Legacy in Transition: Family Business Transition in Vietnam
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Since the early days of Doi Moi, Vietnam's economic landscape has been significantly shaped by the spirit of its first-generation entrepreneurs. In fact, 95% of Vietnamese enterprises are family businesses, and the 100 largest family businesses contribute about 25 percent of the country’s GDP; family businesses overall represent about 70% of private enterprises in the country. In many industries in Vietnam, local companies thrive through a better understanding of the local market, and continue to have a strong momentum.
In addition to forming a large part of the private sector, family businesses are also more resilient - contrary to popular belief, the odds of survival globally for family businesses are higher than typical businesses.
A pioneering generation arriving at a crossroads
These entrepreneurs have navigated the complexities of a burgeoning market economy to establish successful family businesses that are integral to the nation's growth.
However, a lot of private enterprises in Vietnam were founded in the 90s and early 00s, and now enter their third decade. They typically face a different challenge: that of transmitting the reins of the businesses, be it to the next generation in the family or to external investors. Meanwhile, second generation entrepreneurs, often in their thirties and educated abroad, while bringing modern management knowledge to legacy businesses, may struggle to integrate back into the existing system and local business practices.
Structuring the company correctly is pivotal for the continued prosperity of the business, but how should it be approached?
The limitations with family businesses
Family businesses in Vietnam have thrived under the stewardship of the founders, often characterized by strong personal leadership and a deep understanding of the local market.
Yet, the success formula that has served it so well may not be equipped to sustain future growth or transition. Many of these businesses lack formal structures, corporate governance, and succession plans. Processes in the companies may not match the standards of international investors and managers, which can be a deterrent. Worse yet, corporate cultures can be very reliant on Founder’s wisdom and decisions, which could hamper future growth once leaders step away or delegate more of their responsibilities.
5 lessons for managing the transition
To ensure a stable and successful handover, family business managers in Vietnam should work on five dimensions.
1. Institutionalize Business Operations:
Moving away from a founder-centric model requires establishing clear organizational structures and processes. This includes defining roles and responsibilities, creating standard operating procedures, and implementing management systems that do not solely rely on the founder's expertise. Institutionalizing operations will make the business more attractive to external investors and empower the next generation of leaders with a clear framework for decision-making. In many places, this corresponds to a formalization of existing, implicit processes.
How to get started: ensure the business has a clearly defined organization structure, with each department having clear areas of responsibility, job descriptions, KPIs, and SOPs. Make sure the decision-making is clearly delegated, and not dependent on the founder for day-to-day decisions.
2. Foster Professional Management and invest on talent earlier rather than later:
Introducing professional management can bridge the gap between the entrepreneurial approach of the first generation and the strategic vision required for future growth. External managers bring fresh perspectives, skills, and experiences that complement the family's insights and values. This blend of professional management within a family business context can drive innovation and adaptability, and will also prove reassuring when the time comes to bring in additional investors. Usually, the process of recruiting external management is also a powerful catalyst for companies to work on their culture, talent strategy, employer brand, compensations - all steps that become critical to manage the transition. On the flipside, this talent injection will also come with challenges, and therefore should be done early to ensure new leaders go through one or two business cycles before possible transactions come about.
How to get started: make sure the 5-10 most important positions in the company are occupied with reliable leaders, that have proven competencies, and are motivated by something else than their loyalty to the founding family. Develop the HR function to be able to attract, onboard and retain talent while building a strong employer brand.
3. Strengthen Corporate Governance:
Good corporate governance is crucial for transparency, accountability, and the alignment of interests among family members, management, and potential investors. Establishing a board of directors that includes independent members can provide oversight and strategic guidance during and after the transition. When doing so, a key question to ask is often “ will this ensure that the business keeps running when historical founders step away?”
When adjusting their governance bodies, family businesses should seek to add a diverse set of perspectives, and find balance in two dimensions:
Balance between independent voices and family voices: The objectivity, skills and independence of external directors is hugely beneficial to family businesses, while the inclusion of family representatives (especially the new generations) will ensure continuity and a good understanding of the context
Balance between forward-looking, 30,000-feet strategic thinking and industry expertise: A board of director with enough long term thinkers will ensure that family businesses challenge themselves and anticipate challenges. Conversely, maintaining few members that are closer to the industry (may they be in executive positions or not) ensures a grounded, balanced guidance
How to get started: review the composition of the board of directors to ensure they meet the criteria in terms of independence, diversity of perspective, and skills.
4. Lift accounting and financial processes to meet investors expectations:
As businesses mature, the need to welcome external investors typically comes with heightened scrutiny on financial processes. While early entrepreneurs tend to focus on simple heuristics to grow the core of their businesses, some legal, financial and accounting practices can become neglected.
Often, a sizable effort is needed on three fronts: setting up clear corporate and legal structures that can enable outside investments, developing clean and audited statements that will build confidence in the business, and developing a solid, data-driven management accounting system that will allow new generations of employees to pilot performance (for example with monthly data that allows revenue and cash forecasting, etc)
How to get started: confirm informally with prospective investors that the legal structure of the company makes it attractive for foreign investors. Get familiar with typical due diligence processes in the industry to ensure the company would be able to provide the right documentation. Set up a reliable, auditable accounting system.
5. Find renewed momentum
Perhaps most importantly, one of the important roles of the first generation of founders will be to ensure they don’t leave behind a legacy organization, but also a company with strong prospects.
In the years before a business transmission or external investments, developing a strong business momentum is key, not only to ensure a good valuation for the historical shareholders, but also to make sure the company remains attractive for current and future employees. Practically, this means developing a solid, ambitious business plan, allocating resources to innovation, turbo-charging the sales engine, and sometimes re-investing in marketing and branding.
How to get started: Get the management team to develop an acceleration program, to create momentum in the company, in a formalized way. Communicate accordingly to mobilize the organization.
Exhibit 1. Notable examples of family business transitions
By Matthieu Francois, who is Partner at Delta West and Delta West team
The authors come from backgrounds in investment banking, consulting and entrepreneurship in Vietnam, and support Vietnamese mid-cap corporations in their transformations and transmissions through Delta West.
