Thanks but no thanks - NextGen is branching out

Longevity is of interest to every family business but according to Sue Prestney, that might soon be a thing of the past. Prestney, who is the Australian chairman of MGI and a partner in the Melbourne office, says there are worrying signs ahead for family business.

MGI does a comprehensive survey of family businesses every three years. The results are analysed extensively by business and government. Its last survey, published this year, revealed that family businesses have been hit hard by the GFC and perhaps structural changes as well. They are ‘surviving but not thriving’ with 55 per cent of family business owners concerned about particular problems in their industries, up from 15 per cent in 2003 and a decrease in the number of family business employees, from 31 to 23 when expressed as a mean. Also, the survey revealed they have been left with profound succession issues with almost 60 per cent of family business owners saying their children are not interested in taking over the business.

Prestney says people from the next generation seem more interested in branching out on their own. Maybe it’s a generational thing. Maybe it’s because family businesses tend to congregate in conservative mature sectors like manufacturing and retail. Their children might be more inclined to set up businesses like web development companies or marketing agencies, perhaps starting up something that may well become a family business in a few years’ time.

“I have clients who have sold their long held family businesses creating a pool of money – enabling children and grandchildren,” Prestney says. “That’s great that they have been able to realise the value of their business."

“That just might mean that family businesses in the future may not have as long a life cycle. We might be seeing the churning of wealth coming out of the traditional businesses and into new businesses started by the next generation.”

It could also mean family businesses might be less inclined to take risks and innovate than in the past.

“Obviously there are a lot of family businesses innovating but you have to be prepared to take a risk and have a mentality of innovation and often it takes that next generation coming through to bring that renewed vigour and new perspective.

“We are seeing that less. The survey shows a decline in the participation of the next generation over the last 10 years. It could be a generation Y thing. It could be they are less attracted to the traditional business models. Family business as a beast will always be vibrant and will always be there but it just might be that we see less longevity and we see more of the next generation going and doing their own thing rather than joining into the traditional business, which might be at a mature stage in its life cycle.”

She says the next survey in 2016 will have to look at why the Next Gen is not entering family business, and why family business owners are staying longer at the helm.

“They are probably healthier than 65 years olds were two generations ago so they are quite capable of still working. So it’s more likely they’re deferring retirement, not because they don’t have something else, but because they can work and perhaps want the money.”

In any case, it will shed more light on succession. This is critical because it’s making many family businesses more conservative, less inclined to take risks and innovate.

“A large percentage of them are relying on the continuing ownership of the business or the sale of the business to fund retirement because savings have taken a hit in the last few years,” she says.

“They are not intent on growth. They are looking to fund retirement. They have an intention to keep the business small, so it looks like what has always been entrenched conservatism is actually now more entrenched.”

She says the next survey will also look at why daughters aren’t interested in joining the family business and are striding out on their own as entrepreneurs. “What we need to have a bit clearer is whether that’s something that’s been imposed from the current generation saying ‘we don’t think it’s appropriate for the girls to be involved’ or whether it’s something coming up from the girls saying ‘we’re not interested, we don’t want to be bound 24 hours a day to the business’. We need to understand that a bit more.”

The survey’s findings give MGI lots of material to lobby the government over. MGI has talked to state and federal governments about what family business needs. Prestney has also had discussions with the small business minister Bruce Billson.

She says one of the key issues she asked Billson to address is the tax treatment of shares. When a family business gives some equity to a star performer in order to keep them, the person receiving the shares has to pay tax on their value straight away, before they have even made any money.

“All you have to do is give an extension of time to pay the tax until such time as you sell the shares. It’s deferral until you get some money,” Prestney says.

She says government should also provide funding to help family businesses get advice and create strategy plans. “We can’t have so much of our economy without a direction.”