A version of this article was published in the Otago Daily Times on 15 August 2020.
“Covid” and “Change” go hand-in-hand. Family businesses (meaning husband-and-wife teams plus at least one sibling and/or more than one generation) can often withstand change. Due to their emotional ties to their business, they can have a stronger sense of commitment and do whatever it takes to survive tough economic times. How has your family business survived the Covid crisis? Is it time for you to plan for change?
A key finding of a 2016 study by PwC of New Zealand family businesses showed that while they are more closely held than their international counterparts, they are still not statistically likely to endure much beyond a second generation of ownership. Only 8 per cent of survey respondents reached the fourth generation or further. That could be because we are a young country however it could also be due to a lack of sustainable succession planning, done progressively over time, all the while enabling the business to grow. In 2016, 48% of those surveyed said they intended to hand their business over by 2021. It would be interesting to see if they acted on those intentions?
Succession planning can involve tricky conversations so it is often ignored or dealt with only when parents are very close to retirement. When family businesses do consider succession planning, they usually only talk to their accountant or solicitor – often the person who has acted for the parents for many years. The accountant or solicitor will no doubt be able to assist with the transactional needs, but family businesses often come with complex layers of personalities and history which need to be unlocked to ensure a plan is created that works for everyone involved. This can be a protracted process and involve conflicts of interest, neither of which the parents’ lawyer or accountant may want to deal with.
Effective succession planning also needs to cover a broad spectrum of time – not just when the change of ownership is legally registered or financial statements are due to be filed. Input from other experts is important, such as financial planners or strategy consultants, who can offer a longer term view of what is viable for individual family members and the sustainability of the business.Then there are the skeletons in the closet that need to be dealt with or else they will come back to haunt you. Help from an independent facilitator to work through the planning process will enable a safe space for all family members to be heard. "Every family has a secret and the secret is that it’s not like other families”. For example, are there daughters in your family who have missed out, or fear missing out, on what they believe they are entitled to? 91% of the 2016 survey respondents intended to give male and female offspring an equal footing when making choices about succession. Again, it would be interesting to see if they acted on those intentions?
Family businesses like to see themselves as informal and relaxed, so their response to the suggestion that they create a succession plan is: "Who needs it? We know each other well enough. We can sit down and work things out when they come up." Sometimes informality works fine. But, some families are finding that as they grow and their business becomes more complicated or wealthy, their business can be held hostage to painful disagreements which expose old wounds and misunderstandings. If open dialogue between you and your loved ones can be hand from the start, with a transparent process and plan, for example, around who has what roles and who has what authority, such disagreements can be avoided.
If family businesses don’t work out, they lose money and family relationships. Farms are common examples and they are further complicated because they involve an emotional connection to land, not just the monetary value of it. It can be useful to have independent person who can ask the awkward questions and has the neutrality and knowledge to think differently about solutions.
Typically there are intergenerational issues such as “founder capture”. Parents spend most of their lives building the farm business and are often worried about what will they do if they don’t work so they hang around. Businesses get stuck because founders won’t hand the reins over. The next generation involved in the farm typically can’t forward plan, be innovative or take risks. Also, how and when are family members going to get money out of the business?
But on the other hand, the next generation can be part of the problem: are they ready to take over? Do they want to be involved? Do all of them want to be involved?
Perhaps the biggest stumbling block is what people think is fair. Fairness needs to be negotiated. Kids of ALL ages ask: is it fair? They compare themselves to their siblings. Fairness is not an independent thing that is based on logic. Fairness is relative to each person that you literally have to look at how each person feels about things. And Kiwis are not always good about talking about our feelings.
Before you head to your lawyers or accountant, here are some tips:
The earlier you start succession planning, with a diverse range of advice, the better equipped your family business will be to withstand uncertainty and change in the future. Even a second wave of Covid.