We’re living in an era of trail-blazing start-up innovations and digital disruption, of baby boomers entering retirement and Gen Y entering their inheritance. But growing older doesn’t mean a business must pass quietly into the night.
Australian Businesses Passing the family Baton
There are more than 2.1 million businesses operating in Australia (ABS, 2014), and up to 87% of these are family-operated (ABS, 2013), up from 70% in 2012 (FBA, 2012, per Macquarie). The majority of these businesses need to get moving on their succession plan now, according to Australia’s longest-running study of family business, the 2015 Family Business Survey by KPMG and Family Business Australia (FBA).
A large majority of family businesses say they expect to replace their CEO (76%) and transfer ownership of the business (72%) in the next 5 years.
Of these businesses, 60% hope to pass the leadership down to another family member, and 64% want to keep ownership in the family.
Even more business owners (84%) say their primary motivation is to build something for the future of the family, according to the American Express Economy of Shopping Small Report.
But keeping it in the family requires a comprehensive and adaptable business succession plan. How can we make sure we are ready to pass on our business leadership or ownership – before the time comes to do it?
The answer lies in planning and increasing family communication, suggests the FBA survey. We look at their latest insights, and the wisdom of Australia’s oldest surviving family businesses.
Are Australian Businesses Prepared?
Unfortunately, it appears that we aren’t yet ready to achieve our expectations of family succession.
According to accounting firm BDO Australia, only 1 in 3 businesses pass successfully from family founders to their family’s second generation. Only 1 in 10 businesses survive to see a third generation.
The reason may be not training a successor in time. 55% of business owners and CEOs planning to pass on leadership in the next 3 years told the FBA they do believe their successor is not yet ready.
PwC’s smaller Family Business Survey 2014 showed a similar result – only 8% had a robust succession plan in place already. Less than half (47%) had next-generation family members already working in the business. Meanwhile, PwC data shows that 1.4 million business owners intend to retire in the next decade.
Thankfully, we have improved our preparedness somewhat over the past two years. 21% of businesses now have a plan for transferring ownership (compared to 10% in the 2013 survey) and 42% now have estate planning in place (compared to 30%).
We looked at what our goals should be in 2016 if we are to pass on the family business in the next 5 years as many hope to.
Goal 1: Get your plan and policy up-to-date
What should be in your plan
If you don’t already have a succession plan in place, you can download a template and read a basic guide from the Australian government’s small business department, Business.gov.au. CANSTAR recommends you then take your draft plan to an accredited financial advisor, including the following basics in your draft:
- The names of the current business owners and each person’s role in the company
- Business name, national ABN or ACN registration details, and any state registration details
- Any assets, property, trademarks, or patents belonging to the business
- The date the plan was prepared (written) and the date of the most recent update
- The current market value of the business
- Conditions that will apply if the business is sold, such as minimum sale price, length of time it should be left on market, who will receive the proceeds of sale, and taxes payable on the sale
- Retirement payments required to be paid by the business following succession
- Buyout details if the leaders are in a partnership that will dissolve upon succession
- Supporting documentation, any related wills, and succession contracts or resumes of potential succession candidates
Update your plan frequently
Notice that we didn’t say “regularly”, because regularly might mean once every ten years. Instead, we recommend frequently looking at your succession plan, around once a year when you do your tax return.
Jim Thompson is in the sixth generation of Australia’s oldest known family business, Summerville Farm, established near Hobart in 1811 by a marine from the First Fleet. Thompson credits their succession plan as the key to their survival.
“[The plan] needs regular updating, with all involved kept in touch,” he says.
CEO of Family Business Australia, Robin Buckham, says communication and hand-overs between generations can make or break a family business.
She acknowledges, “It’s quite difficult to have that chat to dad about him going. It’s often the first step that’s the hardest.”
She recommends putting formal structures in place so that this conversation happens naturally as part of the everyday running of the business, rather than being a purely family-centred conversation. She says this helps to keep emotions from running high.
Include cover for the future of your family business
Your succession plan should include business life insurance. If you were unexpectedly unable to run your business because of serious illness or injury, this insurance would cover major business expenses to help your family get through until you are back in action.
If you were to pass away, your business life insurance would enable your appointed successor or business partner to buy out your share of the business and keep the business – and your legacy – running.
Buying business life insurance is one of the smartest succession planning decisions you can make as a business owner. Compare what’s available in Australia using our website, and choose a policy can handle the demands of your family business.
Goal 2: Create formal structures to prevent and defuse family conflict
Running a family business can be pretty stressful! Over 80% surveyed by KPMG and Family Business Australia in 2015 said they experienced conflict and tension between family members during the last year. The top three sources of conflict were:Goal 2: Create formal structures to prevent and defuse family conflict
- Differing goals, vision, and/or strategy
- Balancing the needs of the family with the needs of the business
- Lack of family communication
However, those with a Family Council were significantly less likely to have experienced family conflict over the business. One in two family businesses even have formal policies for the selection, remuneration, and promotion of family employees, compared to just half that many in 2013.
Using more formal structures in family businesses is increasing overall. In 2015, 52% now have a formal board of directors, compared to 39% in 2011; and 31% have a family constitution, compared to 20% in 2011.
Goal 3: Share the reins as soon as you can
The FBA’s measure of family business performance (FPB) found this year that the long-term success of a family business depends on when and how leadership is passed on.
Businesses with an experienced CEO aged 51-60 outperformed all other family businesses. Apparently your fifties are the golden years for a CEO. Businesses with an experienced CEO did even better when they made their leadership teams more diverse, including women leaders and non-family leaders.
But don’t hold onto the reins too long. Businesses with CEOs aged 61-70 or older declined in success steadily as their CEO grew older. The worst-performing businesses had CEOs aged 70 years or older.
This is not an insult to the wisdom of our elders in any way. As we age, many things change including our risk profile, personal goals, and ability to learn new things, all of which affect how a business can perform.
To adapt and survive, a family business must walk the tightrope between innovation and experience. The FBA found that family businesses with an entrepreneurial culture – coupled with innovation and delegation of authority – are outperforming other family businesses.
Sharing leadership is often the best way to do this. While training your successor to understand your wealth of experience, you can also allow them to bring their understanding of new technology and innovation to the table.
Even when innovation comes at a cost, Australian consumers are fairly supportive of family businesses. The Economy of Shopping Small Report by American Express found that 42% of Australians say they would continue to support a small, family-run business, even if prices increased by 10% compared to cheaper competitors.
Goal 4: Make sustainability your goal
Maintaining a legacy is more important than short-term profit or loss, says Corrina Wright, the sixth generation family owner/manager of Oliver’s Taranga Vineyard in McLaren Vale. Oliver’s is tied for Australia’s third-oldest family business, along with the Cressbrook Homestead in Queensland.
“We take a very long-term view, not thinking about a strict dollar return, but more about sustainability,” says Wright.
“Being a family business, we see ourselves as custodians of the land, not owners of the land.”
Most business owners (69%) told the FBA that they will need to invest in additional staff in order to take advantage of future opportunities.