With all the Baby Boomers planning their retirement, family businesses everywhere are facing a high-risk changing of the guard.
By Kim Harland
As the Baby Boomer generation moves into their retirement years, Australian family businesses are facing the largest intergenerational transfer of wealth and leadership in history. Recent statistics show that nearly two-thirds of current family CEOs are aged over 50 and two-thirds of family businesses intend to pass ownership on to the next generation in the next five years.
Unfortunately, surveys have shown that family businesses are not prepared for succession. A 2013 national survey by KPMG found that just one-third of Australian family businesses consider themselves succession-ready.
Success rates are poor
Statistics about intergenerational business and wealth transfer are grim: the vast majority of families lose their wealth by the second generation. By the third generation, the situation is worse: 90 per cent have lost most or all of their wealth. The reasons? Succession failures usually happen because of poor planning, poor communication, and family conflict after the death of a parent.
Solution: Start planning for succession now. Usually, a five- or 10-year horizon is necessary to adequately prepare the business and its new leader for the transition. Proper planning involves a business valuation exercise and the establishment of formal timelines.
Family businesses often have the added complications of competing successors, as well as family members having differing perspectives on the future of the business.
Business leaders who are uncertain about how to go about creating a succession plan would do well to attend one of the many courses offered on succession, or consult with a family business adviser who can provide recommendations.
Multiple generations in the kitchen
Many family businesses are moving into the second or third generation. With life expectancies increasing and current leaders reluctant to retire, businesses will have to learn to cope with the perspectives and priorities of multiple generations.
Just as “too many cooks spoil the broth”, too many generations can cause a variety of problems within a business when their roles aren’t defined or younger generations feel shut out of decision-making by their elders.
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Solution: Communication, communication, communication. Giving family members space to air grievances and have their opinions heard is critical to the healthy functioning of a family business. Many business leaders, accustomed to being the family visionary, aren’t able to let go of their primacy when new generations start to take leadership roles.
Creating succession plans that clearly outline when and how new leaders are to step up can help smooth the eventual transfer of leadership. However, until then, allowing each generation of the family to feel included in the strategic direction of the firm is vital to family (and business) harmony. Retreats, family councils, and other non-business forums can also offer opportunities to bridge the generational gap.
The definition of a “family business” and the makeup of its family and non-family employees have evolved considerably in the past and will continue to change. Families are complex entities and the introduction of second spouses, half-siblings, adopted siblings and new family members makes ownership and management issues complicated. Many businesses have non-family employees and executives who contribute to business success at a very high level.
Not all family members participate in the family business the same way. Finding ways to recognise contributions to the business while defining ownership is critical to maintaining business function while avoiding family drama.
Solution: Family businesses that intend to become multi-generational concerns should separate the ownership structure of a business from its management through the issuance of shares, or another mechanism.
This separation has the dual effect of keeping ownership of a firm within the family while allowing for professional management. Families should also institute financial agreements such as shareholder agreements, pre-marital agreements, and other documents that define expectations and protect family wealth.
Kim Harland is director, client services, at FINH