Family businesses are the backbone of the Australian economy, employing more than 50 percent of the workforce. But, they also face unique challenges with the dynamics of family relationships added to the complexity of business. – David Harland, Managing Director of FINH
History is against them with statistics showing that only 12% of family businesses ever make it to the third generation. Current trends don’t offer much hope either as 43% of family firms have no succession plan in place.
What are the success factors that can help family businesses navigate the next five critical years?
A 2016 PwC survey highlighted the challenges and opportunities of family businesses today. Here are 5 critical success factors for family businesses based on their findings:
1. Do the hard work of succession planning
Poor transitions and a lack of succession planning is the single biggest factor in the failure of family businesses. To prepare for a handover from one generation to the next, a strong and effective board needs to be established by adding independent directors.
Hard questions need to be asked and answered as family businesses move towards transition:
- How dependent will the retiring generation be on the cashflow of the business?
- What skills do the new generation need to succeed?
- When will the retiring generation release the reigns of the business?
2. Professionalize your structures
Every growing business faces the need to professionalise their operating philosophy, but for family businesses, there is an added layer of complexity. These steps can help your business move forward into higher levels of professionalization:
- Develop shareholder’s agreements
- Form a family council
- Hire external managers
3. Develop a strategic plan
Operating from an annual budget year on year limits the business to incremental efficiency improvements without creating new opportunities. Family businesses intend to expand their horizons but struggle to do so.
One in three family businesses are still operating in only one sector and in their home market. They intend to grow their exports from 25% to 33% within the next 5 years – but they also said the same thing 5 years ago, with no increase actually achieved.
Strategic planning is the missing middle of family businesses that can bridge the gap from the annual budget on the one hand to unfulfilled dreams and visions on the other.
The disruption that digitization has brought to the marketing environment is one example where family businesses can take advantage of the change or get left behind in legacy systems. E-commerce, online advertising and consumer targeting on social media are powerful new tools that were not available to previous generations.
A concern for family owned businesses is a lack of awareness of the impact of technology on their businesses and the challenges this may bring about. Only 7% of respondents in the PwC survey cited technology as a key challenge over the next 12 months, which debunks the myth that family businesses are naturally innovative and respond easily to change.
5. Empower the next generation
Something current family business leaders and the next generation have in common is their belief in the power of entrepreneurship and their openness to set up new ventures alongside the existing family businesses. Unlocking this idea and making it a practical reality could help to prepare the next generation for leadership, while creating value for the current business.
CPA’s are in a unique position to help family businesses navigate the choppy waters of the next five years. They are often looked to as trusted advisors and appreciated for their independent views.
Developing the skills needed to walk alongside families through complex business transitions and the emotions that family dynamics add, will stand CPA’s in good stead play the positive role they can in supporting family businesses.
As published in CPA’s InTheBlack-
If you are looking for help with your family business, please don’t hesitate to call us at FINH on 3229 7333.