A key part of what forms businesses are relationships, and relationships are what successful businesses grow from. This is especially true for family businesses, where the relationship between family members—whether they’re working in the business or not—can likely dictate success or failure, and vice versa.
Family businesses face unique challenges, most of them requiring careful planning and consideration to overcome. Below, our consultants at BDO Wellington have laid out their expert advice on how to approach key challenges for family businesses.
Succession planning can be a huge challenge for family businesses, but the best successions have a well laid plan and start discussions as soon as possible. Ideally the process is carried out over a relatively long period of time. There may be an interested family member who wants to succeed the business, so it’s best to give them insight into how the process will work as early as possible as. That process could also involve the successor working outside the family business to acquire key skill sets or learnings to bring back in time
Honest and open communication is key during any succession plan; as it is key to 90% of life. As advisers we have encountered scenarios where parents are hesitant to give out information to the children for many reasons. However, parents need to work with the next generation so the successor can assist in the planning, and in particular understand the financials so they have a clear understanding of what may be required financially to assist with succeeding the business from earlier generations.
Succession can look different from one business to another. The successor may have an expectation to get some of the business for free but does that match the earlier generations views or needs. How the business, or shares in the business, is transferred is part of a wider succession plan, and must be considered in the wider needs of the family.
But how is succession done when the next generation doesn’t have the money to buy the business? There could be an outright sale, funded by some sort of combination of bank debt, loans from the previous owners, new equity, then the successor uses the income of the business to pay down any loans. The previous generation may continue to work in the business and receive an income, or partially sell down their ownership over time, so the successor can use the income off their partial ownership to purchase further interests from the earlier generation. That way, parents are still gaining income out of the business while giving incoming family members a chance to succeed the business.
A family business does not operate under a typical employer/employee scenario, so those family/employee relationships need to be navigated with the utmost care. A family’s entire livelihood can be driven by one enterprise, so everyone needs to have clearly defined roles and responsibilities. While working, everything must be treated with an employment relationship in mind—making sure basic things like human courtesy stay intact, while taking away family-related issues or concerns. Put the business hat on while at work, and put the family hat on while at home.
Communication, again, plays a huge role here. There need to be clear, pre-established channels of communication about the business. Wider family meetings, for example, are a great way to let everyone know what’s going on, especially if some siblings work in the business, and some do not. Some larger families extent this further with a family charter/constitution that clearly documents the interaction of family and business.
Balancing the desire for growth, versus the founders/older generation needing an income stream
It's not uncommon for a very talented and driven child who works in the business to want to grow said business. However, doing so might be in conflict with the existing shareholders (parents) who may desire the business to pay out super profits to parents/shareholders as dividends.
In these situations, having independent people on the Board to assist the family with decision-making streamlines the process. The Board needs independent people such as trusted business advisers to balance desires to grow with other income streams.
During a succession plan, the older generation must learn to slowly let go, and leave their business for the next generation to take care of. The ability tro do this will be determined by the succession model the family is following and those very important interpersonal relationships. This can be very difficult, for a wide range of reasons. Some parents may start to interfere when they shouldn’t, or may hand over the business in title, but not in practice. A clear plan covering the transition is essential to assist the family in steering the ship during these times.
Developing a succession plan is a lot of work, but it is a vital document to have. It needs to be carefully laid out, and everyone in the family must agree to follow it from the start. Often, we work with the entire family, even reaching out wider than the immediate family may be required, to ascertain what the non-working family members want, and to have well-rounded data/views to help draft the plan.
Contact our expert consultants for further advice
Family businesses may present their own unique challenges, but they are also extremely rewarding. BDO has helped a number of family business overcome these obstacles, and ultimately succeed through expert business advice and consultation. If you have any further questions, please don’t hesitate to contact us or to speak to your local BDO team today.