We’re living in an era of trail-blazing start-up innovations and digital disruption, of baby boomers entering retirement and Gen Y entering their inheritance. But growing older doesn’t mean a business must pass quietly into the night.
Kiwis want to keep the business in the family
There are more than 500,000 businesses operating in New Zealand (Statistics NZ, 2015), and we’re doing well. According to the PwC NZ Family Business Survey 2014, 74% of family businesses reported growth in the last year.
More than 1 in 3 family businesses (38%) plan to pass on management of the business to the next generation (PwC, 2014). Another third (36%) plan to pass on ownership, but not management, to the next generation. The remaining 25% plan to sell or float their business in the future.
But keeping it in the family requires a comprehensive and adaptable business succession plan. How can we make sure we are ready to pass on our business leadership or ownership – before the time comes to do it?
The answer lies in planning and increasing family communication, suggests the FBA survey. We look at their latest insights, and the wisdom of New Zealand’s oldest surviving family businesses.
Are we prepared?
Unfortunately, it appears that we aren’t yet ready to achieve our expectations of family succession.
PwC’s NZ Family Business Survey 2014 found that only 17% have a documented succession plan in place.
Unfortunately, as accounting research firm BDO New Zealand points out, the biggest challenge facing our family businesses is the brain drain. Many young people now prefer to cross the ditch in search of a job that pays better than the family business, in order to pay off expensive student loans.
We looked at what our goals should be in 2016 if we are to pass on the family business in the next 5 years as many hope to.
Goal 1: Get your plans up-to-date
What should be in your plan
If you don’t already have a succession plan in place, you can download a template from the Human Resources Institute of New Zealand. CANSTAR suggests you then take your draft plan to an accredited financial advisor, including the following basics in your draft:
- The names of the current business owners and each person’s role in the company
- Business name and reserve or registration details
- Any assets, property, trademarks, or patents belonging to the business
- The date the plan was prepared (written) and the date of the most recent update
- The current market value of the business
- Conditions that will apply if the business is sold, such as minimum sale price, length of time it should be left on market, who will receive the proceeds of sale, and taxes payable on the sale
- Retirement payments required to be paid by the business following succession
- Buyout details if the leaders are in a partnership that will dissolve upon succession
- Supporting documentation, any related wills, and succession contracts or resumes of potential succession candidates
Update your plan frequently
Notice that we didn’t say “regularly”, because regularly might mean once every ten years. Instead, we recommend frequently looking at your succession plan, perhaps once a year when you do your tax return.
After all, a lot can change in a year – family members can move away, change roles within the business, leave the business, or encounter unexpected health difficulties.
Check on your business banking
Having a good business account can make a big difference to the stress involved in running a family business and obtaining business finance if you need it. Compare what’s available in New Zealand using our website, and choose the institution that can best handle the demands of your family business.
Compare business banking products with CANSTAR: https://www.canstar.co.nz/business-banking/
Goal 2: Create formal structures to prevent and defuse family conflict
Running a family business can be pretty stressful!
For this reason, CEO of Family Business Australia (FBA) Robin Buckham recommends putting formal structures in place. Buckham says conversations about succession planning should ideally happen as part of the everyday running of the business instead of during family activities.
“It’s very much about having the structures in place to allow that conversation to happen, and to happen in a less emotional way.”
When it comes to official processes, 83% of family businesses have at least one procedure in place to deal with conflict (PwC, 2014).
Non-family members in non-executive leadership positions can also be a useful business structure. About 66% of family businesses have non-family members on their board of directors (PwC, 2014).
Other useful formal structures for a family business include a Family Council, as well as a Family Constitution or Charter.
Goal 3: Share the reins as soon as you can
An Australian study by KPMG and FBA in 2015 found that the long-term success of a family business depends on when and how leadership is passed on. Businesses with an experienced CEO aged 51-60 outperformed all other family businesses.
But don’t hold onto the reins too long. Businesses with CEOs aged 61-70 or older declined in success steadily as their CEO grew older. The worst-performing businesses had CEOs aged 70 years or older.
This is not an insult to the wisdom of our elders in any way. As we age, many things change including our risk profile, personal goals, and ability to learn new things, all of which affect how a business can perform.
To adapt and survive, a family business must walk the tightrope between innovation and experience. 49% of Kiwi family businesses say they reinvent themselves every new generation in order to survive (PwC, 2014).
Beginning to train your successor as early as possible is the best way to ensure your company’s survival. While helping your successor to understand your wealth of experience, you can also open the floor for them to share their understanding of new technology and innovation.
Many businesses are getting there. 30% family businesses have a Next Generation family member working in a senior executive position in the company (PwC, 2014). Another 26% have family members working as non-executives in the company who could be being trained for more.
Goal 4: Make sustainability your goal
According to the PwC 2014 report, the number one priority for family businesses in New Zealand is ensuring the company’s long-term future. This is just as it should be. 74% say they take a long-term approach to decision-making.
Third generation family manager David Babich of Babich Wines, one of New Zealand’s oldest family-owned wineries, credits their business success with being conservative. Their company survived when other family-owned businesses didn’t, through two world wars, the Great Depression, and hard times induced by post-war regulations.
“We have never … taken a lot of big chances, and that has got us through the booms and busts,” said Babich.
He says maintaining the values of their founding grandfather was also part of their long-term success.
“Respect, integrity and the needs of customers were important to him.
“Back in 1920, Grandad took an order for six bottles of wine for a wedding and delivered it himself by horse. It was an 80km round trip and he ended up staying for the celebrations.
“That is the sort of commitment and dedication we still try to apply today.”