Family business: The next generation

About 80 percent of all businesses in Australia are run by families, so the trends that affect them are likely to come your way. They’re facing skill shortages and corporatisation, but with the potent combination of love, power, and money in the mix.

A study by RMIT University shows that $1.4 billion will change hands in the next decade, from entrepreneurial baby boomers that shunned the boss and set up their own businesses, to their successors, whoever they may be. 

The handover probably won’t be a traditional one, says Philippa Taylor, CEO of Family Business Australia (FBA), noting an increase in 'families in business', rather than a family business. The difference is the next generation may not follow in the footsteps of their parents by continuing the business, but use the asset to move in a different direction.

"There are a great number of kids who are coming into a family business but if dad is making widgets, the son doesn’t automatically start making widgets," she explains. “He will join the family business and start another business within it, almost like an incubator.”

Surprisingly, considering their number and their value, family businesses don’t receive much recognition for their contribution to the economy. Most pressing is the need for skilled and unskilled labour. “Employment and finding good people is their highest priority,” says Taylor. “A lot of them are affected by the skills shortage, particularly unskilled workers. They are battling to find unskilled labourers, so are keen on us lobbying for the immigration laws to allow more unskilled workers to do that work. I find it extraordinary that governments don’t show more concern.”

Taylor also notes that although it is generally more difficult for family businesses to attract talent, they tend to stay longer. “When you have uni grads coming into the workforce, going to work for a family business probably isn’t as sexy as going to work for PricewaterhouseCoopers. Once a family business has attracted a good person, however, they can see they are valued and they have a lot more leeway in terms of initiative,” she explains. “To say they get treated like family is a cliché, but in so many cases it’s true.”

Harry Kras runs the Family Business Resource Centre, advising family businesses on matters ranging from setting a charter to succession planning. He sees some family businesses struggling with conveying intent to outsiders. “It’s a matter of managing expectations. If I go into a family business understanding that there will be an advantage given to family members, then I know what I’m getting myself into,” he says. “But it’s hard to know that going in for a job interview—I probably won’t ask that question.”

The onus is on the family to set boundaries between the family aspects and business aspects of the company. Each family is different, says Kras, with each company deciding how it will operate on a scale with family at one end and business at the other. “How they operate and make decisions is based on where they sit on that scale. The issue that arises is, it’s a moving goalpost.”

This is where a charter or constitution can guide behaviour and manage relationships and where a clear job description helps define each family member’s role. However, says Kras, all the written aspects need a physical manifestation for the business to work at a more professional level. He cites a case where a woman would not answer to the CEO, her brother-in-law, but would instead go above his head to the chairman, her father.

“There are all sorts of informal networks. Family businesses have to think about how that works and how to keep that from impacting on the business,” says Kras. “It’s great to have a family member reporting to non-family members to clearly separate those points of authority, but it only works once the family makes a decision about which end of the family business spectrum they’re operating on.”

Making Plans

The increasing corporatisation of family business is therefore a good thing, if done well, he believes. “Sometimes it’s internal. As the business grows, it just needs to professionalise to a greater degree—better staff, better management teams. There’ll often be an imperative to operate at a more professional level to attract and keep good people,” he explains.

“At the same time, there’ll often be a resistance that comes from change and the danger that comes from losing all the inherent advantages that family businesses have by growing at a pace the family can’t keep up with.”

This is what has happened in agribusiness with a lot of family farms responding to pressure from corporate farms by expanding, without the resources to cope. “Usually a farm passes to the eldest son or is split between family members, so that’s an imperative for growth. They need to become larger organisations to be successful. But, because of the many family members living off the land, it’s difficult to be seen as a viable commercial business,” he says.

{mospagebreak} 

Succession is another area where many family businesses need to pay more attention. Taylor cites the FBA’s recent survey, conducted by KPMG, where only 20 percent of respondents had a documented succession plan. She says the organisation hopes to change that by supporting the process in various ways.

“We work very strongly to help all family businesses look at children coming into the business as an opportunity rather than an obligation. There’s nothing worse than having someone there who doesn’t want to be there, it’s not good for the business and it’s not good for the individual,” she says. “We have training programs for incoming members of the family giving youngsters a chance to improve their skills because if the business doesn’t succeed, that child may be looking for a job in the open workforce.”

If families are unsure about the transition, she suggests importing an external adviser to look objectively at the management of the business. “We also argue strongly for the regent that if your son or daughter isn’t quite ready, have somebody manage the company until he or she has been groomed and is ready, willing and able,” she recommends.

Kras agrees, noting that timing the conversation is the hardest part. “It’s a tough topic to broach. It’s tough on the incumbent because they’re having fun and it’s tough for the successors to raise without upsetting the apple cart. Getting that conversation started at the right time is critical.

“There’s a common analogy of the relay race. The successor has to be fully up to speed, running at the same pace as the incumbent for the handover. You can’t hand over before this line, and if you do the handover after that you’ll be disqualified as well. It needs to fit into a logical sequence. The process takes time, it’s difficult if it’s rushed,” he says.

Family businesses also need to consider alternative succession methods and exit strategies, such as appointing non-family members to head the company or selling the business. The RMIT survey reports that more than half the respondents said they would sell if the price was right.

“That needs to be thought about clearly as that’ll impact on the family, employees, customers,” warns Kras. “The Government is concerned about rural areas where family businesses are often central to the community. If the sale or succession of those businesses isn’t handled well, what happens to that town? It could blow out into the rest of the economy.”

All the more reason to put family first, even in the business world.

{mospagebreak} 

Family Portrait

A hundred years ago, E.J. Paxton opened Paxton Opticians in Sydney. Fifty years later, his son evolved the business into Paxtons Photographics. An
other half-century on, it's business as usual for the third and fourth generation.

Business heir, John Paxton, spent his school holidays doing odd jobs at the Paxtons Photographics city store, before working in sales aged 18. When his father died unexpectedly, without a succession plan, Paxton was just 24. "There were two choices, either to run the business or to sell it. After some hard thinking and discussion, I made the decision to keep running it with the assistance of my mother," he recalls. "There was a lot of pressure to take over, but by default because my father died."

The transfer differed greatly from the first to second generation. Paxton's grandfather lived to 92 and retained significant control of the business until his death. In observing the first generation handover, Paxton believes the way he inherited the business was both good and bad. "I had the disadvantage of no father to guide me while I was finding my feet, so they were really tough years, but then I had the benefit of him not telling me what to do."

Paxton, his wife Marcia and their two sons, Michael and Matthew, are all employees of Paxtons Photographics, with seven camera stores in the Sydney metropolitan area. Although Paxton says there's no pressure on his sons to take the helm, he strongly advocates good succession planning, no matter what the intention.

"Every business needs a written plan, especially family businesses, in case you become unwell or die. Otherwise you end up losing the family member and the financial security the business offered. Insurance is essential, but you also need to leave things in good order, tidy and organised and accurate," he recommends.

For proper handovers, Paxton suggests owners recognise the right time to pass the reins and nominate an heir who understands the business. "And if family members want to be part of the business, they definitely need to have experience, which means apart from working in our business they need to go and work elsewhere," he says.

Paxton will have no problem finding a family member with knowledge of the business. Both sons currently hold sales positions, but have worked for other companies, while Marcia heads the sales and marketing department and works in the city store. Her firsthand knowledge of staff and customer issues assists upper management decisions. "When I work in the store I wear a uniform just like the staff and that's good for morale," she says. "A problem in a lot of businesses is that there's no real owner, they're shareholders. The customers think it's marvellous that the owner actually works in the shop."

While the family work well together, Paxton says the relationship between the family members and the rest of the staff is just as important. "It's basically a family business and we try to get the staff to be part of that family. In a large corporation you might end up being a bit of a number, whereas we have around 80 staff all treated with respect and as part of the team."

One problem they have identified is switching off outside business hours. "We have an unwritten rule that when we go for a walk or go out on the boat on the weekend we don't talk business, otherwise you never get away. For family members, that's essential," Paxton says.

Paxton’s tips

* Don't bring the business home

* Make sure you have a plan in place

* Spend money on your accounting

* As well as investing money in the business, look at other investments

* Health is more important than any business

Family Business Statistics 

– 69 percent of family businesses turn over more than $5 million a year

– 64 percent of family business CEOs are male family members; 5 percent are female family members and the rest are outsiders

– 40 percent of family businesses are small businesses with less than 20 employees

– 57 percent of respondents plan to retire in the next ten years

– 25 percent of family businesses have a formal succession plan in place

Source: KPMG/FBA 2007 Family Business Needs survey

Long-lasting Aussie Dynasties:

*Akubra (Keir family)—4th generation

*Bing Lee (Lee family)—3rd generation

*Coopers Brewery (Cooper family)—4th generation

*Darrell Lea (Lea family)—4th generation

*Dial-An-Angel (Blackman/Robertson family)—2nd generation

*Faber-Castell Australia (Faber-Castell family)—8th generation

*McGuigan Wines (McGuigan family)—4th generation

*Palace Cinemas (Zeccola family)—3rd generation

*Tobin Brothers Funerals (Tobin family)—3rd generation

*Wittner Shoes (Wittner family)—3rd generation

Related Stories