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Thinking Ahead, Today. A PwC Entrepreneurial and Private Clients publication

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Page 1: Thinking Ahead, Today

Thinking Ahead, Today.A PwC Entrepreneurial and Private Clients publication

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Foreword

Welcome to the first collection of our annual Forward Thinking series, a unique collection of thoughts surrounding family owned businesses in Singapore. This publication is a collection of articles produced based on our experience working with over 100 owner-managed and family businesses in Singapore.

The typical family or entrepreneurial business in Singapore is a relatively young one. Unlike their counterparts in Europe or America who have undergone several generations of succession, active family members or business owners in Singapore are just into their second or third generation. Many are transitioning from one generation to the next and from an owner-managed to owner-led company. In the local context, companies in this segment typically embark on a progressive shift towards taking their company public too.

Externally, today’s business landscape has evolved into one that is increasingly competitive, compounded by rising costs and a more discerning consumer market. Despite the fact that these changes do not take place all at once, it certainly seems like a fair bit of adjustment for business owners to make. How can family businesses and entrepreneurs place themselves in a better position to tackle these challenges particularly in times of transition?

The guiding principles found in this collection aim to enhance awareness of best practices within the segment of entrepreneurial businesses and family enterprises. It discusses several themes relating to family governance, succession planning and sustainability, some of which are fundamental but have not necessarily gained adequate awareness among key stakeholders in the business. The trick also lies in tying these practices with the unique qualities of your organisation.

We hope that this helps to demonstrate possible gaps not previously known to the business and triggers you to anticipate and prepare for promising opportunities to come.

Ng Siew QuanEntrepreneurial and Private Clients LeaderPwC Singapore

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Foreword 3

Is there a place for corporate governance in family businesses? 6

Corporate governance and non-executive directors in family-owned businesses (Part 1) 10

Corporate governance and non-executive directors in family-owned businesses (Part 2) 12

Internal audit for SMEs 14

Sustainable family businesses 17

Opportunities & challenges for SMEs & family business expansion 20

Family-owned/managed businesses come under IRAS’s spotlight 22

Executing a successful IPO 26

M&A as a growth strategy 30

Integrating business and technology 34

Connect with us 38

Table of contents

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The concept of corporate governance is widely recognised and practised in many multinational corporations and listed companies. Policies, guidelines and structured systems are set out to ensure firms are operating effectively and efficiently through sound means. Businesses big or small ultimately share some common ground in that all business owners look for growth and sustainability. Having a good corporate governance framework does just that to aid this vision. Adopting these structures makes much sense for companies but family firms have been slow in picking this up.

Are family businesses so different that corporate governance is not relevant to them? The short answer is no as the two greatest threats to the successful continuity of family businesses are conflict and lack of succession planning. Having good governance practices may serve to mitigate these threats.

Conflicts in family businesses

Most family businesses wish for business prosperity and family harmony; however they are often confronted with underperforming business units and unresolved family conflicts. Conflicts in family businesses are rarely caused by poor business performance. Most conflicts arise because the family owners perceive that their needs are not met or when situations are unclear or not properly understood. The management of these conflicts become the key to survival of both the business and the family. Indeed, the main reason behind the emergence of conflict in family businesses is the lack of understanding and communication between the three family overlapping dimensions, namely the family, owners and management.

Is there a place for corporate governance in family businesses?

Ownership Management

Family

The Three Circle Model for Family Businesses1

Ng Siew Quan

Entrepreneurial and Private Clients Leader

[email protected]

1 Source: R. Tagiuri and Davis (1982)

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Understanding and managing these dimensions become extremely important as everyone within the family will have their own strong points of views. The individual views will differ based on personalities but also on where the individual family member is positioned within the three circles. Some family members will be active shareholders involved in the running of the business while other family members may just be passive shareholders. However there can be expectation gaps and communication issues. When you are actively running the business, you understand the business challenges; but when you are not in the business, you may have little or no insight into the dynamics of the business. This divergence in knowledge often results in conflicts.

The core issues likely to cause tensions in a family business include:

• Making decisions about the future strategy of the business• Reviewing the performance of family members actively involved in the business• Setting of remuneration levels for family members actively involved in the business• Making decisions around who can and cannot work in the business• Ensuring family members actively involved in the business not consulting the wider family

on key issues• Deciding between the reinvestment of profits and the payment of dividends• Determining the roles ‘in-laws’ should or should not play in the business • Deciding how family shareholders exit?• Agreeing on the basis valuation of shares in the business for those existing the business• Choosing the future leaders of the family business - succession

The 2012 PwC Family Businesses Survey revealed that many family businesses are indeed plagued with these challenges.To be able to navigate these issues, a family business needs effective governance coupled with good communication amongst the three overlapping sub-system of family, ownership and management, to succeed in the long run.

Effective governance to the rescue

The above challenges necessitate the need for stronger and more robust governance processes, structures and policies within family firms. This translates to Family Governance – the internal system that governs the management of the family business to promote accountability, transparency, fairness and disclosure. Family governance when applied consistently and correctly reduces the emotional aspect of decision making and communication. Moreover, the larger the firm grow, the call for corporate governance will be more evident due to the need for regulatory compliance and responsibility to public stakeholders if it decides to become a listed company.

What entails family governance? Essentially, the governance framework seeks to address family challenges by looking at the people, structure and processes. The humble beginnings of a family business may have started with just two or more family members. Business related discussions could have been informal, over a dinner table. However, as the firm grows and more family members enter the picture, it is important that meetings take on more formality and structure. A set of guidelines will help to manage conflicting ideas and opinions as more members join the business.

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What do successful families do to minimise conflicts?

Most families have governance procedures to deal with the business dimension. Few, however, have set up formal governance structures for the family and owners dimensions. The following are some family governance practices which families can consider:

Establish the rules

Through the family council or the stakeholders’ assembly, the family can build and agree on a set of rules which address key ownership issues. These values are often referred to as family protocols or a family constitution. Successful family businesses have adopted these rules which form the basis for strong intra-generational business relationships. Being brothers, sisters or cousins may not be enough at times.

Creating the family constitution lies at the heart of building a base for family business success. This is no different from listed companies where the Board obtains mandate from the shareholders at Annual General Meetings and these are enshrined in the Articles.

Decouple family issues from business issues

Some family businesses do not have clear delineation between family matters and business activities which increases the potential for conflicts. Families that separate the ownership issues from management issues and maintain balance between their relationship as family members and their contractual relationship as business owners have a more viable family business.

This is similar to Corporate Governance principles where the Board is accountable to the shareholders and the management is accountable to the Board. There are clear rules as to what management, Board and shareholders can do.

Establish a family forum (family council)

Families can create family councils and shareholders’ assemblies for the family owners which are a separate forum from the board of directors and management of the company. The family council becomes a forum which allows family owners to be actively engaged in the debate surrounding ownership and family issues – the emphasis here being the fact that all family members can participate, regardless of whether they are actively involved in the management of the business. In this way, it increases the communication channels and minimise expectation gaps, thus the threat of family conflict is lessened and the chances of the next generation embracing and supporting the family business are improved.

This practice has been followed by many families all over the world and in some cases the family council and the shareholders’ assembly occupy as much time as the management of the company. The concept is no different from the Corporate Board representing the shareholders.

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Concept of fairness in the family

Fairness in the family means that all family members should be treated in a consistent and equal manner.

Divisions and fragmentation between family members can be caused by family members suspecting others of benefitting at the expense of the family.

The whole family should have a real commitment to fairness. This in turn calls for the family constitution to be created with the fairness concept as the key ingredient.

Conflict resolution mechanism

The 2012 PwC Family Businesses Survey indicated that although most of the families interviewed admitted to having conflicts, more than 30% have formed mechanisms in place and the trend is set to grow.

Family businesses are increasingly creating formal conflict resolution mechanisms which provide a forum where family members in dispute can air their differences and hopefully resolve the issues in an amicable way. However, in family businesses, emotions sometimes run high which makes it difficult to resolve issues in an effective way. Therefore, families set up conflict resolution committees which include the involvement of an outsider, a person who is trusted and well respected by the family and offers that independent voice. The role of the independent outsider is extremely important as they bring objectivity in resolving family conflicts.

The same principle can be applied to having a nomination committee within the family council to screen family candidates to decide if they should join the family business as management or just remain as a shareholder.

The use of such impartial go-between provides a neutral forum in which the disputants can air their differences without being intimidated. The process is more structured than ‘ordinary’ negotiation and the results are often more long-lasting.

Conclusion

The bottom line is clear. Family businesses need a clear set of guidelines just as much as large corporations do. Adopting a long term perspective helps cultivate preparedness for unique challenges faced by family businesses.

The best time to repair a roof is when it is not raining; the best time to establish family governance is when the family is harmonious. You want to put that in place before anything untoward happens.

The governance framework demonstrates an ability to avoid sudden surprises and anticipate conflict. It also challenges families to think ahead and propel them for growth. The key is to review these structures and plan as the family business grows.

Good family governance is a journey, not a destination.

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Over the last five years, there has been a reasonable increase in the number of non-executive directors in family and privately-owned businesses. Non-executive directors provide a particularly useful role on the boards of family and privately-owned businesses. As they bring considerable value to these businesses through their personal skills and experience. While ensuring that potential conflicts are minimised, they can also contribute to maintaining a focused and formalised conduct in the management of the businesses. Another benefit is the delivery of independent advice to the management of these businesses at times of transition, particularly when ownership is being passed to the next generation of a family.

Where are the benefits of appointing a non-executive director?

The essential contribution from non-executive directors is that they bring a fresh and broader perspective to board discussions and decision-making. Non-executive directors should be selected based on the diversity of their background and experience. The following are some of the benefits that the non-executive directors can bring to a board’s deliberation and decision-making process:

Holistic approach

As a result of their managerial responsibilities, executive directors may not be best-equipped to give proper weight to different aspects of issues faced by the board. Non-executive directors can usually view matters from a more holistic approach after considering the needs of actual shareholders and internal requirements if of management.

Independent view

As non-executive directors are not heavily involved in the daily running of the business, they can bring a wider judgement to bear on matters before the board. This is particularly useful in the context of strategic planning, or when there are events of special importance to the business’s future, such as mergers, acquisitions and investing large amounts of capital.Non-executive directors can provide new perspectives, thus helping the board to think through and challenge its underlying strategies and examine the available options.

Corporate governance and non-executive directors in family-owned businesses (Part 1)

David Toh

Partner, Risk Assurance

[email protected]

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Specialist knowledge

A business that has moved into a new market, an overseas location or a new technology may need board-level counsel from an expert. The addition, for example, of a merchant banker, engineer, academic, marketing specialist, lawyer or accountant can supplement internal resources during such a significant change in the family-owned business’s development.

Network connectivity

Non-executives will generally have more contact and involvement with the greater business community than executive directors given that they may sit on a few different boards bodies. This connectivity may be put to use in identifying new sources of finance or new potential customers or suppliers, the Government or additional sources of professional advice.

How can I find a suitable non-executive director?

Like all new directors, a non-executive director would normally be selected directly by the existing board. Personal contacts and recommendations can be an important way of identifying suitable candidates. For example, the family-business founder often has a principal role in identifying suitable people who would be prepared to offer their services. Existing non-executive directors may be able to suggest others from their wealth of contacts, and professional advisors to the family-owned business may be able to help by recommending candidates. But there will be times when outside help is needed. The Singapore Institute of Directors is a national body for company directors in Singapore. The institute provides a range of services including assisting with the identification of suitable candidates to act as independent directors for companies in Singapore.

Non-executive appointments are often made from those who are still engaged in the industry. Besides them, those who have recently retired are often another important source.

How does this apply to me?

The importance of non-executive directors has come into focus with the inclusion of them being a corporate governance requirement for public companies. However the benefits of them are also applicable to family-owned businesses and it might be worthwhile considering whether the appointment of one or more non-executive directors could add value to your business.

This article was first published in The Edge on 1 June 2013.

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Many family businesses bring in non-family executives to lead their businesses. To make this work effectively, the right balance must be created to ensure that the executive is focused on adding value for the business, whilst providing a fair reward for them if they deliver.

This sounds straightforward, but incentivising executives in a family business throws up many issues. For example, family businesses operate with long time horizons – the key is to keep delivering value for the long-term – but many executives look at shorter time horizons. How will this dichotomy affect wage structures?

This article explores the different kinds of considerations for family owned businesses and appropriate remuneration structure for non-executive directors in a family business.

KPIs linked to business strategy

The primary consideration should be business strategy. Senior executives will have a big impact on the strategic direction of the business and on driving value creation for the family and shareholders, so it is crucial that incentive arrangements are directly correlated to achieving the KPIs set in place. These KPIs should be aligned to the strategic goal of the company. Strategic decision making will have an impact on driving value creation for the owners of the business. For example, appropriate reward packages in business looking for high, potentially risky growth will be different to those in businesses looking for more steady stewardship.

Package design

In listed companies, shareholders are typically institutions which may be looking to maximise short-term returns. Pressure from institutional voters has led to businesses using very similar incentive plans, even when they operate in completely different business areas. Conversely, in a family environment, considerations are different as the management and shareholders are often the same. The family business culture and values will add a different dimension compared to a traditional listed company. Hence, family custom and practice are likely to be more influential on decision making than they would in listed companies and a focus on longer time horizons will be typical. In high-growth businesses a significant portion of the package should be linked to the achievement of aggressive growth targets, and incentives will be higher compared to salaries. These incentives may be deliberately designed to encourage the taking of managed risks. Conversely, some businesses may be more interested in strong but steady growth over a very long-term. This supports a much higher base salary compared to the high growth situation.

The next question is should the incentives be delivered as cash or shares?

Corporate governance and non-executive directors in family-owned businesses (Part 2)

David Toh

Partner, Risk Assurance

[email protected]

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Considerations on paying cash or equity

Incentive arrangements delivering some form of equity payouts are common in listed companies, this is not necessarily the case for family businesses. The emotional impact of making share awards in a family business cannot be overestimated. Owners of the business may be concerned about share distribution to a non-family member for not only reasons of dilution, but also because it may be perceived as giving away control. The question also arises as to whether an equity holding in a family business really motivates executives? Additional issues include the fact that there may not be available buyers for the shares, or the shares may be difficult to value, though executives may feel more aligned to the business. This could very much depend on the individual. Some executives may focus on the total cash value of their package and their overall ability to create wealth rather than how this is delivered.

However, in the case of a potential initial public offering (IPO), the business may be happy to provide equity as the future upside, post-IPO, is effectively funded by new shareholders.

Considerations for performance targets

In listed companies, executive performance targets tend to be short term, with a maximum period of one to three years. On the other hand, shareholders in a family environment often look for long term stewardship. Performance conditions should reflect what the business is trying to achieve over the next one, three, five, seven or more years. Clearly, measures based on share price would be difficult to operate in a family business, but measures of the value added to the business can prove effective. For instance, measures of economic profit can demonstrate the value added to a business over a period of time in excess of the cost of capital. In other businesses, performance measures can be directly linked to strategic objectives, such as developing a new product, cost rationalisation or maximising annual earnings.

Effectively incentivising a non-family executive in a family business can be difficult if not approached the right way. However, a well developed incentive plan can provide comfort to the owners that the executive will act in their best interest. The key is to understand the business strategy and design a plan which is closely aligned to those long-term goals. Setting the right performance conditions will ensure that the executive is rewarded only if those goals are delivered.

This article was first published in The Edge on 1 June 2013.

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The Singapore government has been placing strong focus on the SMEs in recent years. Recognising their strong potential to drive the local economy, much has been done to assist this group that comprise largely of entrepreneurs and family businesses.

But unlike multi-national corporations, SMEs face very different challenges. A common challenge that unfolds in the process of ambitious growth plans is the lack of access to significant levels of funding.

Not all government grants and schemes may be applicable and sufficient to enable these businesses to achieve the plans they want. Funding from banks is an option but often, SMEs are not granted access due to several reasons.

Obtaining bank loans may not come so easily for entrepreneurs and family businesses as financial institutions often have stringent requirements that these enterprises may not be able to fulfil. Most commonly, SMEs lack proper documentation and information such as credit histories, cash flows or even evidence of sound corporate governance practices. These requirements, although necessary, are often not sufficiently and precisely documented.

The above issues can be mitigated by carrying out an internal audit. Internal audit is an independent consulting and assurance activity that brings a systematic and disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. The activity is designed to add value and improve a company’s operations.

How internal audit can benefit SMEs

While many business owners tend to view internal audit as a result of “something gone wrong”, when proactively implemented, it can help prevent unforeseen circumstances and lower the barrier to accessing funding from banks. The bottom line that business owners need to concern themselves with is that prevention is better than cure.

SMEs need to know that far more time and resources need to be deployed when dealing with the consequences at a later stage than performing an internal audit early. Performing an internal audit in a timely and regular fashion can lighten the burden that business expansion for SMEs usually brings.

Internal audit for SMEs

David Toh

Partner, Risk Assurance

[email protected]

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There are several reasons why SMEs may decide to perform an internal audit:

• Going public – internal audits will help the business prepare for the requirements needed to be listed as a public company.

• Improve the effectiveness and efficiency of operations – when roles and responsibilities of management and employees are clarified with greater controls over the management of business growth, overall performance of the SME improves.

• Compliance with laws and regulations – this is particularly important in reducing business disruptions, customer/employee litigation and establishing better relationships with clients and vendors.

Broadly, greater risk management, controls and governance processes will pave the way for SMEs to gain better access to external capital, lower financing costs, higher credit ratings and stronger investor confidence.

SMEs in good position for internal audit

Many entrepreneurs and family business owners commonly hold a greater sense of ownership over their companies as opposed to regular employees in multi-national corporations.

These owners are largely involved in building the foundation of their business right up to where it is at present day. As a result, they are the very ones who have developed pristine knowledge and understanding of their business.

The desire and commitment to grow the business often place them in a good position to instinctively be on a look out for risks and act upon them. Moreover, acting on these risks and especially critical ones, can be carried out more quickly given the smaller size of the business.

Secondly, entrepreneurs and family businesses typically adopt a better focus on long term growth due to their aspiration for business continuity. This complements well with the fact that internal audit delivers insight and foresight into the future of the business and makes recommendations on how best to face that future.

Internal audit is a continuous process and not a one-time event. Reviews must be conducted as the company grows and business owners should be more flexible to update existing controls as and when the situation calls for it. To capitalise on the benefits of internal audit for SMEs, risk consciousness should be communicated to all staff.

The good news for SMEs is that most are already practicing some form of internal audit in their business.

The question that business owners need to ask themselves is, “how can I capitalise on what I am already practicing?” In order to carry this out, certain controls have to be formalised to ensure all areas are thoroughly looked into in a systematic way.

This article was first published in The Edge on 2 December 2013.

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Overview

Keep It Going, a business sustainability forum with panellists from PwC and family businesses such as Royal Selangor, Atlas Sound and Continental Steel kicked off on 18 July 2013 as a platform to share experiences and encourage best practices in the business community.

The session was moderated by entrepreneur Richard Eu, CEO of the successful local family business, Eu Yan Sang.

The family business landscape

About a decade or two ago, very little attention was paid to family enterprises and entrepreneurship in Singapore. However in recent times, there has been increasing limelight with this group of businesses being recognised as high potential drivers of the economy.

According to PwC’s 2012 Global Family Business Survey, family businesses in Singapore, although small, adopt a strong sense of personal ownership, are less bureaucratic and more flexible.

Over 80% of these businesses are in their first or second generation. Many of them aspire to grow and expand like any other business. Interestingly, as family enterprises grow successfully, many will start to look and operate like large corporations. The sheer size of the company will require proper management and other formalised structures as they become accountable to a growing number of stakeholders.

However, the processes and considerations taken to bring the family business to the next level also mean having to apply an approach different from what large corporations follow. With the presence of family ties, relationships between siblings or generations need to be taken into consideration. Often, this can be a tricky situation, especially if there are no formal standards or structures to guide the business in challenging times. Family members may be fraught with emotions and lack the objectivity needed to come to an agreement.

Sustainable family businesses

Ng Siew Quan

Entrepreneurial and Private Clients Leader

[email protected]

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Unique challenges for family businesses

The sustainability of family businesses in Singapore depends largely on negotiating three tipping points.

The first tipping point – scale, is characterised by the moment a business achieves a certain size but can only progress further by making a significant step change. A significant change for long term growth could mean internationalising the family business or creating new access to financing. Not all family businesses will be able to manage these challenges successfully.

Ng adds that skill gaps can be evident as a family business expands and finds that they may not have the “bandwidth” or experience to effectively deal with new issues. The same PwC survey also revealed that family businesses in Singapore are finding it more of a challenge than the rest of the world in terms of attracting the right talent. “It’s not always easy to attract talent because talent will know there is a glass ceiling,” Ng comments.

However, the essence of a family business lies in handing over the trade to the next generation and this can prove to be the most challenging tipping point to deal with. Ng points out, “nobody will initiate succession planning or talk about formalising a governance structure. But if these things are in place and if something were to happen, you will have something to fall back on.”

But what is an example of a governing structure?

Royal Selangor is a family business that has in place a formal governing body that coordinates the interests of families in the business and allows them to speak with one voice to the board. Executive Director Chen Tien Yue is a fourth generation member and is in the business with 10 other cousins. He shares that the establishment of a family council2 has helped in representing the family’s needs.

In the case of Atlas Sound, succession planning was very much in plan due to the family’s circumstances. Jeannie Tien founded the company with her late husband, A B Tien in the 1960s. Today, it is well-known as the leading sole distributor for Bose sound systems. Succession planning came naturally when A B Tien was unfortunately diagnosed with leukaemia. In August 2003, his son Michael, took over the helm of the business upon his passing.

2 PwC defines “family council” as a forum to discuss how families wish to present themselves through the business to the community, in carrying out its values and goals. It is responsible for the scope and governance of these committees under its wing – Family Office, Next Generation Committee, Family Welfare Committee and Charitable Committee.

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However, not every family business comes prepared. Continental Steel faced a major setback in 2006 when its founder suddenly passed away. His son Melvin Soh, who was then working in Hong Kong, flew back immediately and has since, been running the business where he is a majority shareholder with his mother. He reflects that his life “had changed overnight”.

Ng describes these ‘succession’ circumstances as one of the four Ds that can make or break a family business. Death, Departure, Disability and Divorce present huge challenges for the business and regardless of the form they take, the moments of succession are rarely completely straightforward.

Forward planning for such circumstances reduces the impact that these challenges bring and creates room for sustainability.

Richard Eu, CEO of Eu Yan Sang and fourth generation member of the family enterprise adds that his idea of sustainability is also “to have values set right from the beginning and have it communicated to succeeding generations.” These values are ones that are important to the family and most importantly, bind and keep them in the business together.

The sustainability of family businesses requires the willingness to invest in the long term and a robust governance system to overcome impending challenges as firms grow.

Moving forward in 2014, family firms will continue to be a vital part of Singapore’s business landscape and in order to remain as key players in the growth and recovery of the local economy, the practice of forward planning should be embraced.

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Despite signs of recovery in developed economies, the business world continues to display signs of volatility on the back of widespread unemployment, particularly in the Europe and US. For Singapore, persistent talent crunch and intense competition are two key issues that emerge as businesses seek to combat such challenges and look to thrive.

Our PwC Global Family Business Survey 2012 indicates that more family-run businesses are being driven by competitive pressures to get pass their reluctance to avoid excessive risk and are entering into foreign markets. Family businesses, like other businesses, are facing big pressures to start expanding overseas in order to remain competitive.

Challenges

Expanding into overseas markets becomes particularly complex for family businesses. Our survey suggests that the three most significant issues stem from gaining an understanding of the local culture and the ways of doing business, competition and dealing with the local regulations. Specific challenges and long term success depends on the negotiation of three key tipping points as family-run businesses look to venture overseas:

Scale – every business faces challenges as it grows and balancing the growth can be a tricky process for family-run businesses. Up-scaling and internationalising your operations raises complex questions about the resources your business can draw on, the ability to access finance, the risks businesses are prepared to take on, how to structure your local and foreign operations and determining the most appropriate mode for market entry.

Skills – having a committed and strong management team with appropriate skillsets is crucial. A visionary and capable leadership often leads to business growth and sustainability. Family-run businesses recognise that lack of skills can be a huge challenge to address among family members.

Succession – at the forefront of entrepreneurs and owner-managed businesses is having a succession plan in mind. Most family-run businesses have four options: full handover to the next generation, transfer of ownership to non-family management or a sale/listing of your business. Each raises different issues and how does this fit into your plans as you expand your business overseas? Succession is often a sensitive topic of discussion but family-run businesses need to start preparing for succession as early as possible, particularly when your business internationalises and issues become more complex.

Opportunities & challenges for SMEs and family business expansion

Lennon Lee

Partner, Tax

[email protected]

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Common pitfalls

It is vital that business owners are fully aware of the tax implications of expanding the business. For example, what mode of entry is best suited to your business needs or how to repatriate cash back into your business?

We often see that one of the challenges faced by businesses owners is not having the appropriate and robust investment and business structure in place, or rather being unaware of the need to understand the tax and structuring matters.

Tax structuring and tax planning should be seen as a proactive process but the approach adopted by many business owners often is reactive and tends to put these issues off- either until a buyer comes along, the business is closing or there are plans for an IPO. It can be costly to unwind and we frequently see that not planning ahead can impede the ability to grow as you spend time fixing the issues.

Seeking assistance from the Government

The Singapore budget in 2013 focuses on the need for the economy and businesses to drive the increase in productivity. The government’s aim is to revitalise and re-energise the SME sector – starting with plans to improve the accessibility of government support schemes for SMEs.

It has a range of schemes and incentives designed to help SMEs grow their businesses and become international. These often come in the form of grants to defray costs that you might incur in the quest of expansion.

One such scheme is the Market Readiness Assistance (MRA) Grant, which is administered by IE Singapore.

Through the MRA grant, businesses are able to tap into a panel of partners to provide support in a chosen scope. One of the key visions of the MRA Grant is to help businesses identify the issues, costs and potential challenges with overseas expansion.

By working with IE Singapore’s panel of partners, IE Singapore will co-fund 50% of the eligible cost (capped at $20,000 per year), with a maximum project support period of no more than six months). The Singapore-based company must have their Global Headquarters anchored in Singapore and its annual turnover must be less than $100 million per annum.

Conclusion

Operating in many places is hard work. Learning the different cultures, the local rules around labour laws, customs, liscensing matters and tax regulations takes time and effort. Whatever the type of expansion you are planning, you need to do a full cost and risk assessment upfront. An overseas expansion will always cost money in the early years but it is a worthwhile investment. There are additional practical and commercial challenges but also plenty of ways an entrepreneur and owner-managed business can obtain the appropriate support to ensure success. Having a plan may mean the difference between surviving and thriving.

This article was first published in The Edge on 7 October 2013.

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Many family-owned/managed businesses are not aware that the Inland Revenue Authority of Singapore (IRAS) has specifically identified them as a segment where they are putting extra efforts in education and enforcement programmes.

The IRAS observed that small family-owned/managed companies generally tend to pay insufficient attention to maintaining proper controls and accounting records, resulting in them filing incorrect tax returns. It issued a paper in November 2012 (the Paper), detailing its tax compliance review findings for family-owned/managed companies. The Paper summarised the outcome of the IRAS’s tax audits on these companies, and highlighted common mistakes made in their tax returns.

How does IRAS define a family-owned/managed company?

Broadly, these are companies owned/managed by individuals related as a family. The family may be a majority shareholder of the company and exercise control (active or passive) over the company, or a minority shareholder which exercises effective control over the company. Family-owned/managed companies make up approximately one-third of the IRAS’s tax base.

Frequent errors made in their tax returns

The following are some of the common errors that were highlighted in the Paper:

1. Claiming of non-deductible expenses

• Private and domestic expenses – Private expenses (e.g. private travel and entertainment expenses, personal insurance expenses) are not tax deductible. Some family-owned/managed companies do not draw a clear distinction between business and private expenses, leading them to claim deductions on expenses which are not business-related.

• Expenses on private motor vehicles – Some companies made wrongful claims of private motor vehicle expenses, which are not tax deductible even if they are incurred wholly for business.

• Others – Claiming deductions on excess CPF contributions over the statutory limits, and claiming medical expenses above the relevant deduction caps (i.e. 1% or 2% of total remuneration).

2. Understating income and overstating expenses The IRAS also found that some taxpayers failed to take into account all the sales invoices

issued, hence understating their income for income tax purposes. Other taxpayers were found to have kept insufficient source documents and records to substantiate their claims on purchases and expenses, leading to excessive and/or unsubstantiated tax deduction claims.

Family-owned/managed businesses come under IRAS’s spotlight

Ho Mui Peng

Partner, Corporate Tax Advisory

[email protected]

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3. Related party transactions

Some companies were found to have made excessive deduction claims for service fees paid to related entities. In some cases, this charging of service fees by a separate company was done merely to benefit from the partial/full tax exemption schemes given to each separate entity without commensurate services being rendered.

4. Omission in Form IR8A

Family-owned business owners tend to overlook the point that private expenses paid by their companies can be taxable benefits in kind for personal tax purposes.

There were certain omissions that were found in the Forms IR8A issued by companies to their employees and directors. These included lloans to them that were taxable benefits-in-kind, club subscriptions, stock option benefits etc.

The way forward for family-owned/managed companies

Given IRAS’s focus, the key take away from this is that family-owned/managed companie should keep proper records and accounts. Although some family-0wned/managed companies may be exempt private companies which qualify for audit exemption, it may be helpful for companies to consider engaging an external auditor to review their accounts from an independent perspective.

Further, companies should place a greater emphasis on their tax compliance. Companies who are relying on their own employees to file their tax returns should ensure that these employees are sufficiently trained and qualified to do so. Such companies can also rely on the information provided on the IRAS website, which is a useful (and free) resource. Companies can also consider engaging a tax advisor to assist them with their tax filings.

Companies who have found errors in their tax returns should consider the relevance of the IRAS’s Voluntary Disclosure Programme (VDP), given that the penalties under the VDP are much reduced compared to those payable once a taxpayer is selected for review and omission is noted. Under the VDP, IRAS will waive the penalty for voluntary disclosure of errors within one year from the statutory filing date of 30 November (subject to conditions). A penalty rate of 5% per annum is imposed for voluntary disclosures made thereafter.

It is clear that family-owned/managed companies have been, and will continue to be, under the compliance focus of the IRAS. The key question for family-owned/managed businesses is: Are you ready if you are picked for an IRAS tax audit?

This article was first published in The Edge on 1 April 2013.

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As IPO market momentum increases, many companies are assessing their readiness to go public.

If you are taking your company public, you should commence preparation early in the process in order to maximise your chances at a successful IPO – one that will be transformational for your company.

While market timing is outside a company’s control, preparation is not. If an IPO is in management’s short, medium, or long-term goals, expect discussions and planning sessions to begin early in the process.

Perform and IPO readiness assessment

At the beginning of the IPO process, companies should perform an IPO readiness assessment across key functional areas to evaluate the effort required for the registration statements, identify organisational gaps, and ensure that they have a tangible plan to meet their IPO objectives. Company leaders should ask themselves, “Why do I want to go public?” Some of the reasons may include:

• To raise capital for expansion• To use publicly traded stock to acquire other companies• To attract and retain talent using incentive stock plans• To diversify and reduce investor holdings• To provide liquidity for shareholders• To enhance the company’s reputation, raise its profile in a particular market, and create

brand awareness• To pay down debt or move toward an optimal debt/equity capital structure

These assessments help companies articulate their reasons for going public, which should then drive the overall IPO strategy, timing, and offering structure. These assessments help companies articulate their reasons for going public, which should then drive the overall IPO strategy, timing, and offering structure.

Executing a successful IPO

Tham Tuck Seng

Partner, Assurance & Capital Markets

[email protected]

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Establish two work streams

The IPO process consists of separate, elemental processes that are interdependent on one another. Every part of the company plays an important role, and each contribution must be coordinated and staged precisely. One way to ensure a successful performance is to establish two equally important parallel work streams at the start of the IPO preparation process. We refer to these two work streams as Going Public and Being Public.

Going Public involves gathering information, determining the optimal tax and legal structure, filing the registration statement with the exchange, marketing the business, and selling the shares in the road show.

Being Public is the process of transforming the organisation so that it can operate as a public company. It includes enhancing financial reporting capabilities, creating an investor relations function, and meeting the governance, reporting and internal control standards and listing requirements of the selected exchange.

Both work streams should be established in parallel to help companies focus on the ultimate goal: to become and operate successfully as a publicly traded company.The two work streams require multidisciplinary approaches that involve all areas within the organisation, from the board of directors to the back office departments. All department heads should be aware of what is transpiring since they will need to participate in the information-gathering process, evaluate their department, and help determine a transformation plan for the new organisation.

Put in place strong IPO leadership

Companies should appoint a strong, dedicated, internal IPO leader to oversee day-to-day execution of the IPO preparation process and keep it on track. The IPO leader should be empowered to direct internal resources, make decisions, and serve as a single point of contact for internal groups and external advisors.

A strong IPO leader provides the various departments and advisors working on the IPO the coordination and direction needed to keep the project on track. For example, company finance employees might not know what information they are expected to share with outside lawyers, bankers, accountants and other advisors. In addition to providing direction and answers to critical questions, an IPO leader also must be able to identity and direct talented resources from across the enterprise and know when to rely on advisors and when to push back.

Selecting the right IPO leader is important. Depending on a company’s circumstances, these leaders typically come from the CFO, controller, corporate development, or general counsel offices. Regardless of their background, IPO leaders should expect to commit significant time to a process that can take six to 18 months (based on complexity and market timing) to complete.

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Establish an effective project management process

A well-designed project management process will see to it that company departments and external advisors are executing on a common plan; it can help identify other company initiatives that could impact the IPO process and ensure that these do not affect the timing and success of the IPO.

As companies progress through the IPO preparation procedure, it can be difficult to maintain an awareness of other company initiatives that could impact the IPO process. For example, a large ERP system upgrade, business acquisition, or a change in strategic direction will impact the IPO process and could severely hamper its timing and planning. A well-designed project management process seeks to identify these types of issues and ensure that they do not affect timing and success.

Get the right finance organisation

The first few quarters of life as a public company are critical. There is uncertainty among investors and analysts because the company maybe relatively unknown. The newly established public company may also be unfamiliar with forecasting results and performance. And the consequences of not meeting expectations can be severe. In fact, an inability to communicate effectively with analysts and investors to manage expectations in those first few quarters can be damaging to shareholder value and compromise credibility. As a result, companies need to get the right finance organisation – one that has the capabilities to deliver quality financial reporting at the right time and meet the needs of a public company.

A good IPO plan will identify the critical aspects of the finance function that need to be in place before starting the IPO preparation process, for example, the CFO and controllership functions. Others, such as external reporting capability can be build up during the IPO preparation process. The key is getting the appropriate balance of resources in place at the right time without overdoing it before the IPO is certain.

Don’t try to do too much at once

Companies need to take a staged approach to building a public company. Trying to achieve multiple initiatives at the same time can strain an organisation such that the project drowns under its own weight and the IPO is delayed or is never completed.

Far too often, companies try to complete an acquisition, a debt refinancing, a significant systems or ERP upgrade, a cultural and business integration, a new incentive compensation strategy, a new organisation structure, a new legal structure, a new management philosophy, and new board and governance policies, in conjunction with their IPO.

Hence the need for an effective IPO readiness assessment that can help alleviate issues by prioritising tasks and completing them within scheduled phases.

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Set the IPO structure early

Invest time up front in examining existing stakeholder concerns and determining the offering structure and marketing options.

While is it difficult to finalise and document the details for all of these terms at the start of the project, the more complete the offering structure is at the start of the project, the more efficient the project will be. Changing the structure or primary transaction dynamics during the process can cause significant delays and can have legal, tax, and financial reporting surprise implications.

Consider all exit paths

An IPO is often just one of several possible exit paths; the process of preparing a company for sale in a public offering can also be used for other exit strategies such as private placements of equity, or sales to strategic or financial buyers. The process of revisiting historical financial statements; improving operations, internal controls and processes; and preparing a company for sale in a public offering can also be used for these other potential exit strategies. A strong IPO readiness assessment can evaluate each option and, when necessary, layer dual or multiple track processes into the IPO plan.

Start preparing now to be ready when the IPO market is right for you

IPOs are back. Solid economics, strong fundamentals, and a well-prepared story to market can provide a great foundation for a successful IPO.

Achieving a successful IPO, however, requires connecting many pieces of a complex puzzle, some of which are outside of the control of company. But one thing companies can control is their own IPO preparation process. Companies that envision an IPO in their future should start preparing now to give themselves the best possible chance for success when the markets are open.

This article was first published in The Edge on 2 September 2013.

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Bringing the business to the next level is a common boardroom topic. Quite simply, staying status quo is often not acceptable in light of an increasingly competitive and changing environment.

It is for this reason that mergers and acquisitions (M&A) are being pursued by companies as one of the quickest paths to achieve the elusive growth sought by companies.

While there are significant financial and strategic benefits in an acquisition, the risks and potential cost of failure that accompany acquisitions are equally real. Deals are inherently complex and failed acquisitions may, at its worst, bankrupt an otherwise financially sound acquire.

To minimise the major pitfalls in an acquisition, a well established process and financial discipline in the course of an acquisition ought to be put in place:

A. Setting objectives

All too often, some business leaders may be pressured to do deals in order to achieve short term performance targets. M&A, on the contrary, should be a tool to achieve long term strategic objectives, be it capturing new markets, realising synergies, consolidating market share or even business diversification.

The M&A objectives, along with financing plans, form part of the long term business case. Companies must certainly move fast once suitable M&A targets that fit into their long term business case are identified.

They should, however, avoid becoming overly enthusiastic in, or feel pressured into, closing a deal and lose sight of their long term objectives.

B. Protecting yourself in a deal

Involving the right people in your organisation and consultants in the acquisition process to assess the deal risks and advise on appropriate protection mechanisms is important (i.e. “due diligence”). Effective due diligence can help to identify deal blind spots and breakers, better analyse financial and operational health, set negotiation parameters, challenge synergy and valuation assumptions and assess risks.

In addition to flagging downside risks to a deal, an effective due diligence should also uncover potential upside that can be exploited, e.g. operational improvements, cost savings, revenue maximisation, turnaround/restructuring/synergistic opportunities, capital optimisation and better asset utilisation. Thus, a properly executed pre-acquisition due diligence enhances a deal by uncovering hidden values and other reasons that may inspire the potential acquirer to pursue a deal more aggressively.

M&A as a growth strategy

Lie Kok Keong

Partner, Advisory (Deals)

[email protected]

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C. Paying the right price

When undertaking a transaction nothing is more important than assessing the value of the business and price to be paid.

Pricing is possibly the trickiest decision to make in an acquisition with negotiation power and tactics in play. Unfortunately, companies often realised it may have over paid for an asset after the fact, when the deal is completed.

A well considered valuation of target companies helps to reduce the risk of over paying for a transaction. From our experience, the qualities of a good valuation include:

• Independence and objectivity of the valuer (not motivated by a particular deal outcome)• Commercially viable projections assessed against industry trends, historical performance of

Target companies and realistic business plans etc• Sensitivity and scenario analyses, including worst-case business outcome and synergies• Addressing key due diligence findings in valuation

D. Focusing on integration

Companies who do not follow a disciplined approach to integration usually are not as successful with their deals as those who do. This boils down to the fact that integration is often the most challenging phase in an acquisition, inevitably involving change and sensitive people issues that are unsettling to the operating state of a company.

As such, it is important that a well defined integration strategy that focuses on priority initiatives and communication with all stakeholders (be it employees of acquired company, suppliers/customers, public officials) is in place. Senior leadership should be involved to lend weight in the integration process.

At times though, business leaders should evaluate if change and integration (or the extent) to an acquired company are truly necessary. It is possible that the culture of the acquirer may overwhelm the acquired company and dilutes the very ingredients that make it tick.

As with everything else, proper planning, risk management and a focus on executing integration are often the deciding factors if a deal will be a success. As they say, he who fails to plan is planning to fail.

This article was first published in The Edge on 5 August 2013.

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From back office to front office

Technology is an inseparable part of strategic thinking in today’s business world. To stay competitive – and afloat in the sea of a precarious global economy – organisations must see technologies as intrinsic to their entire business plan. They cannot afford to view them just as part of an IT department relegated to mundane technology functions such as keeping servers running, email flowing, and telephones working. Success therefore depends on the right alignment of IT and business strategies, as well as bringing them together in the early stages of any plan.

Your company’s technology leadership3 should be involved early and often, not only on every project, but also in the formulation of long-term business strategies, including both front-office and back-office functions. PwC has seen that many companies do not share strategic ideas with technology leaders early enough. Not sharing these strategic ideas may force technology leaders to play catch-up which ultimately hampers adoption of disruptive, yet beneficial, technology-based advancements.

Why should IT be given a seat at the table when it comes to strategy? Because our world depends on technology to move information forward and capture it in relevant, real-time ways. IT has been at the center of integrating technology with business processes. IT has the tools (in the form of enterprise architects, infrastructure, and process engineers) to incorporate technology into the fabric of your company’s products, processes, and infrastructure. Businesses also now adopt technology beyond typical IT support through digitised products, automated processes, and risk avoidance programs. In essence, IT has architecture and engineering skills that are valuable stock in a company’s portfolio.

More and more, the inclusion of IT as an enabler for new strategies is critical. Instead of considering IT as the “tail that wags the dog” or an afterthought, businesses must strike a balance and include IT as a member of the strategic planning process. The notion is that IT means more than just providing support is the thing of the past. In fact, in leading organisations, IT is often seen as the key component to lead business innovations.

Integrating business and technology strategyCrafting the real value of information technology through a holistic enterprise approach

Charles Loh

Partner, Management Consulting

[email protected]

3 PwC defines “technology leadership” as IT leadership as well as the broader infrastructure engineering (automation, process control, robotics), R&D labs leadership (product development, testing), and marketing and product design leadership (digital products).

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Merging of two diverse strategies

The traditional view of IT is that they are the “behind-the-scenes” group that only kept emails, computer networks, and the telephones functioning properly. Not anymore. Today, the IT group sits at the forefront by helping companies focus on and enable their strategy while creating efficiencies for the business side. Leaders recognise that merging business and IT strategies translates to increased revenue and long-term value to shareholders.

For example, the shift in technology over the past few years has led consumers away from bulkier laptop and desktop machines to smaller tablets that allow them to perform the same tasks more easily.

More importantly, successful companies also align the strategies of the business and IT early and often; the two groups are truly symbiotic. Upfront alignment is critical for the two groups so that they evolve together throughout a plan; this includes not only strategic execution, but also creative identification of new go-to-market plans through the use of technology.

An action plan

So, what path can companies take to accomplish such a merger? How can they effectively combine business and technology strategies and move them forward as a single unit?

PwC’s point of view for developing a sound technology strategy is “Think holistically, plan incrementally, implement quickly.” Some key considerations are:

• Engage the business early and often in the process to define their long-term strategy, identifying where innovative use of technology can work best.

• Jump-start the multi-year plan by following these basic guidelines of the traditional scientific method: 1) ask your question; 2) do your research; 3) construct a hypothesis; 4) test your hypothesis; and 5) analyse the data and draw a conclusion.

• Consider a broader spectrum of technologies beyond the traditional domain of back-office IT; pay special attention to technology trends (such as the “consumerisation” of IT) and IT’s potential in areas such as research and development, manufacturing, and digital product design.

Increaseed value

X

Business strategy

IT strategy

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• Develop a multi-year roadmap for the technology strategy that:

- recognises short-term or tactical needs in forming the foundation for future changes

- specifies interim targets, which will act as milestones with associated financial benefits to demonstrate bottom-line success along the journey

- enhances business benefits

• Make a case for change, using portfolio management concepts to balance risks and returns. Take measured risk for strategic benefits rather than being too conservative.

The notion of innovation

The business strategy provides a key opportunity for IT leadership to engage and help differentiate the organisation. Existing business strategies often range from high-level visionary statements lacking necessary details to a detailed “wish list” of functionalities with no overarching objectives or strategies. IT, as one of the primary enablers of the business strategy, is in a prime position to work with the business to add detail to the strategy and at the same time introduce innovative technologies to drive new business opportunities.

PwC recommends that IT hold innovation workshops to engage business peers in discussions about exactly what the business needs to accomplish and what technology brings to the table. It is key to educate business leaders about disruptive technologies and engage them in discussions about the “art of the possible” – how such technologies may affect the business.

Forging a target state

Once business leaders define their business strategy, strategic planning begins in earnest. The next step is to define a strategic target “state” across the organisation. The goal is to describe a three-year vision that enables the business model, business operations, organisation, and technology architecture to achieve the objectives defined in the business strategy. By starting with the end in mind, the company avoids being influenced by setbacks in the current operations and technology.

PwC recommends the use of modern management science techniques – such as issue-based problem solving and a hypothesis-driven approach – to avoid “boiling the ocean” during the IT strategy definition journey. The business strategy usually provides clear definition of the business problem and allows IT to propose hypothetical solutions such as an integrated Enterprise Resource Planning system, automation through robotics, innovative digital solutions (e.g. wearable technologies), etc; test them; and, if proven, integrate them into the future IT landscape to support the organisation’s growth opportunities.

This article was first published in The Edge on 4 November 2013.

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Connect with usYour Entrepreneurial and Private Clients team

Ng Siew QuanPartner, Entrepreneurial and Private Clients Leader +65 6236 [email protected]

David Toh Partner, Risk Assurance+65 6236 [email protected]

Risk Assurance

Tham Tuck Seng Partner, Assurance+65 6236 [email protected]

Capital Markets

Charles LohPartner, Advisory+65 6236 [email protected]

Consulting

Lennon Lee Partner, Tax+65 6236 [email protected]

Tax

Lim Hwee Seng Partner, Tax+65 6236 [email protected]

Lie Kok Keong Partner, Advisory+65 6236 [email protected]

Deals, Mergers and Acquisitions

Lee Chian Yorn Partner, Assurance+65 6236 [email protected]

General Assurance

Alex TohPartner, Assurance+65 6236 [email protected]

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© 2014 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PricewaterhouseCoopers” and “PwC” refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.