Set to Fail

Set to Fail

One of the first questions a family business member will ask me is why do we need a family business advisor? At FINH we focus on the positive impacts of implementing a shared vision for the family through governance. But we felt it was time to remind family businesses of what they have to lose and how if they do not take action. David Harland – Family Business Advisor

As family business advisors, we keep an eye on trends in the family business sector to better advise our clients. Frankly, what we’re seeing is disquieting. We believe that the sector is facing unprecedented challenges that will cause many family businesses to fail over the next ten years.Going-out-of-business

Why? The reasons aren’t new: poor succession planning, lack of access to capital, governance issues, and other obstacles have always been issues for family businesses. However, coupled with the largest generational transition in history, these problems will create a tsunami that we fear will sweep away many firms.

The scope of the problem is enormous: A 2013 PwC survey found that while nearly half of Australian family businesses (worth approximately $1.5 trillion to the Australian economy) intend to pass their business on to their children, less than 44 per cent had put a formal succession plan in place. As the decade progresses, a wave of aging baby boomers will be looking for the exits and their businesses aren’t ready. Here’s why:

1. Few businesses have family governance structures in place

Next to succession, family governance is one of the issues most families are reluctant to address because it forces them to confront major changes in the way they manage the business. Governance structures formalise the way that businesses are managed and delineate the separation between family and business. Without family governance, businesses are open to the risk of internal discord and ownership issues down the line.

2. Each generation has a competing vision

With many owners remaining active in the business well into their 60s, 70s, and 80s, next generation leadership struggles are becoming common. When the formal handover of ownership and management is unclear, these competing visions for the future cause confusion, duplication of efforts, and make planning for the future impossible.

3. Leaders lack education about succession planning

Many business leaders don’t know how to get started with succession planning or view it as a single event instead of an ongoing process. Surveys show that many current generation leaders are delaying retirement and struggling with the reality of leaving their business in another person’s hands. However, leaving succession planning too late is very risky; a sudden death or unexpected illness can harm the business and compromise the family’s financial health.

4. Businesses have limited access to capital for liquidity events

Family businesses that have sought outside funding for expansion or liquidity events, might have experienced the tough road most of their peers face. Banks, private equity firms, and other traditional sources of business financing generally aren’t interested in the long time horizons and complex family dynamics inherent in our businesses. Without sources of funding, liquidity events due to retirement or family member exits can put a serious strain on business cash flow and limit exit options. The solution that we frequently present to clients is access to capital through a network of global family businesses that are seeking to diversify their holdings by investing in like-minded family businesses.

5. Businesses fail to use their “family effect”

Research has repeatedly shown that family businesses tend to outperform their nonfamily peers. One study found that family firms on the S&P 500 grew their annual revenue at more than double the rate of their corporate peers. However, these results are averages and many family firms simply aren’t harnessing the power of their “family effect”- the intangibles that differentiate them from their competitors. By not effectively branding themselves and leveraging the trust clients have for family businesses, they are throwing away one of their greatest advantages.

6. Family business advisors are not working collaboratively

When the left hand doesn’t know what the right hand is doing, it’s impossible to manage a business effectively. Family businesses are complex entities and many businesses suffer when they lack integrated advice. Qualified advisor must have a sophisticated understanding of a family business’ unique strengths and challenges and be able to work collaboratively when giving advice.

7. Families focus on estate planning instead management succession

Many family businesses are aware of their succession problems and are actively working towards a solution. However, many business leaders make the mistake of confusing estate planning with succession planning and rely too much on so-called drop-dead plans. Estate planning is not management succession planning. If leaders truly want to ensure that their businesses will survive after their transition or death, it’s critical that they begin training up a successor and laying the groundwork for the future success of the business.

Would you like your family business to avoid these worrying trends? Contact FINH on 07 3229 7333

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