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How family businesses can safely hand over to the next generation

How family businesses can safely hand over to the next generation

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One third of Australian family businesses will transition to the next generation within five years. PwC’s four tenets for succession planning can help ensure families are ready.

“Happy families are all alike; every unhappy family is unhappy in its own way.” What Tolstoy forgot to mention in the opening line of Anna Karenina was that succession planning is similarly bespoke to each family business. Whether it involves the founder transitioning from CEO to Chair, or perhaps staggering new responsibilities for next-gen family members to minimise risk – succession planning is unique for every business and family.

And yet a huge number of Australian family businesses have one thing in common. They’re heading towards succession right now.

PwC’s 10th Family Business Survey found that 30% of first-generation Australian family businesses expect the next generation will become the majority shareholders within the next five years. The survey also found that 20% of all family businesses surveyed in Australia are prioritising increasing next-gen involvement in decision-making. This growing sense of urgency around succession could well be in response to global uncertainty and the COVID-19 pandemic, and it certainly tallies with the upswing in succession enquiries we’ve received at PwC recently.

So where to start when thinking about succession? 

Succession is a process, not an event It starts with identifying a common purpose and goal, understanding each other’s values – and only then structuring a process to bring all family members along on the journey.

Glen Frost

The first thing to note is that succession is a process and not a single event. It’s less about walking out one Friday afternoon and never coming back, and more about a structured, controlled transition that takes place over several years. For some businesses, succession might mean the founding generation takes on a mentor role in order to upskill future leaders, share IP and ensure a smooth transition. Or, for a set period, founders might retain control over hiring C-suite executives but hand over responsibility for hiring other staff. Or they might retain responsibility for purchasing assets valued over a certain threshold. There are many different variables to consider.

Ultimately, though, succession should involve a clearly articulated strategy that adds value to the business – and to family relationships. Because unlike Tolstoy’s families, the succession process doesn’t have to be an unhappy one.

PwC’s four tenets of successful succession

While the ‘Anna Karenina Principle’ applies to succession planning (that is: there are many ways to fail), there are also ways to improve your odds of success. At PwC, we recommend these four tenets of successful succession: 

1. Communication 

Sixty percent of failed wealth transfers are due to a breakdown in communication and trust within the family (Preparing Heirs, Williams and Preisser). And yet PwC’s Family Business Survey found that only 25% of Australian family businesses have a robust, documented and communicated succession plan.

Whether you’re handing over the reins as business founder, or stepping into your parents’ shoes as a next-gen leader, (or perhaps you’re on-selling the business in a trade sale or management buyout), clear communication is crucial. 

This might mean involving an independent party as a go-between or sounding board. On many occasions, we’ve been asked by founders to act as a third party and speak with each of the next generation to gauge their individual understanding of the organisation’s succession plans. It’s remarkable how different each person’s answers can sometimes be.

To avoid any misinterpretation, we recommend creating a coherent succession plan and then communicating it explicitly with all stakeholders. Not only can this give suppliers and employees peace of mind – but it can also help ensure family members are still speaking to each other at Christmas.

2. Governance

A staggering 70% of business and wealth transfers fail between family generations (Preparing Heirs, Williams and Preisser), and yet PwC’s survey found fewer than a third (28%) of surveyed family businesses have a constitution or protocol in place.

This gap in governance is an unnecessary risk. We recommend developing a family strategy, based on an aligned vision and clear values, as well as a family charter. This can sometimes be a confronting practice for the founding generation, especially if they built up the business without much formality or structure. The founding generation may not have needed much structure but, in the long term, the succeeding generations will. 

Be sure to include a comprehensive dispute resolution mechanism, too. Blood might be thicker than water but that doesn’t mean family members won’t occasionally disagree. And the best time to agree on a dispute resolution mechanism is when there isn’t a dispute!

3. Flexibility

Flexibility is a must when setting up a succession process. Families are dynamic and so your governance must be (relatively) malleable in response. For instance, we recommend families revisit governance structures regularly because their longer-term objectives can change as the family does. New generations will enter the business, people will get married, and ownership arrangements can vary accordingly. 

At the same time, while governance must be flexible it should also be relatively difficult to change. No one should be able to update well thought out governance structures too easily, and there must be a clear process to follow when making any changes. That way, stakeholders have some sense of stability, and family members can rest assured that one cousin isn’t going to waltz in and start making changes without consulting anyone.

4. Values

Succession should also be anchored in your family's values. For instance, our survey found that more than half (57%) of Australian family businesses contribute to their local communities, indicating that local impact is a priority for many. These sorts of values should be clearly articulated so that your family and the family business can come together for a common purpose, and so that your purpose is sustained long into the future. This doesn’t just provide continuity for the family and the business – it can also provide peace of mind for community stakeholders that rely on philanthropy/support from the business.

Happy ending

While Leo Tolstoy understood a lot about the human condition, I beg to differ on his view of families. A clear and comprehensive succession plan can help ensure that a family truly can be happy in the long run. 

 

In summary, these are some essential steps for succession:

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Start early, and communicate often. Developing and implementing a successful succession plan takes time. It’s important that you start thinking about how you see succession happening for your business and family, but also to confirm whether your children are on the same page. You may envisage them stepping into your shoes and running the business - do they want the same thing?

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Professionalise family governance. Having a professional governance structure and a clear process for conflict resolution, preferably involving an independent party, makes business sense. A professional approach strips emotion and personal bias - common stumbling blocks for families.

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Governance should reflect that families are dynamic. Family businesses need to revisit governance structures regularly, because the structure of ownership can change as next-gens enter the business or through marriages. Therefore, it is important to set out parameters in a family constitution and keep them

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Allow external help. Conflict and differences of opinion are inevitable - we’re only human. But the emotions involved in family discussions can be difficult to resolve internally and often an external advisor, skilled in facilitation and communication, will be a key ingredient. They won’t be offended if you end up realising a large part of their value comes simply from not being part of the family.

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Growing a family business can be demanding, exhilarating, and intensely personal. No matter where your business is on its journey to success, we can be at your side with the insights and solutions you need to stay fit for growth and moving forward at the right pace.

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Glen Frost

Glen Frost

Partner, Private Clients, PwC Australia

Tel: +61 (2) 8266 2266

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