Family Business Succession is never a simple, straightforward endeavour. Besides the financial outcomes of the transition, the human needs and emotional involvement of all family members must be taken into account. The business advisory firm Baker Tilly International, in cooperation with Swinburne University, has taken a closer look to both the sociological and economical implications for the family business succession process and presents its first results to you in this article.
The Scene: Risk and Opportunity
In just seven years the global baby boomers population (born between 1946 and 1964) will be aged between 56 and 74 years, weighted heavily towards the higher end, and most businesses controlled by them will have changed hands. In Australia the value of businesses to be transitioned was estimated in 2006 at $A3.5 trillion1 on a population base of 19.85 million people.
For business people, this transition represents a period of great risk and opportunity. A risk for those exiting to secure a fair capital value and continuity of their businesses, a risk for the economies in which they trade should they flounder in this transition and an opportunity for the new generation of owners to consolidate and build upon the generations of knowhow and value possessed by these businesses.
Enter the realm of Family Business Succession where there is really no clear guidance for owners as to how they should approach this critical point in their business’s lifecycle. Baker Tilly International, leveraging off the work of its independent member firm in Melbourne, Australia in conjunction with Swinburne University in Australia and the conduct of a three year research project into the success strategies, barriers and dynamics of family business succession, is undertaking a global survey to support and extend this research. This article takes a ‘first look’ at the findings that are emerging from this survey, which will continue to be conducted until June 2013.
Existing Research: A Snapshot2
Family business appeared to be an area of study that had fallen between the gaps of what sociologists and economists perceive as their individual domains. To sociologists it is a question of business and to economists it concerns family3. In order to fill this gap a specialist research literature on family business studies has emerged, in which a major theme is succession planning. However, the definition associated with ‘succession’ is one that may itself act as a significant barrier to effective succession.
Succession planning is commonly defined as ‘… making the preparations necessary to ensure harmony of the family and the continuity of the enterprise through the next generation’4. However, in studying succession, researchers struggle to reconcile the economic motivation of individuals, the cultural dimensions of family and the human need for recognition and belonging:
‘There is something more deeply rooted in transfers of power than impersonal business interests. The human tradition of passing on heritage, possessions, and name from one generation to the next leads both parents and children to seek continuity of the family business’5.
In seeking to understand the complexity of family business succession, researchers have looked to motives – ‘the complex or subjective meaning which seems to the actor himself [sic] or to the observer an adequate ground for the conduct in question’6. Researchers often assume these motives to be self-evident – business continuity across generations and family harmony. However, this assumption may be ignoring the complexity of human nature and needs. A successful family business is the result of an incumbent’s lifetime of entrepreneurship and it is therefore unrealistic to expect them to surrender the control over their business without struggle7.
At this point succession literature seems to oscillate between what it believes should be the focus of succession (continuity and harmony) and the identification of barriers often linked to the incumbent’s individualism, sometimes described as their ego. The current models of effective succession recommend a suite of protocols, roles and structures to bring about and support continuity and harmony – family charters, meetings, councils, offices, foundations and formalised positions, accountability and outside advisors. These current models tend to assume overarching motives and focus on formal structures to regulate motives and behaviour. They largely ignore human needs and the importance of purpose to achieve successful outcomes.
Baker Tilly International Global Research: First Look
Outlined below is a first look at some key aspects of the research. Importantly, this research considers the ‘before, during and after’ dimensions of succession, which allows a comparison of responses through the experience curve of developing a succession plan.
Profile of survey to date:
• 52 countries participating –7 languages
• 1000 fully completed survey responses.
• Respondents:
• 17.9% completed succession plan
• 31.8% commenced plan but 14% only just commenced
• 50.3% not commenced
• 25% = < 40 years old
• 60% = 40-60 years old
• 15% = > 60 years old
• 79% male, 21% female
• 85% have children
• Taxation and estate planning advice
• Next generation ready to step upHealth was not considered a main trigger except for those who had not commenced succession.
• On-going jobs for my employees
• Family harmony‘Selling the business for the best price’ was only an important consideration for those who had not yet commenced succession. ‘Keeping the business in the family’ was not a key consideration at any point in the succession process, whereas ‘continuity’ and ‘on-going jobs for employees’ were. There is a clear distinction and separation between continuity and family ownership.
When grouping what may be considered related responses:• The capacity of the business to provide adequate financial returns, support retirement and support the next generation
• The next generation lacking the necessary skills, not being interested or not being old enough.However, when considering the single highest ranked challenge the response was ‘ensuring the fair distribution of assets among family members’.
What were the main outcomes achieved?
Across the experience curve of the succession process (not commenced to completed) the main outcomes appeared to transition, which may reflect the challenges in succession and balancing the competing demands:
• The importance of ‘formal documentation of the succession plan’ grew to be the most important outcome.The importance of the ‘succeeding generation feeling trusted and empowered’ diminished in importance during the succession process to regain ranking as the second most important outcome upon completion.
• Giving family members a better understanding of the demands of the business, and
• Identifying the best person for the job
• 26% = spouses of family members involved in the business
• Fair inheritance for family members not involved in the business.
• Clarity around ownership and inheritance for incoming generations.
What is happening with your business where succession completed?
• 56.7% = business will be kept in family
• 26.8% = will be sold
• 16.5% = still unsure
Who will be the next CEO where the business is retained?
• 44% = Family member
• 36% = Non-family member
• 20% = still unsure
Who was your most trusted advisor?
• Accountant
• Spouse
• LawyerIt is worth noting that a third of respondents considered a range of different family members as being their preferred trusted advisor.
Do you have formal family meetings, a family charter and a family council?
• 35% = formal family meetings
• 13% = family charter
To what extent were the outcomes of the succession process supported?
• 94.4% = satisfied with the outcomes
• 76% = outcome was supported by the majority of family members
• 10.6% = outcome was actively opposed by significant stakeholders
“The orienteering approach is purpose driven and provides for the evolution of the business to deliver a compounding of wealth from generation to generation while ensuring family unity, individual growth and a sense of contribution for all.”
Orienteering: A New Way Of Thinking About Succession
A new approach to succession planning is emerging from this research. Adopting ‘orienteering’ as an analogy for the succession process allows an approach where desired outcomes and goals (the summit) may be established at the commencement, challenges can be identified and a course of progress is mapped to the summit with rest and checkpoints noted. Through this approach, new obstacles may be overcome when they arise and the path adapted as the summit will always be in clear view. The orienteering approach is purpose driven and provides for the evolution of the business to deliver a compounding of wealth from generation to generation while ensuring family unity, individual growth and a sense of contribution for all.
If you wish to participate in this survey please visit https://www.research.net/s/BTISuccessionSurvey
About the Author
Dr Richard Shrapnel PhD is a partner/executive director of Baker Tilly Pitcher Partners, Melbourne, Australia, an independent member of Baker Tilly International – the world’s 8th largest network by combined revenue of its member firms. Richard is a business strategist and one of the three chief investigators undertaking the three-year succession research project in partnership with Swinburne University.
References
1. Smyrnios, K.X., Dana, L., The MGI Family and Private Business Survey 2006; RMIT University (October 2006) Melbourne, Australia.
2. The content of this section has been drawn from the literature review undertaken by the family succession project research team at Swinburne University led by Prof. Michael Gilding.
3. Berle, A., & Means, G. (1967 [1932]). The Modern Corporation and Private Property. New York: Harcourt Brace World.
4. Lansberg, I. (1988) ‘The Succession Conspiracy’, Family Business Review 1(2): 119-43
5. Barnes, L.B., and Hershon, S.A. (1976). Transferring Power in the Family Business. Harvard Business Review, 54(4), 105-114.
6. Weber, M. (1978). Economy and Society: An Outline of Interpretive Sociology. Berkely: University of California Press.
7. Fleming, Q.J. (2000). Keeping the Family Baggage Out of Family Business: Avoiding the Seven Deadly Sins that Destroy Family Businesses. New York; Fireside.
