Family Business Succession Planning

Darius Hii, Director at Chat Legal, provides insights into family business succession planning ahead of his upcoming presentation at the 2nd Annual Family Business Advisory Conference, where he will focus on succession planning for blended or complex families. 

Statistics from 2012 from the Australian Bureau of Statistics and Family Business Australia stated that approximately 70% of Australia’s businesses were considered a family business (which amounted to approximately 1.5 million family businesses).[1]

Recent reports (quoting Family Business Australia) have continued the statistic that family businesses employ over 50% of the Australian workforce.[2]

These statistics combined with age old saying that ‘the first generation makes it, the second generation spends it, and the third generation blows it’, is a stark reminder of the importance family businesses have on the lives of the relevant family members and employees.

With recent statistics stating that only around 30% of family businesses survive into the second generation and 12% would be viable in the third generation, it is crucial that we, as trusted advisors seek to assist our family business clients in having appropriate succession plans in place.

What makes a family business different?

Family businesses offer unique issues not considered as part of non-family businesses.

While decisions made by businesses managed by non-related parties can often be simplified into ‘doing whatever maximises profit’, family businesses can often make decisions that are considered irrational from a purely profiting perspective.

These decisions can include (but are not limited to):

• picking family members into leadership roles in the business regardless of experience;
• declining to proceed with profit-making transactions in favour of maintaining the family wealth; and
• choosing to self-finance transactions as oppose to undertaking third party financing, thereby limiting the scale of transactions entered into.

Interestingly enough, there is developing area of academic literature explaining the reasons for making such decisions.

Specifically, the ‘factor’ that influences family businesses in making these decisions relates to a concept of ‘socioemotional wealth’ (or ‘SEW’).

SEW has been defined as the ‘non-financial aspects of the [business] that meet the family’s affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty’.[3]

This can be summarised as meaning that decisions in family businesses are often made to maximise:

1. a family’s control and influence in the business;
2. the identification of family members involved in the business;
3. the potential to exert the family’s within social ties and the broader community;
4. emotional attachment of the family in the business; and
5. the prolonging of the ‘family dynasty’,

even to the detriment of the business financially.

The ‘unique’ issue affecting family businesses, therefore, is the fact that family businesses need to consider the impact of ‘family’ when making decisions to do whatever maximises profit.

What are some steps we can take when advising family businesses with their succession plan?

A successful family business succession plan will come down to balancing:

1. the wants of the owners of the business (the Ownership);
2. with whose making the decisions of the business (the Management); and
3. ensuring the decisions are made in a manner consistent with the family (the Family).

This balance can be achieved by properly understanding the goals of all stakeholders and ensuring appropriate strategies and arrangements are implemented through the preparation of various legally and non-legally binding documents.

Below are some steps that can be taken to implement an appropriate succession plan for family businesses:

1. step 1 – have discussions with key stakeholders, namely the heads of the family and key members involved with the business, to understand:
   1. the family’s objectives in relation to the succession of the ownership and control in the business;
   2. the family’s values and overriding principles that should be considered for future generations;
   3. whether there are any transition arrangements that can be implemented to ease key persons into the business;
2. step 2 – check whether the current structure of the business is appropriate to ensure the family’s intention in relation to the succession of the ownership is able to be effected and if not, undertake a restructure to ensure the business is in an appropriate structure;
3. step 3 – put in place appropriate legal documents to ensure ownership in the business passes to appropriate family members (whether by way of Will, deed of change of trustees/appointors and call options etc.);
4. step 4 – put in place appropriate documentation that implements a framework in how management in the business passes (in a way consistent with the family’s objectives); and
5. step 5 – put in place appropriate documentation documenting the family’s values as well as discussion and dispute mechanisms to allow non-business family members to discuss issues and transactions with those family members involved in the business.

Key takeaways

There is no single correct answer on the best business succession plan for family businesses as every family group has different objectives, intentions and values.

What is important, however, is understanding the ‘family’ factor and ensuring appropriate arrangements are put in place to enable ‘ownership’ and ‘management’ to work in tandem for the ‘family’.

Please contact the author if you have any queries about this article

[1] Based from Australian Bureau of Statistics Release 8175.0. Counts of Australian Businesses, May 2013; and Family Business Australia, 2012; the author was unsuccessful in locating more recent statistics on this matter but notes that a ‘98%’ was used in relation to ‘small business and family enterprises’ in Australia (being businesses with less than 20 employees) in the Australian Small Business and Family Enterprise Ombudsman’s ‘Small Business Counts, Small business in the Australian economy’ publication, July 2019

[2] https://www.mybusiness.com.au/management/6219-australia-marks-national-family-business-day; the author acknowledges that the association quoting the family business statistics is one that looks to represent family-operated businesses

[3] P Berrone, C Cruz, L.R Gomez-Meija, “Socioemotional Wealth in Family Firms: Theoretical Dimensions, Assessment Approaches , and Agenda for Future Research” Family Business Review, 25(3), 258-279

Darius Hii, LLB/BCom (Finance), CTA is an estate planning and tax lawyer, who works alongside private clients and advisors to provide comprehensive structuring advice.  The core of his work revolves around planning today for a headache free tomorrow and relates to personal and business succession planning.  This often involves preparing holistic estate plans and ensuring they are structured to complement a client’s succession planning and asset protection intentions, as well as implementing tax effective business succession and restructuring strategies.  He has developed a deep interest in trusts and taxation which complements his area of practice, and has spent time involved with payroll and land tax disputes with the Queensland Office of State Revenue.  He founded Chat Legal Pty Ltd to provide legal services to busy individuals and families outside office hours and at a location convenient to them. You can connect with Darius at darius@chatlegal.com.au or via LinkedIn .