A wider choice than succession
Philippa Taylor, chief executive officer of Family Business Australia (FBA), prefers the term ‘transition’ to ‘succession’, because this covers not just the transfer of businesses to family members but presents a wider range of choices, including external management.
Research released by the FBA last year, in conjunction with KPMG and Bond University, found that only about half of family members surveyed were interested in taking over the reins from the previous generation. Yet, maintaining control of the family business was also seen as the highest priority for more than 60 per cent of respondents. Taylor points to a “massive tsunami of transition” in train, with 60 per cent of family businesses likely to be looking at a transition of power over the remainder of this decade.
“But only 23 per cent have a plan,” Taylor says. “They might be thinking about it, but they are not doing anything and don’t have a plan. The incumbent generation don’t want to stop working. It’s all about the concept of longevity and staying in control.”
Bringing in external managers
The decision on whether a family should bring in external managers to take over the day-to-day running of the business is nearly always difficult, but there can be enormous benefits in injecting new talent who can leverage their experience and introduce fresh ideas to take the business forward.
“It can work extremely well and it can actually help infuse a different level of thinking and a different type of culture, for example, innovation,” Smyrnios says. “That’s a real key element with any intergenerational transfer that you want to ensure there is innovation, and sometimes external leadership can actually foster that and enable that to happen. That really needs to handled appropriately.”
The FBA’s Taylor says that rather than being a birthright, next-generation family members should always be benchmarked against external managers and also prove their competency to take over the running of the operation. “It shouldn’t be about having the same surname,” she says. “Family members coming into the business should have at least five years of experience working outside of the business.”
Dr Jill Thomas, a senior lecturer at the Business School of the University of Adelaide and an Honorary Research Fellow in the Australian Centre for Family Business at Bond University, says that handing a family business to external managers really depends on the situation, because any family business will really want the best person for the job.
“It depends on the next generation’s age, experience and competency as to whether they’re ready to take over the most senior management role. The family may consider a non-family CEO as an interim appointment. On the other hand, if they want different competencies they might consider a non-family CEO on a permanent basis. The important part of doing that recruitment is that potential applicants will want to understand if they’re a stop-gap while the children are growing into the role, or if it’s a genuine strategic appointment for a non-family manager. Outsiders also definitely need to have an understanding of the history and ethos of the organisation.”
Thomas says one of the challenges of a family business is emotional attachment, and the need to ensure the business is getting objective advice and managing that overlap are key leadership challenges. “Bringing in an external party removes the emotional attachment as they can be more clinical in their approach to the family business. But a family CEO can still be an excellent professional person if they’ve got other people around making sure they’re taking advice from a range of sources. It’s about how they structure the business and what they have in terms of a management team and board and what other advice they get.”
[breakoutbox][breakoutbox_title]Case study 2: Bulla Dairy Foods[/breakoutbox_title][breakoutbox_excerpt]Six generations and still counting[/breakoutbox_excerpt][breakoutbox_content]Victoria’s Bulla Dairy Foods business is living proof that with a lot of planning and the right management mix, keeping a business in the family can still work, even after a century.
Founded by Thomas Sloan as a creamery in 1910 in the inner Melbourne suburb of Moonee Ponds, Bulla Dairy Foods now ranks as Australia’s largest family-owned dairy and manufacturing company, with annual gross sales of about $400 million and around 550 employees.
Today Bulla is headed by Thomas Sloan’s grandson, Russell, 63, the oldest member of the extended
family working in the business. Russell’s brother Ian serves as chairman of the board, which is made up of representatives from the controlling families.
Russell Sloan has worked in the business for 40 years, been managing director for the past 12, and says that at some point soon he will be looking to retire.
“We’ve been fortunate that we’ve been successful and the company has been able to survive for more than 100 years. The family has stayed involved and we have been able to go the distance by continuing to invest in the business,” says Sloan.
A family constitution was drawn up about 10 years ago, detailing the expectations on family members working in the business, including members of the board. “We’ve been able to work together as a team,” Sloan says. He has two sons working in the business, but notes that his successor will not necessarily come from within his immediate family or the wider family ranks.
“I’m nearing the end of my use-by date and we will have to work through a plan as to myself in the not-too-distant future,” he says.
“We’ll be casting our net out beyond the company to see who’s available. Who is best for the job may well be a family member, but it may not be.”
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The business of succession
Business succession invariably will have some form of financial implication, especially in more established operations that have complex shareholding structures, including family trust arrangements involving multiple beneficiaries.
In cases where a business moves from one generation to the next, but where members of the next generation decide that the best way forward is to split the business into two or more parts, a whole raft of legal and financial issues will come into play. As well as potentially having to unwind financial structures, such a scenario would need to involve asset valuations and would have serious tax implications. For example, selling a business asset from the core business to a family member would certainly have capital gains and possibly other tax implications. The most famous recent example of a major family business break-up occurred when the $1.5 billion Smorgon empire transitioned from the second to the third generation in the 1990s, triggering a full deconstruction that involved a complex break-up of assets across multiple families and even a public float.
Craig Holland, a partner at Deloitte and the author of The Art of Business Succession, points out that as a family business grows it needs to develop improved management processes and to hire experienced professionals. “Skilled professional managers help the owner with strategic direction and growth, finance, accounting, tax, human resources, information technology, operations, sales and research and development,” he says. But Holland says that in cases where there is an external person working in the business and they are passed over in favour of a family member, there is sometimes animosity as they feel they’ve been overlooked.
“Some of our clients feel that their son or daughter doesn’t possess the right skills at the moment, so they’ve sent them off to work elsewhere to develop those skills and capabilities so they are able to come back into the family business down the track. The business of succession can be a very tricky issue.”
