Family business succession

Blood may be thicker than water, but when it comes to the family business, there are certain pitfalls that can be avoided to ensure longevity and livelihood for future generations.

Bringing in outsiders and professionalising a board of directors can really pay off for family businesses.

Keeping it in the family

Family businesses are the backbone of our Australian economy, employing more than 50 per cent of the workforce, yet 43 per cent of family firms have no succession plan in place.*

A significant proportion of family owned businesses really struggle when it comes time to consider ‘passing the reigns’ over to the next generation of family members, and more to the point, fail to consider and plan ahead of time, for the second or third generations, and the evolution of the business over those generations.

Many family businesses remain controlled and run entirely by family members and are reluctant to consider advice by ‘outsiders’.

There is a high correlation between businesses that fail to plan for succession and those that fail to successfully transition from one generation to another.

Independent input and process

It’s difficult to generate independent thought, when the board of directors of the family business is made up entirely of family members, and even more difficult when they have all worked in some capacity in the business, as their only form of commercial experience. A successful Board of directors requires a mix of various skill sets and more times than not, those family members don’t have those skills. This is a key point for consideration. Often those more strategically-minded family members feel constrained by the less strategically-minded and this can eventually lead to a fracture in the family dynamics, where those that might have more strategic intent for the business get frustrated with those that are happy to let things continue as they are.

When businesses plan for and seek out independent input, the effect can be remarkable.

In most cases there is a single ‘event’ that causes the key family members (more often than not they are also the Directors) to seek out professional assistance, such as a medical emergency for the patriarch/matriarch or an approach by a potential purchaser. This generally creates a great deal of debate and uncertainty amongst the board and at this point, the board becomes vulnerable to emotive (and hasty) reactions to the situation.

Many commentators before us have cited that the major weaknesses of family boards are that processes are often not formalised, and there is a lack of a formal corporate governance policy that is appropriate to the particular business. Many small businesses do not see value in the expense and time commitments that such processes require to be effective, however this approach is short-sighted in regards to future strategic decision making and can even impact future value on a sale.

Typically, Mum and Dad have spent the last 10, 15 or 20 years building the successful business and have not spent the time to implement processes or any real form of ‘corporate governance’. This single ‘event’ happens and then the issue of succession becomes paramount, and (from the owners’ perspective) urgent.

Again, more often than not, there is at least one son or daughter in a senior management role, with certain expectations of inheriting or obtaining ownership of business. In many instances upon a thorough objective review by an independent person, that son or daughter may not be the most effective person to carry out that role.

Most successful family businesses are those that can isolate the family issues from the business issues.

Enhance family businesses by introducing:

  • Proper governance structures
  • Shareholders agreement
  • Formal processes and systems
  • Advisory Board
  • Non-executive directors
  • Succession planning

To move from an existing family member board of directors, where all of the decisions are made by family members (generally with Mum and Dad as the key decision makers), to including a non-family member independent director, is a large leap. As an intermediate step, the family should consider at the very least, creating an advisory board to assist the directors to understand how non-family, independent member/s on the board of directors would consider and deal with certain issues.

This interim step will ease the family members into understanding and isolating the family dynamics and decision-making processes. A successful, commercial, independent group of directors will have the strategic and long-term success of the business as their only objective.

Generally, the advisory board would comprise Mum, Dad, the general manager or managing director (often a son or daughter), other key family members who control various sectors of the business and two other independent members. They are often the family accountant and lawyer who have been associated with the family for many years, however sometimes those roles are also played by non-related associates who have also run their own successful businesses and may now be retired.

Essentially the advisory board members should be selected to provide the best independent strategic advice to the family on any decision. Importantly however, the advisory board members have no formal decision making power, they are advisors only.

Once the family are comfortable with the non-family members contributing to the success and future direction of the business in this way (which may take a year or two), the next step is to formally invite non-family members to become directors with formal decision making power. This is where the business can really achieve its objectives without the interruptions and distractions of family issues clouding true strategic decision making.

A word of caution when inviting non-family members to become directors; if Mum and Dad consider that the family has complex family issues, or there are many family members on the board, they may be better to invite two non-family members, so that the single independent director has some support when matters are open to a vote, or can break voting deadlocks by taking emotions out of the debate and deal with issues in an objective and independent manner.

Summary

In our experience those businesses that are successful over a long period of time, passing on from generation to generation, are those that plan for succession – they have proper governance, they have an up to date shareholders agreement, they have professional directors on their board, and have made decisions along the way to achieve the objectives of the business first, not getting distracted by family issues.

We have experience in assisting family businesses in their succession issues and planning, including governance and shareholders agreements, and would be happy to meet and discuss your individual circumstances with you.

 

* Statistics taken from the PWC 2016 Family Business Survey

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