Family businesses are special. All businesses bring a mix of joy and anguish, excitement and the occasional terror. In addition, families in business have the satisfaction of working with and for others that they love – and all of the difficulties that these close relationships and blood ties can bring. The more involved the family are, the more intense the emotion – this is especially true of farming families. Family businesses face the same issues as all small and medium sized businesses – and then some! This is particularly the case when it comes to handing on the business.
The single biggest threat to a family business is succession. Family businesses combine all the tensions of family life with all the strains of business, and this is especially true at the time of generational change. Worldwide statistics indicate that few family businesses survive to the third generation. Every culture has sayings that capture this ‘truth’ such as “rags to riches to rags” or “ the first generation makes it, the second generations holds on to it and the third generation loses it”. Succession is the ultimate test of the way a family business is managed.
Succession is not an event; it is a process. There are several tips for ensuring an effective transition so that both the business and the family remain intact and thrive:
1. Confront reality. One day the business (or the farm) will succeed to someone else. You will not live forever. Several reality questions have to be addressed such as “When?”, “To Whom?”, “How?” and most importantly , “Will you plan and control the process or will you just avoid the issues and let what happens happen?” Families often avoid planning for succession because it raises difficult issues such as who will (or won’t) succeed. It also forces whoever owns/runs the business to confront his own mortality. In addition there is the fear of loss of control. Many owner/operators are too busy with day-to-day tasks to think about succession, and may prefer it that way! Many consider the business or farm their life – and their nest egg – and are fearful that succession will limit their options. Others simply do not know how to plan for succession.
2. Put the business first. Family businesses often struggle to see the business as one that happens to be owned by a family rather than see themselves as a family who happens to own a business. For the business to survive and thrive decisions about the future need to be made with a business head rather than a familial heart. Family members are likely to overlook the fact that the business funds their lives – and the needs of the business (rather than just their personal wishes) need to be considered at the time of succession. This is a great time to review the opportunities and threats that the business faces and make a realistic assessment of the strengths and weaknesses that the business carries. Now is the time to get out completely if the business looks unviable for the future. Don’t allow the family to indulge themselves – they may lose their estates as well as their jobs!
3. Separate ownership and management. Succession involves the transfer of both ownership and management. They should not be confused. Ownership can be handled in a number of ways. The business or farm can be sold and the proceeds shared amongst children. This is straightforward and allows all to be treated equally but only works if you want to get off the farm or out of business. Ownership can be addressed through shares – which may or may not have voting rights attached. Those who have the time to take a longer term view may wish to invest in other assets such as property or bonds or insurances that allow the farm or business to be passed on intact to one child and the others to receive other assets. Putting the farm or business in a family trust allows all family members to receive benefits in the future. A trust has the added advantage of helping protect the business or the farm from relationship breakdowns – it’s tragic to see farms or businesses sold up to settle with former spouses and partners.
4. Test prospective managers rigorously. It is very tempting for farmers and business owners to hand over management to sons and daughters. Often that is the dream that you have worked so long and so hard for. But don’t allow sentiment to cloud your judgement. You should apply three tests:
a. Do they have the abilities and the competencies needed to run the business?
b. Do they have the respect and authority needed (or can they get it)?
c. Is this what they want?
If they fail any of these tests they are unfit to run the business. Obviously, it pays to start early. The prospective successor needs to learn the business and, preferably, be seen to succeed in another business as well. They need management as well as technical skills – think planning, finance, marketing and people. They need to earn respect from all the other employees. And they need time and opportunity to assess if this is the right move for them. The future of your business depends on getting this right. And it is far too easy for the emotions of a parent to interfere disastrously with the requirements of a successful management transition.
5. Talk about it! Whether you intend to pull away entirely from the business or farm, or wish to retire gradually, it is best for the business that you signal changes well in advance. Talk to members of the family about what they want and how you can best prepare together for possible futures. It can help to use an external facilitator (ie lawyer, accountant, financial advisor) to get discussion going and ask the awkward questions. Getting the patriarch to ‘let go’ so that an orderly process can be put in place is essential for the health of the business – If the old do not go the young may not stay!
The views or information given in this article are not necessarily the views of AMP or AMP Adviser Businesses. It provides general financial information and is not intended to provide financial advice. For personalised financial advice, we recommend you contact us.