the past, entrepreneurship relied on courage, personal connections, and foreign trade orders; now, it requires digitalization, branding, and compliance, all of which depend on organizational structure, data, technology, and capital—these skills were not as important in the past.
- New Valuation Criteria: In the future, companies will be valued based on their ability to be successfully handed over. Companies that can continue to operate without their owner will be more valuable, while those that cannot will depreciate in value.
What Can We Learn from Japan, the United States, and Germany?
- Japan: The lack of successors is not considered a family matter but rather an industrial issue. Half of Japanese companies face this problem, leading to the development of mechanisms for business continuation (involving relatives, employees, third-party acquisitions, or government facilitation), shifting the focus from who inherits the assets to how the business continues.
- United States: Exiting the market is part of a company's life cycle. In addition to passing the business to children, other options include hiring professional managers, selling to funds, management buyouts (MBOs), and employee stock ownership plans (ESOPs). For example, there are 6,600 ESOP programs in the U.S. that allow employees to take over companies and preserve the company's culture.
- Germany: Succession is seen as a matter of industrial resilience. Many German "hidden champions" (small, specialized companies) are crucial to the supply chain, so succession is linked to maintaining industrial capacity.
There Are More Than Just Passing the Business to Children
- Passing to Children: This only works if they are willing and capable, and if the company is worth inheriting. They need to be prepared in advance (through experience and mistakes) and not just because of their family ties.
- Passing to Internal Employees: Suitable for smaller private enterprises, employees who have worked with the boss for years understand the business better than outsiders. Granting them authority, shares, and status 3-5 years in advance can prevent disruptions.
- Passing to Professional Managers: Suitable for well-structured companies (like Midea). He Xiangjian separated ownership from management and governance, showing that the company must be in a position where managers can take over successfully.
- Selling the Company: This is not a sign of failure; it can be a strategic move when the company is still valuable. Selling to peers, funds, or state-owned entities ensures employees have new opportunities, the company's capabilities are preserved, and the family can realize their wealth (otherwise, the value may decrease during economic downturns).
- Dignified Shutdown: For companies without technology, brand, or profitability, it is better to complete orders, lay off employees, and settle debts before closing down—this is also a form of responsibility.
The Most Concerning Issue: The Silent Exit of SMEs
- Symptoms: These companies stop investing in new equipment, hiring young employees, taking on long-term contracts, switching customers, renting out factories, or disposing of equipment. The owners may still show up daily, but the company has no future and gradually disappears without a formal bankruptcy.
- Impact: SMEs are like the "capillaries" of the industrial chain, providing essential services and processes. Their mass exit can weaken China's manufacturing infrastructure, causing more hidden but significant damage than the failure of larger companies.
Conclusion
Chinese private enterprises are transitioning from a phase of entrepreneurial growth to one of business continuation and exit, which is a sign of a mature market economy. The first generation of entrepreneurs needs to learn about how to exit successfully, and the market needs to develop more sophisticated systems for mergers and acquisitions, ESOPs, and industrial funds. Local governments should focus on retaining existing companies. Succession is not just about handing over control; it's about ensuring that businesses, their capabilities, and the founders' achievements have a meaningful future.