Business succession planning

Getting started with business succession planning

Taking the first steps with handing over your business to the next generation

Family businesses account for 70% of businesses in Australia. However, only 30% of businesses survive the transition to the second generation, and just 12% make it to the third generation.

So if you’re the CEO of your family business and are considering transitioning control to the next generation in the next five years, there’s a lot at stake. How can you identify and prevent the common pitfalls of family business succession planning? What can you do now to help ensure your company is one of the 30% that survive?

This article sets out some basic questions a family business owner must ask before setting out on the journey of succession.

Business succession planning has two parts

According to the Australian Small Business and Family Enterprise Ombudsmen (ASBFEO), family business succession planning is the orderly transition of the management and ownership of a family business to a future generation of family members. It’s important to understand that there are two parts to this definition:

The management transfer, which includes the day-to-day management of the business, such as governance and commercial decisions.

The ownership transfer, which refers to the equity interest in the business entity. An owner may or may not have an interest in the daily operation of the business.

Key challenges to family business succession planning

According to the ASBFEO 2020 Small Business Counts report, 60% of employing Australian business owners are approaching retirement age. But a 2021 PwC Australian family business survey reveals only 25% of Australian family businesses have a robust, documented and communicated succession plan in place.

A detailed succession plan is crucial to your company’s success in the next generation.

In March 2021, the ASBFEO released an Introductory Guide to Family Business Succession Planning to help Australian family businesses understand the process of succession. It provides business owners with a lot to think about, but in our experience business owners need to think very carefully about what’s involved in planning to hand over the reins before they get stuck into the details.

Are the building blocks in place for an ownership transfer?

When we advise family businesses on succession, we like to address some of the big picture questions up front. It might be useful to consider questions such as:

  • Is yours a business well suited to transition within the family, or are there other ways for you to exit the business?
  • Does the next generation want to be involved with the family business and, if so, to what degree? For example, do they wish to be involved in the running of the business, or have a more hands-off role?
  • Are the family dynamics and relationships suitable for the work of succession? What conversations have you already had with family members about their future roles and responsibilities? A lack of trust and communication among family members is the issue behind most unsuccessful wealth transfers, according to the Institute for Preparing Heirs.
  • Are you prepared for a detailed process that can often take far longer than you expect?

The potential value of an advisory board

PwC’s survey found that only 28% of family businesses have a constitution or protocol in place, creating a gap in governance and unnecessary risks to the current and future iterations of the business.

That’s why advisory boards, family councils, shareholder boards and business constitutions are increasingly popular mechanisms among family businesses. Non-family participants with expertise relevant to the business can provide advice or pose questions without the emotion that can arise in high-stakes discussions with family members.

Is an advisory board a possibility for your family business? Talk to us about how to go about developing one.

Consider the legal aspects of succession planning

While creating a family business succession plan can help your company survive a smooth and successful transition to the next generation, some aspects of succession require legal advice to minimize future risks.

Issues regarding governance structure, tax, estate planning, the transfer of shares and business ownership all have legal implications – and high-stakes consequences.

PTW’s Managing Partner Tolly Saivanidis is highly regarded for his work with family businesses, and is regularly asked to advise boards on a range of confidential issues.

 

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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