The challenges of running a family business

23 July 2013
There are many benefits to owning a family business. These include the ability to build a family-owned asset and ongoing legacy, the opportunity to work with family members who have a shared vision for business success, the opportunity to become an integral part of the local community and the ability to share the proceeds of business among both working and non-working family members.

There are nevertheless some common challenges faced by family businesses. The MGI Australian Family and Private Business Survey, researched by RMIT University and first published in 1994, is the longest running longitudinal study of its type in Australia. In June 2013 the eighth report of the series was published and identified some of the most common challenges for family businesses as follows:

Letting go of leadership/ownership control

Family Business - Ownership TransitionAccording to the report, only 20% of business owners have established a clear process for successors to develop as individuals, in their roles and in the business. This is described in the report as “a critical practice for long-term family business success and continuity. For the business to continue in the family there must be family successors who are ready, willing and able to assume control when the incumbents are prepared let go of the reins.”

This may be reflective of the indication that 41% of family business owners believe that it will not be feasible to implement leadership succession in their family business – often due to the fact that for many businesses, the younger generation family members are not as interested in actively managing the family business as the older generation.

Securing adequate capital for growth and retirement and Providing liquidity for family owners to exit

Family Business - Retirement CapitalFor many small business owners who over the years pour their time and money into the development and maintenance of their business, two significant interrelated issues as they age are to fund their retirement and/or afford to buy out the shares of other family members.

It is natural that this should be a concern, with the MGI report finding that family business owners are becoming older: in 2010 approximately 21% of owners surveyed were in the 60 – 69 age bracket; this proportion has risen significantly to 37% in 2013. This is accompanied by a decrease in the percentage of owners who believe their businesses are ?sale ready, from 56% in 2010 to 44% in 2013. Significantly though, 64% would seriously consider selling their business, if approached.

Choosing a suitable ownership structure for the next generation

Family Business Management - The Next GenerationFor those businesses who do intend to remain in the family, a documented ownership structure is important. While the report indicates that 72% of respondents consider their business to be a “family business”, only 47% have two generations involved in operations. Just 26% of the surveyed businesses are second generation and a mere 14% are third and subsequent generation.

There are a number of structural ownership barriers that make intergenerational transfer difficult, including the lack of a documented ?buy-sell? agreement in most businesses and the lack of both a strategic plan and a business plan in almost half of the businesses surveyed. A lack of documented operational and succession planning surely raises the risk of miscommunication and misunderstanding among generations.

The good news, though, is that according to a recent report by federal parliament?s Joint Committee on Corporations and Financial Services (?The Family businesses in Australia?) family businesses are an integral and competitive part of Australian life. To quote: “Despite their diversity, family businesses have common features and traits that distinguish them from non-family enterprises in terms of their risk averse, long-term approach; flexible decision-making; greater commitment to retaining staff; significant contribution to the community in which they operate; and higher labour productivity than nonfamily firms.”  Keeping it in the family, then, is surely something to aim for.

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