When the next generation opts out

Succession is not a given in family businesses. Many will be forced to bring in outside management teams or to sell out.

Family businesses have a succession problem – often, the kids just don’t want to take over.

According to a survey by family business advisory firm MGI last year, six out of 10 (58 per cent) family business owners say younger generation family members are not as interested in actively managing the business as the older generation.

It’s a long-term issue now facing many Australian family businesses, and there could be a host of reasons behind it. The family business founders might have protected their children from the business by looking after their education and ensuring they have many other opportunities outside. The younger generation might not have the skills to run the business. Or the older generation might not trust the younger ones. It could be a combination of all three.

Family Business Australia now recognises this and, for the last two years, has offered a course for next generation family members, Leadership Development for the Next Generation, which teaches them what it’s like to be a leader in the family business when they come in working on the shop floor.

The course is open for all next generation members of the family business, working inside and outside the business, and for potential leaders from the next generation. It teaches participants such skills as matching their leadership styles to that particular business, and how to understand and develop their own leadership.

It is a popular course, but what’s even more popular is the FBA’s CEO program where 10 to 15 next generation family business members meet with a high-profile family business CEO in a special session for advice and guidance. Past programs have included businessman Norman Smorgon, Danny Breckler (Betts Group), Frank Seeley (Seeley International), and Bruce Tyrrell (Tyrell’s Wines). 

There’s also a new mentoring program that FBA plans to roll out nationally next year. The program aims to further develop relationships between future family business leaders, and give them support networks for the successful transition of family business operators. It’s a good beginning for those that aren’t ready yet to join an FBA Forum Group.

Just how much of a difference the FBA leadership course and other programs make remains to be seen. But they’re unlikely to be enough to solve the succession problem.

Family business experts say businesses need to fundamentally change if the owners want them to remain in family hands. Examples include the Dennis Family Corporation, which professionalised its ownership structure with family trusts, mission statements, written rules about everything, formal governance structures including monthly family council and board meetings, both with outside directors, and a matrix governing each family member’s rights and responsibilities.

Another example is the US confectionery company Mars Corporation, makers of Mars Bars, Maltesers, M&Ms and Snickers. Mars passed from family leadership into non-family leadership while moving into the fourth generation of family ownership.

The alternative for business owners is to sell out, but the current weak business environment is making it difficult to sell some businesses. That means owners are unlikely to make much money out of a sale.
Graph for When the next generation opts out

Harry Kras from the Family Business Resource Centre says this is now becoming a big decision for more family businesses. “It becomes a decision for the family whether they want to go from a family business to a family in business,’’ Kras says. “They might take a more hands-off approach and get professional managers to run it and make a conscious decision that they don’t want family members to run it.”

Family business consultant Jon Kenfield says this ‘professionalising’ of the family business will be the big trend for the future for family businesses that want to keep the operation in the family fold. He says family businesses now have only two options. The first is to sell it and the second is to professionalise the management so that the managers run it while the family sits on the board.

“We have an increasing number of business owners in their 70s discovering it’s not going to work, that there is nobody who wants the business, including the kids. And all they can do is close the doors or sell it off to a big consolidator who is going to hoover the place up and buy it for next to nothing and lay off all the staff, “Kenfield says

“You have an economic consequence to that particular problem, which I call the fossilisation of business ownership, and I think it’s a real issue that nobody is talking about.

“The second option is where you work with both generations of the family and you have to create a significant change in the business, because you have often had fairly dominant parents and a fairly weak management because the management have been basically ‘yes’ men.

“You have to change the management to a competent professional management team so that the children can continue as owners at a board level to run the business as an income-generating activity using professional managers but not necessarily working to any great extent in the business.”

Kenfield says these businesses need to be transitioned into good working assets that are reasonably profitable, on the basis that family members will no longer be running the business.

“They will be supervising, they will be declaring the returns to make it worth keeping as an investment, but they have to upgrade the management team so they are capable of running the business efficiently,” he says.

“Effectively what you have got is the family having an investment in its own business, which it knows best, as opposed to selling the business, converting the money into shares and then hoping to God the stockmarket is good for them.

“It should be survival of the fittest so the ones that are smart enough will recognise they can’t walk out and take a whole bunch of cash; they have to put a couple of years of effort into making this work by increasing the skills of their staff rather than relying on old individual owners.”

Many family businesses, which are started up by strong entrepreneurial types, are unlikely to make the transition. As Kenfield says, that’s likely to result in one thing: “We might end up with significantly less family businesses because what we’re seeing is a big hoovering up, we’re seeing the consolidators now swooping.”

The alternative is a major transition in family businesses, when the next generation is less interested in taking over. What’s certain is that the sector will look very different in a few years’ time.