Research shows family businesses face succession crisis: Four ways to ensure you have an exit strategy

Family businesses continue to struggle with planning for succession, according to preliminary findings from research by Pitcher Partners, Swinburne University and the Australian Research Council.

The research is based on interviews and qualitative statements from more than 70 family businesses selected from some of the oldest and most established families Australia-wide which are in the top 500 private companies list.

The issue of succession is coming to a fore as the baby boomer generation prepare to exit their businesses. By 2020 baby boomers will be aged between 56 and 74 years of age, with the weighting heavily towards the higher age.

However, the latest survey data available indicates that around 75% of business owners have no exit strategy.

Richard Shrapnel, partner at Pitcher Partners, told SmartCompany families need to start talking about succession to put an exit strategy in place:

1. Start talking about succession now

Shrapnel says family members are not trained to have conversations about succession and so succession often just occurs by default.

“Succession is a very sensitive area and it is an area which is often not spoken about within the family, there is often a subtext where people are waiting for something to be said as the conversations are difficult,” he says.

“We see the key barriers are how to even commence the conversation and deal with sensitivities about age, usefulness, equity, fairness and the roles of family members.”

Shrapnel says family businesses give a lot of excuses about why they are not ready yet to talk about succession.

He says, “I’m still young”, “The business is not at the right stage yet”, “My family members are not ready” and “The market is not quite right,” are all common excuses for failing to set up an exit strategy.

Families need to put aside the tired excuses and sit down to have a conversation.

2. Include spouses

Shrapnel says there is a distinct difference between the way husbands and wives in family businesses handle succession planning and both partners need to be involved.

In an attempt to simplify the process, he says there is an uncertainty and hesitation regarding the inclusion of spouses in the succession process.

“Principally men are the leaders of the business in the baby boomer generation and they believe the question of succession is one they need to think about, often they don’t engage their partner and when they don’t engage their partner the succession process is not successful,” he says.

“When they engage their partner the conversation is quite different: men think about what is best for the business, while spouses think about what is best for the family. What is best is a blending of those two which then allows the children to be part of the conversation.”

3. Look for innovative solutions

While succession planning is often thought of only in the context of transferring a business within a family, the research found succession takes many forms in today’s market, including:

• the outright sale of the business to third parties;
• merging the business with others;
• the sale of the business to the management team and employees;
• the closure of the business and sale of assets; or, in some cases
• doing nothing and facing the gradual decline of the business.

“The risk if you don’t do anything about it is there might not be any chairs for you to sit down when the music finishes,” Shrapnel says.

“Young entrepreneurs should look for businesses going through succession processes as there can be rich opportunities for acquisitions but there are also significant risks for families who don’t deal with these matters.”

Shrapnel says family businesses are no longer necessarily just divided among children equally.

“The conversations are not about equity; it is about fairness, a look at who has contributed to the business and can other family members be paid out in another way. The way businesses are being divided are becoming quite innovative,” he says.

4. Consider getting external advice

While Australia has many well-known business dynasties – including the Murdoch, Pratt, Lowy and Fox families – Shrapnel says they face the same succession issues as all family businesses.

“The difference between the larger family businesses and smaller families is degree of complexity – when there is greater complexity larger family businesses draw in external advisors to assist them, while smaller families try to do it alone, which can be dangerous,” he says.

“All families are families, so the dynamics of wealth, contribution, fairness, equity and self- interest all buy into the process.”