Family businesses account for 70% of all businesses in Australia. Family businesses also employ around half of the country’s workforce. In a way, family enterprises are one of those who carry the weight of the Australian economy.
One of the strengths of a family business is the preservation of wealth across generations. A family business is also unique in the sense that it is rooted in values common to all members. Family business dynamics is also interesting but could lead to the breakdown of a successful enterprise when family disputes creep into the management of the company.
A study by the Family Business Institute showed that only 12% of family businesses survive until the third generation. The study further showed that, by the third generation, the family business will lose 90% of its money. Notable successful Australian family enterprises, such as logistics empire Linfox, packaging conglomerate Visy Industries, and one of our clients, Shore Hire, however, illustrate that longevity is not impossible for family businesses, provided members of the family establish proper measures.
Constitution creation and succession planning are two of the steps towards the sustainability of a family business.
Just like the constitution of States around the world, the family constitution is the “shared language” of the family that reflects its values, beliefs, and aspirations. SmartCompany suggests developing a constitution that includes policies and processes from communication, decision-making, remuneration, and dispute resolution.
The constitution can document how the business started and the values it is rooted upon so that future generations will have a guide as to where to steer the company when it is their time to take over the lead roles. While the constitution is not a legally binding document, it helps remove the often emotionally heavy disputes family members will have in the future.
The constitution also clarifies ownership and corporate structure and defines the roles of family members. Further, the constitution will include accountabilities and crisis management.
As the business and family grows, so does the constitution. SmartCompany recommends hiring an independent advisor to help craft the document and to help keep the family focus on business-only matters.
Successful family businesses are built, not born. They are not overnight successes. Take as an example, Linxfox, which started with a single truck in 1956 and only marked its turning point in 1968, or 12 years later when it expanded its fleet to 60. Planning for the future of a family business does not happen in one meeting and does not conclude in the naming of an heir or successor.
KPMG Enterprise Partner Bill Noye points out, “succession is a process, not an event” and it takes a lot of preparation. It is not uncommon for family members to start working in the family business doing the most labour-intensive activities and receiving minimum wages. It is also not uncommon for family members to be named successors only when they have climbed up the corporate ladder. This is because, even in family businesses, family members still need to prove themselves worthy to be named heir of the family legacy.
Succession planning is a natural consequence of a family constitution. It is a document that also includes the plan of the family and the process on how to execute that plan. Mr Noye notes that having a succession plan is having a framework for the family and the business to prepare the next generation for the role of leadership and ownership.
Further, succession planning includes the creation of retirement plans for members of the family who are involved in the business. The family is not prevented from hiring an “outsider” from running the business, but that scenario would defeat the concept of a family legacy.
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