It’s an avenue for familial expression, an opportunity to establish meaning and a legacy-driving vehicle--it’s the family business. When contemplating family businesses, the numbers are staggering: an estimated $4.3 trillion in wealth held, 70 per cent of Australia’s actively trading businesses are family-owned and over the next decade, as Baby Boomers pass on their assets, more than $3 trillion will change hands. The sector is an economic behemoth.
Don’t be fooled into thinking that being part of a family business is a ticket to ride the gravy train--it’s not. Every business is accompanied by unique and complicating factors however, after decades of observing and servicing the interests of family-run organisations, here are my top five items in successful family businesses.
Installing the right business structure
Building your family business on solid structural footing is paramount. That is, ensuring the legal structure supporting the business is fit-for-purpose. Why is the correct business structure important? Licenses, tax rates, liabilities, operating expenses, employee versus owner status, control of entity, reporting requirements, distribution of profits, superannuation, workers compensation, access to capital, succession planning, exit strategies, business dissolution and tax planning only but scratch the surface of the machinations available under each distinct business structure.
It’s worth noting, as your business grows and complexity multiplies, your existing business structure may no longer be suitable. Perhaps there’s been a change in management or ownership, you’re restructuring to meet financial goals and objectives, changes to legislation have come into effect, expanding overseas has become an option or are simply looking to improve operational functions, successful family businesses save themselves countless headaches by ensuring their legal and compliance obligations are understood and met.
Robust asset/wealth accumulation and protection strategies
It’s counterintuitive to spend lifetimes working to build asset portfolios only to leave them exposed and susceptible to business risk, unexpected events and/or litigation. A successful family business is one which recognises the transformative nature of equity and the defensive power of structuring to limit liability. Wealth accumulation and asset protection strategies should be viewed as a tandem, a dynamic duo working to grow and defend your family’s wealth portfolio.
A good starting point is the separation of assets from risks. Do you operate trading entities and asset holding entities? Are they the same entity? Have you nominated a risk taker and an asset holder? Have you quarantined personal assets from business assets? If there’s deterioration in the family dynamic, would you be comfortable with the Family Court looking through personal investment structures? Are the appropriate levels of insurance in place? Take a devil’s advocate approach to asset protection.
Now that your defensive strategies are in place, what financial and investment goals/objectives does the family have for the business? What’s the organisation’s appetite for risk and approach to estate planning? Does the family prefer one asset class over another, is cash flow managed to capitalise on investment opportunities, who are the financial decision-makers and how is capital deployed to achieve the business’s financial objectives? Successful family businesses are unified in their approach and to achieve optimal return on investment, routinely review their positions.
In-depth and articulated succession plans for both business/assets
The numbers suggest one in three family-owned businesses survive into the second generation and by the fourth generation, only three per cent remain. If you’re one of the remaining three per cent, it’s most likely because the organisation has a communicated plan and consolidated strategy for transitioning the business and allocating assets to the next generation.
Succession planning should result in three things: (1) minimal disruption, (2) transfer of ownership, and (3) transcend generations. This is achieved by clearly defining the organisation’s vision, policies, principles, rules and processes, solidifying governance structures (whether it’s family councils, constitutions, charters, advisory/shareholder boards and family offices), maintaining strong working relationships with management and key employees, ensuring heirs/successors are well-prepared and subscribing to robust procedures not only for transfer of ownership but also, business operations under new ownership.
When concerning transfer of business asset ownership, strong consideration should be given well in advance with multiple scenarios explored. Responsibilities for assets and liabilities, review of Trust documents, constitutions, office holders, discussion of superannuation entitlements and taxation and succession law all merit investigation. It’s a complex process, one which successful family businesses prepare for years in advance.
Well-conceived family constitution
A well-conceived family constitution will function as one of the most important documents in your family business. It chronicles the core values and principles that govern how the family and organisation interact. Essentially, it’s a guideline stipulating reasonable and acceptable conduct and can be as simple or complex as you like.
A survey conducted by KPMG (2008) found less than fifteen per cent of respondents had a family constitution in place so if you’re unfamiliar with the document, here’s a quick overview. A family constitution should define strategic objectives, articulate succession plans, nominate procedures for handling events, communicate a written mission statement, convey conflict resolution procedures, stipulate employment/performance management criteria (including periodic reviews), describe mentoring programs, advertise distribution of wealth policies, disclose share transfer and share issue procedures, nominate a compulsory retirement age, determine rights/obligations of shareholders (including buy-out processes), how to deal with external/non-family ownership, procedures for amendments and provide guidance to help address change.
Rigours, controls and accountability
Want a successful family business that runs for generations? Treat it like any other business. No sympathy jobs for family members, don’t fall into the trap of exorbitant salaries and inflated benefits, don’t treat the organisation as your personal creditor and separate work from family life. Pay market rates, prepare the next generation of leaders, retain and promote key performers, commit to continuous improvement, install robust management structures, contract external expertise and clearly define roles and responsibilities.
Run your family organisation with the rigours, controls and accountability of a successful business.