Solving the Challenges of Family Business
Successful businesses in Australia often span a number of generations. Wealth, once created, if managed correctly allows current and future generations to build financial stability for the family, long term. But bringing your children and family into the business also brings a dynamic set of issues that have many positive aspects, but also potential challenges, particularly when business direction and generational change haven’t been planned for pro-actively.
One of the major issues facing Family Business in Australia is how to deal with generational change in the interests of the long term viability of the company. While it sounds like a great idea to leave the business to the children, it’s a decision that requires honesty, strategy, planning and preparation.
The first step in readying your business for a transfer to the next generation is an honest assessment of the business. Before considering whether to transfer the business to the children, the question of whether the business is capable of being transferred needs to be resolved. In particular this assessment would consider the future sustainability of the business, the profitability of the business model, and the capability of the business to be transferred. This analysis needs to be realistic and practical. If the business is not sustainable, profitable or transferrable – beware, you may be leaving your children with a ‘millstone around their necks’ rather than a legacy. You need to be honest with yourself and your children about why you want to involve them in the business. If the children are being used because there are no buyers or nobody will pay the price you want – think again. The only business worth leaving to future generations is one that is attractive to outside buyers, a business that can withstand the test of time and be a true legacy for the future generations. Your children also need to be honest with you about their plans, dreams and goals. Leaving the business to someone who isn’t interested and wants to follow a different path will not lead to success.
Once the decision is made to pass the business to the next generation, a strategy to handle the changeover is required. The first step in identifying a strategy is to consider what the business will look like under the control of the children. In devising the strategy, consider the potential involvement of the children in the day to day operations of the business, whether they have the necessary skills to operate the business, how the business is going to financially support the parents (if necessary) when they are no longer actively involved, the goals of the parents, the goals of the children and the duties that everyone will be undertaking particularly where there is more than one child involved in the business. This information will provide a good backdrop for the changeover strategy and also raise a myriad of other issues that need to be considered. The depth and breadth of the issues also highlights the need to allow sufficient time for the changeover to occur.
When everyone is in agreement with the strategy, the next step is the detailed plan on how the changeover is to be handled. In many instances, the children need time to acquire other skills associated with their new role while the parents require time to work out their retirement. It may also be necessary to review the existing skills available in the business and identify which ones need to be brought in or acquired in the absence of the parents. The changeover process will vary for each family, being well planned minimises the impact on the both the business and the family. Additionally, the changeover may take place over a number of years to ensure a smooth transition. Detailed planning will ensure that nothing is overlooked.
Preparing for the changeover allows for the mitigation of risks that may cause serious detriment to the viability of the business. Issues to be considered will include advising the clients of the change and managing their expectations, the impact of the new ’chain of command’ on the staff, and resolving differences of opinions and ideas between old and new, family and non-family. Communication to all the stakeholders during this process will be vital.
As many of the successful family businesses have shown, changeover to the next generation is possible as long as there is Honesty, Strategy, Planning and Preparation.