The significance of succession planning in family businesses cannot be overstated. According to studies, just 30% of family companies survive in the second generation, and 15% survive in the third generation. Given the prevalence of family businesses in Australia, failure rates are alarmingly high, and families must address problems inside their family enterprises.
Typical Causes of Family Business Failure
Conflict within the family is the most typical reason for company failure throughout the succession process. Other potential reasons include concerns such as:
- a lack of managerial skills and preparedness for the role
- failure of parents to ‘let go’
- little or no business planning
- insufficient thought and planning for ownership
- unique demands of family members
To ensure the success and longevity of a family firm, business owners must be proactive in succession planning.
What is a Succession Plan?
A succession plan describes what the future of your organisation will look like once the present owners leave. A succession plan facilitates the seamless and successful transition of the firm, whether to the family or an external hire.
Here are four things to keep in mind when you plan your succession:
1. Consider the Next Generation’s Level of Interest
What if the following generation appears to be uninterested? Founders may wish to pass on the firm to their children and grandkids only to realise no one wants to stay connected with the company.
This can happen when the founders are so preoccupied with the business that the family feels ignored. If this is the case, the children may feel negatively towards the company, complicating the succession.
To avoid this issue, business owners must integrate their operations with family life so the children can have plenty of positive experiences and develop an excellent work ethic and understanding of the business.
2. Do What Is Best for the Company
Providing equal shares for everyone sounds terrific, but it may not be in the firm’s best interests. The last thing you want to do is put your successor in the middle of an unwilling board or a structure that makes operations challenging.
Consider implementing voting and nonvoting shares so that only a subset of the family shareholders (those actively involved in the business) can vote on company policy. Another option is to transfer ownership and management to your selected successor while making other financial arrangements for your children.
3. Prepare to Move On
Prepare your mind to step down from management and ownership when the time comes. It is never a good idea to rule from the fence. Try to put systems in place to regulate their activities after you’ve left the firm. You may unwittingly create leadership uncertainty and a complex work environment for those who remain.
4. Get Outside Help
As a family business owner, you tread a narrow line as the owner of a business executive and family member. When the line becomes hazy, seek assistance from a neutral third party. We can help ensure your hard work pays off even after you retire.
Keep in mind that this article does not discuss taxation; nonetheless, this is an essential factor when planning the succession, and we recommend obtaining counsel on this. If you own a family business and want to discuss developing or revising your succession plan, don’t hesitate to get in touch with us.
Springfield Legals is a law firm that specialises in family law in Queensland, Australia. We also provide our legal services in property and business conveyancing and income protection, and succession planning. Make an appointment today and learn how our services can help iron out your succession planning!