In Australia, family businesses account for a whopping 70% of all businesses. This means that for 1.4 million business owners, the work they do is far more than just a job. A family business is often viewed as a legacy, not only in terms of financial security but also a venture based on a shared culture, identity and set of values.
Unfortunately, the stats on passing down such a legacy are less optimistic. Only one in three family businesses survive a generational leadership change – and that’s most likely because 43% have no succession plan in place.
Start planning for tomorrow today
A change of leadership within a family business isn’t a single event where you hand over the keys and pop the champagne. It can often take years to train up your team and your successor to the point where you can make yourself redundant.
In that way growing a family business is a bit like raising a child – it’s difficult to imagine a time when it doesn’t need you anymore. However, if your business is to become part of that golden 30% that survives a generational leadership change, this must become your ultimate goal.
It’s important, therefore, to start planning your exit strategy as early as possible – especially since family relationships can add a layer of… complexity.
Prepare to have some tough conversations
When emotions, loyalty and trust get mixed up in business it can be a great strength and a real asset. It can also be a potential minefield!
You may, for example, have to manage the expectations of a group of potential successors. Naming one of the candidates as your successor may play into sibling rivalries or other difficult family dynamics.
You may also have to think about taking legal precautions (such as pre-nuptial agreements) to head off complications around ownership, should a marriage in the family break down.
These are hard conversations to have and it might be tempting to put them off until later. However, an awkward family meeting sooner will save you (and your family) a lot of hardship – and potentially costs – down the line.
NB: A business adviser or coach can provide invaluable support during these discussions offering expertise, as well as objectivity. They can also potentially mediate to help resolve conflicts if the need arises.
Don’t try to make decisions in a vacuum
When exploring your options for succession, remember that your decisions will affect three groups with potentially conflicting needs and demands: the business, the family and the individuals involved.
Since maintaining objectivity throughout this process is particularly vital, it may help to seek advice from professionals (your lawyer, financial planner or business coach), as well as trusted family and friends. They can act as a sounding board, helping you to identify and solve any potential issues.
If your business is profitable and marketable, you are in a good position to choose whether you want to keep or sell your business.
(There’s always another option of pulling up stumps and closing the doors – for advice see here: Selling Your Business’ Assets and Closing Your Business)
Option 1: Keeping it in the family
This is often the preference of those who run a successful family business. When it works out, it is also often the most mutually beneficial outcome. Few will have the same level of personal investment and passion for prioritising the needs of the business and helping it reach its potential. Likewise, a well-managed business will often provide the family with far more opportunity for wealth creation and personal satisfaction than the liquidated assets.
Playing the long game
A family-based succession plan can have far reaching implications. For example, if you intend for your own children to take over the family business, it may influence their choices regarding education and career path. If your children show an interest in and an aptitude for the family business, they may need specific training or to gain a business or trade qualification.
Experts agree that next generation leaders should work outside the family business for at least 5 years. Upon their return, they should also expect to work their way up like any other employee. This not only offers better personal and professional development opportunities, it also protects their credibility and authority (especially with other employees who may otherwise attribute their future leadership purely to nepotism).
Identifying a successor
When choosing the right person to take over leading your family business, there are some questions you should ask yourself and your potential candidates:
Do they want to take over the business?
Give each person time to really think about their future in the business – do they genuinely want to play a long-term, leadership role, or do they feel a sense of obligation to do so. If they express a desire to pursue a separate career, allowing them to do so is likely best for all concerned.
Are they objectively suitable for the position?
Does your chosen candidate have the commitment, availability, skills and experience to protect and grow the business you’ve founded? It is likely that you will need an impartial, third party to help you with this assessment – it can be hard to admit that the person you’d always assumed would be your successor simply isn’t a good fit.
Are they adaptable?
Is your candidate able to maintain a culture of innovation and adapt to changes in the industry or market trends? Loyalty and a sense of tradition are great qualities, but if they prevent objectivity, it could end up doing more harm than good.
Are you comfortable with their vision for the business?
Do they have a vision for the future of the business? Does is align with your customers’ needs and values? Technical skills and detailed knowledge of the inner workings of your business are critical in certain roles. However, the leader needs to be able to lift their gaze to the horizon and determine what comes next in the immediate, mid and longer terms.
How will you manage friction between the rest of the family or the wider team?
Selecting one person from a group of potential candidates can be a difficult time for all of you. It is best to make a definite decision and then clearly communicate it, along with your reasoning, to the rest of the family. Don’t make the mistake of trying to keep your options open – everyone will need time to adjust their expectations. Once the dust has settled, you can re-focus the team on what their role will be going forward.
For more information on business coaching services for succession planning, see: Family Business – Handing Down to the Next Generation
Hiring a non-family member to run the business
In between keeping and selling your business sits another option; your family retains ownership of the business but hires an outsider (or promotes a talented and loyal employee) to manage and run the business for you. This could be a good solution if there is no clear family successor, or if that successor won’t be ready in time for your planned retirement.
If you go down this route, you’ll need to be sure that the person you hire is a great cultural fit and that they understand and respect the strengths and values your business has been built on. It is also important that everyone in the family understands that you have empowered this person to make key strategic decisions. They won’t be able to lead effectively if they are hamstrung by family members who want to keep things the same. Any new leader will need the freedom to make necessary changes that prioritise the growth and success of the business.
For more information on business coaching services to hand over the reins to a manager, see here: Have Your Business Run Under Management
Option 2: Selling your family business
It could be that after careful consideration and counsel from professional advisors and other trusted friends and family members, you decide that selling the business is the best option.
If this is the case, your goal should be to build up your business in order to attract quality buyers and a satisfactory sale price.
Buyers will be looking for:
- Healthy financials that indicate growth potential. You’ll also want to create stability around factors like real estate (long term leases etc) and supplier contracts.
- Clearly defined governance and well documented policies and procedures – a new owner will need to absorb as much of your founder’s knowledge as quickly as possible to continue running the business successfully.
- A top performing, self-sufficient team – make sure that your team are capable of running the business without you. The ability to step away from the business (for holidays etc) is an attractive quality for a potential buyer. It also goes a long way towards securing your existing team’s ongoing employment.
Taking the family out of a family business takes time. You should plan for a sales process to take at least three years to accommodate the logistics as well as the emotional adjustment.
For more information on business coaching services for selling your business, see: Sell Your Business to an External Buyer
Pro Tip: Don’t leave too soon. Don’t stay too long.
It is common to see founding business owners stay on as leader long past retirement age. While it is understandable that you might enjoy working at a job you love in the business you created, it doesn’t exactly radiate trust and confidence – things your successor needs to know that you feel.
That said, even once you have officially left, stick around for a little while to make sure things go smoothly and mentor the new successor if required. It’s a fine balance, though – you can expect to still have an impact, but you must truly step aside.
Some tools to get you started
The Department of Industry, Innovation and Science has some good resources that help you gather your thoughts and start important conversations. They even have a helpful Succession Plan Template and Guide. If you aren’t confident in navigating this process yourself, enlist the help of a trusted business adviser or coach.
The next chapter…
We’ve looked at succession planning for the founding owner, but what about the next generation’s perspective? Next time, we’ll explore the process of ‘growing into’ the top job in your family’s business.
The team at Tenfold are the best business coaches in Australia, with awards for Business Coach of The Year and Business Coaching Firm of the Year in 2020, 2019, 2018, 2017. We are experienced in mentoring clients through the complex process of succession planning in their family business. You can read some of our success stories on our testimonials page.