Barriers to succession I’m often intrigued when I read in the press about rather large family-owned businesses which are impacted by family and succession issues. Someone commented to me recently about the issues surrounding Bob Jane’s family and his business and how these have been in the media in recent years. I was asked: “Why do these types of issues arise in quite large businesses? Are they common and do they occur in all family businesses?” Firstly, family disputes are nothing new. They have been going on for thousands of years. However, when you overlay family relationships with business you have a unique dynamic.
As with any relationship breakdown, the breakdown of a family business relationship usually occurs due to a lack of communication between the parties. I’ve previously published my top 5 tips for successful family business succession. The first two of those tips related to communication.
By way of background, we know from the recent MGI Family & Private Business Survey that the average age of a family business owner is 58 and this has increased on surveys over the past decade. Over a third (37%) are aged between 60 and 70, with 25% aged over 65. Interestingly, the survey also found that nearly 60% of family business owners felt that the younger generation family members are not as interested in actively managing the family business.
In a sector that employs over 60% of employees and is estimated to be worth some $4.1 trillion nationally, family business succession is a crucial issue facing the Australian economy.
What do we mean by succession?
Firstly, I think it is important to identify what we mean by succession. In relation to a business, there are a number of areas of succession, but the two most common are management succession and ownership succession.
Whilst some issues spread across both means of succession, I believe that greater clarity can be achieved by looking at these issues separately. For example, there is no reason why parents cannot retain ownership of the family business but handover operational management to the next generation. In this scenario, difficulties arise if, for example, the parents won’t “let go” of operational matters. In family and private business, business owners often wear three “hats”:
- an employee hat – what they do in their employee role
- a directorial hat – what they do because they are a director of the business and
- an ownership hat – the role they play as an owner of the business.
Sometimes these roles get blurred and when they do it is not always apparent which “hat” the person is wearing. So a useful first step is to understand and agree whether a business is dealing with management succession, with ownership succession or with both.
What are the key challenges?
According to the MGI Family & Private Business Survey, around 60% of family businesses are first generation businesses.
It makes sense to assume then, that most family-owned businesses won’t have dealt with this area before and in my experience, the biggest reason these issues are not addressed is that most business owners just don’t know where to start. Many also say that they don’t want the business side of things to impact on a close family relationship. This is perfectly understandable but also quite manageable.
However, sometimes these issues are swept under the carpet in the interests of family harmony. In my view, this is just putting off a problem to another day – a day when the problem may be much bigger, and harder, to deal with.
Suffice to say, in my experience, the likelihood of successful succession planning can be enhanced by both using an external party to facilitate the discussions and following a process. If this is done effectively, the likelihood of conflict between family members can be significantly reduced and managed.
In any family business, the motivations and aspirations of the various family members will be different. I find that one useful exercise is to have the family members complete a simple survey designed to identify what it is each of them are looking for out of the business.
Consider this scenario:
- One sibling may simply be interested in just having a job.
- Another sibling may be interested in taking over management of the business, growing and reinvesting all the profits into the business to fund that growth. Receiving a dividend cheque is not the motivator for them.
- Conversely, another sibling may say they want no active part in the business but they actually do. Not only that, they want their dividend cheque to fund their lifestyle and build prestige. They are not interested in reinvesting profits to grow the business.
I often find that by working through a process with the key family stakeholders that the “end game” becomes much clearer. It helps identify issues that the various family members never realised or articulated and invariably leads to an “a-ha!” moment.
There are numerous options that can result including:
- Ownership and management being assumed by one child. In this case, great care needs to be taken to ensure that other family members perceive this to be an equitable arrangement. Often this will involve a sale of the business (usually at market value) to the child by the parents. This may also involve some form of vendor finance.
- Ownership and management being assumed by a number of children. Clearly, the more family members involved in ownership and management, the greater the potential for conflict and therefore the greater the need for clearly defined rules and objectives for the business and the family members (e.g. a family business constitution). Understanding and discussing the motivations and aspirations of the various stakeholders up front is a key issue.
- Management being assumed by (usually) one child, with ownership remaining with the parents. Once again, care needs to be taken to ensure that roles and responsibilities of all parties are clearly defined and agreed.
Handing over leadership and control of the family business is arguably one of the most difficult decisions facing the owners of these businesses. It has potential to impact not only the performance of the business, but also the life-long relationships within the family. It is therefore critical that it is openly addressed and tactfully handled and a family business advisor can be an invaluable asset to facilitate this process.