Running a successful family business is no easy task. The statistics show that in Australia 70% of family businesses fail or sell before the second generation gets a chance to take over. Over 90% of family businesses sell or fail before the third generation gets to take over. Although these figures look dismal it is up to you as a business owner whether you want to establish a successful multigenerational family business.
One of the major reasons why family businesses often fail to reach a third generation is because of a lack of communication and long-term planning. Businesses struggle when they allow family conflict and emotion to drive charge, as opposed to implementing proven and effective business strategies.
No two family business is exactly the same but here are some steps that a family business should consider introducing into their organisation to increase their chances at remaining success for multiple generations.
A report issued by KPMG discovered that 54 percent of family businesses have no documented succession plan in place and no retirement plan for the current CEO. This is concerning when the majority of small business owners in Australia are currently between 45 and 59 years of age.
Treat succession planning like its an urgent requirement
Deciding to ignore a succession plan is very much like a 30-year-old employee not thinking about their retirement plan. A family business succession and retirement may be a long time away, but the truth is that ignoring them in the formative years can result in serious problems in the future.
One of the major reasons why most family businesses put off or fail to consider succession planning is because they underestimate how extensive succession planning is. A well-thought succession planning procedure will enable a business to reduce the impact their owner or major team member, help buffer the company from sudden changes in business circumstances and prepare targeted individuals for future advancement within the business.
The potential for family conflict to occur is one of the main reasons why succession plans are often ignored. Discussing a succession plan has the potential to be full of mental roadblocks and pitfalls unless it has been well thought through.
As the owner of a family business will probably need someone to guide you through the complexities. Someone whose experience and expertise can help grow trust and resolve conflict between family members.
Plan for a process, not an event
The majority of family business owners view succession like it’s a lofty and far away goal. They hope that someday their children will take over and that the business will magically operate smoothly enough for this aspiration to occur.
It is important to avoid wishful thinking and to avoid treating succession as an event and instead treat it like a process. A successful succession requires large amounts of planning and preparation over an extend period of time which means in most cases it will take several years’ worth of planning.
Some of the key components of this planning process include; generating adequate financial returns, receiving enough interest from potential successors to take over the business and having sufficient trust in the potential successors.
You will also need time to determine the legal and tax issues associated with succession and, if it is the appropriate time for the founder to retire. Retiring would mean the need for estate planning and equity transfers.
Rally around your family values
A family business is more likely to succeed if they have a strong sense of shared values. These values would need to survive beyond the inaugural owner and be transfered onto the next generation. When organising your succession plan, it is important for the owner to list the moral and governing philosophies that are affiliated with your business and your family’s values.
Your family’s values will be crucial during times of struggle and conflict, they are so much more than a simple slogan. Your family values are something that will be rallied around and used as a guidepost for making difficult business decisions. For example; Is your family unity and collective agreement more important than generating extra revenue? Should younger family members be required to work outside the business before they can assume control?
Work on developing your succession plan by viewing it as an opportunity to create a compass that your family gets to carry from one generation to the next.
Hold meetings and discuss succession
A successful succession planning process will require the involvement and direction communication of all family members regardless of which generation they belong to or their current or previous contributions that they have made to the business.
It is crucial to remember that it is not the duty of the current leadership team to micromanage the meeting process. Every influential family member associated with the business and family should be given the opportunity to speak openly and express their opinions on the current state of and the proposed future direction of the family business.
It is unhelpful and unnecessary for a current patriarch or matriarch to run the entire meeting and only find out at a late time that many of the other family members wanted to express their thoughts and ideas and that the reason why they didn’t express them was because they didn’t feel comfortable or have the impression that their ideas for important.
It might be a good idea to have an expert trusted advisor to facility these meetings. For most members of the family business, this might be the first time they have gone through a succession. It would be highly advised to get an expert to guide you and your family through the process to make sure that trust is built and that conflicts between family members can be settled accordingly.
Educate your family
Education is one of the key components of a successful transition. It is critical to provide training and opportunities for learning, so people don’t struggle to contextualise what they need to do during the succession process.
Your family should be educated strongly to perform these following tasks:
- Handle conflict, whether for family or business reasons
- Act as advocates for the business no matter their present responsibilities
- Accept positions of responsibility in the company
- See the family business as a living legacy, with an interconnected past and future.
Develop a written family constitution
The best way to strengthen your succession plan is to hypothesis it in conjunction with a written family constitution.
The constitution serves two key purposes:
- It will act as a governing document that promotes ongoing family business continuity. This means establishing an initial plan as well as identifying fall-back plans and means of settling conflicts or making difficult decisions; and
- It emphasises and defines family values. You must make clear your family values in concrete terms so that everyone — family, non-family employees and directors, and customers — knows what you believe and how you conduct your family business.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 07 36086800.
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