While family businesses account for approximately 70% of all business in Australia, inter-generational longevity is limited with few businesses surviving to the third generation. Why is this?
The advantages of family businesses commonly include:
- stability, with the same people in leadership roles for long periods of time
- commitment, having a sense of “skin in the game”
- a greater sense of accountability to the family
- flexibility of working arrangements and job descriptions
- a longer term business outlook
- often decreased employment costs and capital finance costs
Unfortunately, the very same issues that can make family businesses successful can lead to their downfall.
Disadvantages can include:
- family conflict (being able to leave personal life outside of the workplace and vice versa)
- lack of structured business governance
- a degree of nepotism, causing management to operate a business without appropriate insight from outsiders. Even when outsiders are employed, it may be difficult to retain good staff if they feel they are not being listened to or that their skills are being overridden by what they perceive as family management incompetence
A primary reason for a family business’s lack of longevity across the generations is simply a lack of proper succession planning. It is often seen that it “goes without saying” as to who will succeed to leadership and ownership of the business. Sometimes, it is simply too hard to contemplate and the family might ignore the issue and hope that it goes away.
It is best to start planning early but even if the family business has been in existence for a while, it is never too late to turn your attention towards addressing these issues.
Many disputes can be avoided by:
- having open and frank discussions about who will contribute in the business, in what way and for what reward
- properly documenting how the business will run including Partnership or Shareholder Agreements and Trust Deeds
- ensuring that the business complies with corporate governance requirements
- addressing succession issues and documenting plans to be implemented where exit events occur
Governance documents can include Shareholder Agreements that determine shareholder and family members’ rights to participate in management, salary entitlements including bonus entitlements, dividend policies, leave benefits and other profit share entitlements.
Business Succession Plans can include funding for the exit of a principal and arrangements for succession to various roles and ownership.
Consider a Family Office and a Family Constitution.
A Family Office can involve nominated family members representing the family in business meetings and strategic directions.
A Family Constitution may include provisions that are binding or non-binding. A Family Constitution is a document which sets out the rights, values, responsibilities and rules applying to shareholders, family members and other stake holders in the family business, and processes to deal with issues as they arise in the course of the business operations. It can be implemented at any time and it can serve as a valuable tool to help keep family members to a shared vision and participate in policy and strategic decisions. Involving as many members as possible to participate in the preparation of a Family Constitution can be a very powerful process. Even if the Constitution is not legally binding, the input and agreement of family members goes some way to ensuring that the Constitution is one that is “emotionally binding” on the participants.
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.