No exit for family business

Australia’s ageing family business owners have a big problem. According to new research on the family business sector, 45% are actively planning to sell their businesses and 61.3% would seriously consider selling now. On top of this, 25.2% say they have been approached regarding a sale in the last 12 months.

There is just one problem – these business owners, who control a large chunk of Australia’s $1.6 trillion family business sector, are simply unlikely to get enough from the sale to fund their retirement.

The MGI Australian Family and Private Business Survey 2010 from accounting firm MGI and Melbourne university and RMIT, supports the theory that a tidal wave of family business sales will occur in the next two years, as baby boomers look to sell up and retire.

But while the current business environment is making sales difficult, the survey also points to a number of other potential succession stumbling blocks, including family disputes, a lack of interest from Gen Y and Gen X family members and a lack of planning for the sales process.

Family business owners are already starting to think they will be forced to delay transition of ownership – be it through a business sale or succession – for up to 10 years, with the survey showing that 45.2% of family business owners said they would be working in the family business beyond the age of 65.

The average age of family businesses owners already at 55, and more than half are aged over 50.

The big problem is simply raising enough money from the disposal of the family business – one in three family business owners will have to continue running the business, or sell it, to fund their retirement.

But David Fitzgerald, managing director of business broking firm LINK, says sales of family businesses will not hit the market in any major way for at least two years.

He argues the global financial crisis has put many retirement plans on hold.

“What we found was that a lot of family businesses were devalued during this period,’’ Fitzgerald says.

“There are buyers out there and they do want to buy, but they are only prepared to pay a price substantiated by the 2009-2010 tax figures. They want to see how the company has come through the GFC and what the company actually did during the 2010 financial year.

 “A lot of families were looking to retire and had worked out what their nest egg was, but their investments in property and shares have also devalued.  So in 2008, their property, shares and business were worth so much. Now the shares have gone down in value, property has gone down in value and the business has gone down in value, so they can’t afford to retire.”

“If the business, for example, had an EBIT of $300,000 three years ago, it would be selling for $900,000. If in the last two years, it only made an EBIT of $200,000, then the price of the business will come down accordingly to $600,000 and they can’t afford to retire. The owners have to stay there to build it back up again, or accept the lower value.”

But restoring the business could take time.

“They will have to wait another two years until their business fully recovers. When they get their profit back up to $300,000, it may not be 2011, it may be 2012. Then they will come back on the market,” he says.

A need to sell

At the same time, many family business owners will have no alternative but to find a trade sale, at whatever price, because only half the family businesses are expected to be passed on to the next generation.

The survey shows one in three family business owners say it will not be feasible to implement leadership succession plans, with 60% of family business owners saying the younger generation family members from Gen X and Gen Y are not as interested in actively managing the family business as the older generation.

This is not to say that the younger generation is not interested in running a business, they just want to run their own.

“There is no reason to assume that members of the younger generation are not at least as entrepreneurial as their parents or grandparents,’’ the report says.

“However, they generally prefer to work on their own terms and are, therefore, just as likely to want to start their own business (particularly web-based businesses) or acquire a business, as they are to become willing and able successors of their parents’ family business.”

Professor Kosmas Smyrnios, the director of research at RMIT who conducted the study, says the findings raise a number of uncomfortable questions about the family business sector, which he estimates is worth around $1.6 trillion.

“If the younger generation are not moving into the family business, and if there are so few family business owners under the age of 40, are we seeing the demise of family firms?’’ Smyrnios asks.

“What it does signal is there will be a smaller proportion of family businesses relative to non family businesses. It might also mean that there is going to be an increasing number of non-family CEOs.”

Family disputes still high

One of the other big issues around succession is sorting out family issues and keeping the lines of communication open. While the study does not go into detail into the kind of family disputes that erupt, the research suggests that family issues can throw a spanner in the works and stop the business running effectively.

According to the study, 40.9% of family business owners say family-based issues are more critical than business-based issues and 45.5% believe that when family-based issues are resolved, business issues can be resolved.

It found that 39.7% cited communication between family members as the most critical issue confronting family businesses, while another crucial issue was founders letting go of leadership and ownership.

Smyrnios says these disputes will affect the business and left unresolved, the business will be harder to sell later on.

“These difficulties not only spill over into the business but affect the performance of the firm so the priority must be given to solving them.”

He says many of these disputes are just part and parcel of the family business landscape.

“That is to be expected when you have owners who have put in a considerable amount of their own lives…for the betterment of the family; you have the younger generation who may not be interested; others expecting to take over the mantle and take it to the next level; and you have owners who are reluctant to retire for one reason or another. Issues like that do spur conflict within families,’’ he says.