At a glance
By David Harland
History is against them, with statistics showing that only 12 per cent of family businesses ever make it to the third generation. Current trends don’t offer much hope either, as 43 per cent of family firms have no succession plan in place.
A 2016 PwC survey highlighted the challenges and opportunities of family businesses today. Below are five 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 are the single biggest factors 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.
In addition, hard questions need to be asked and answered as family businesses move towards transition. Among these:
- 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. Professionalise your structures
Many growing businesses face the need to professionalise their operations at some stage but for family businesses there is often an added layer of complexity. The personal nature of family relationships means that the consequences of mistakes could have a terminal impact on the business.
These steps can help your business move toward a higher level of professionalisation:
- Develop shareholder’s agreements
- Form a family council
- Hire external managers
If you would like additional resources on professionalization I recommend visiting Family Business Australia and Insights.
CPAs are in a unique position to help family businesses navigate the choppy waters of the professionalisation challenge. They can serve as trusted advisors and bring valuable independent views.
3. Develop a strategic plan
Operating from an annual budget year-on-year limits the business to incremental efficiency improvements without creating new opportunities.
One in three family businesses are still operating in only one sector and in their home market. Many Australian family businesses report that they intend to grow their exports from 25 per cent to 33 per cent within the next five years – but they also said the same thing 5 years ago, with no increase actually achieved.
Strategic planning is the missing middle that can help family businesses bridge the gap from annual budgets on the one hand to unfulfilled dreams and visions on the other.
The disruption that digitisation 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 challenge facing family-owned businesses is a lack of awareness of the impact of technology on their business and the threats – and opportunities – this brings.
Only 7 per cent 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 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.
David Harland CPA is managing director of FINH, an organisation that specialises in the provision of advice to family groups in business across the Asia-Pacific region.
The opinions expressed in this article are those of the author.