Family-owned businesses provide a foundation for the Australian economy, employing half of the country’s workforce. Around the globe, approximately 80% of businesses are family-owned. In Australia, this figure is 70%. Unfortunately, only 30% stay in business after transitioning to the second generation. Even worse, only 12% of family-owned businesses survive to the third generation. Here we will uncover some of the challenges family-owned businesses can face and ways to overcome them.
Succession planning is essential for family business success
One of the causes of failure of a family business over generations is the lack of succession planning. Sometimes business founders think they can run the business forever and a succession plan is put off for more urgent matters. According to the KPMG 2018 Family Business Survey Report, only 17% of family-owned businesses have a documented unifying plan for the future of the business and only 37% have a process of appointing a new CEO/MD. Succession cannot be achieved overnight, it is better to start planning before it is too late. It is recommended that a board of directors includes non-family directors. They bring a much-needed outside view and their decisions are not affected by family issues. It is important that all stakeholders endorse the succession plan and are willing to support it.
Putting family members into positions they are not able to do is unfair to them and may impact the performance of the business. If a family member is assigned a role they are not ready for, it can cause frustration among staff and siblings. To avoid this, ensure roles are assigned based on merit. If they are not ready for the role, more training and work experience will be required to allow them to gain the necessary skills. If the right person for the position can’t be found among family members, it’s better to bring in an outsider who has the skills required.
Business roles should have set descriptions and salaries to ensure that the person selected has the skills to do the role. Family members should be assigned roles because they want to be there and choose the role for themselves, not because it is expected.
Implement structures and systems
The information needed to run the business is often in the mind of the founders. On a micro level, writing down policies and procedures for day-to-day operations will ensure ongoing business performance if a founder leaves or can no longer work in the business.
Also, put structures into place for good corporate governance. As noted, a board of directors with non-family members prevents tunnel vision. Bringing in outside managers enables family members to step back and manage wealth instead of day-to-day operations. In addition, forming a family council will enable family employees to discuss business issues, create cohesion and establish goals.
A good governance program can include a family business constitution. The FINH Family Business Blog outlines six reasons why you should create this document. These include:
- Laying the groundwork for tough decisions
- Enabling the creation of ethical guidelines
- Building cohesion and internal harmony
- Enabling the improvement of your bottom line
- Establishing rules around conflict
- Planning ahead for people entering and leaving the family business.
Get the next generation involved early
Involving the next generation early will allow for them to get a feel for the family business. Engaging young family members during school holidays and part-time will enable them to determine if continuing in the family-owned business is for them. By observing from a young age they will get an overview of how the business works.
Bring in a family business consultant
Family businesses can benefit from having a specialised consultant create and implement a plan to solve challenges and capture opportunities. A family business consultant can help to align family culture, values and goals with the business.
Listen to all generations
Many family-owned businesses struggle because the younger generations were not listened to. While founders believe they have tried and tested ways of doing things, the next generation will have innovative ideas on improvements. If the younger generation is enthusiastic about introducing new ideas but are disregarded, they will be discouraged from getting involved in the family business in the long term.
Successfully passing the family business on to the next generation is a goal for many family business leaders. By clearly communicating family succession intentions, having a clear structure that defines roles and responsibilities and aligning the needs of individuals within the family with the needs of the business can help your family business transition through generations.
Having a proper succession plan in place is about the certainty of having a safety net and planning ahead for the future of your family business. Start your discussions with your Accountant, Legal Advisor and Finance Broker today.