13 September 2019

Dynasty or dead end? How to ensure your family business won’t fall over if you do

Family businesses make a valuable contribution to our national economy. About 70% of Australian businesses are family owned, employing roughly half of the workforce and generating wealth of approximately $4.3 trillion.

family business succession 12Some of these companies are dynasties: more than 30% of family-owned businesses are passed on to a second generation, 12 per cent to a third generation and 3% to a fourth generation. Of course, not all family members want to take over key roles in the company so it’s important to get this clear well before any transition might occur.

According to a 2018 survey of Family Business Australia members along with KPMG family-owned company clients, around 60% of the respondents said they intended to pass leadership of their enterprise on to another family member – but only 17% had formulated a strategy for how the family would be involved going forward. Spot the gap!

More than half (54%) had no retirement plan for the current chief executive or managing director, and 43% had no preparation in place for the new incumbent. Imagine being suddenly landed with responsibility for fulfilling your predecessor’s intentions without having any detail about what these were or how they were to be accomplished.

It’s all too common for the unexpected death of the head of the business to leave the remaining family members without so much as access to the bank accounts, which is what happened to Eliza Brown when her winemaker father Peter Brown died in a motorcycle accident.

Plan to succeed

That’s exactly what can occur without a succession plan so it’s critical for families to factor this into their regular discussions so that everyone is on the same page and in agreement.

This kind of governance helps prevent conflict between management and family members, according to Family Business Australia adviser Peter Ivett, who says he has observed an increasing trend for advisory bodies with external experts to be appointed to oversee transfers of authority.

“It’s less about passing on a business, expecting it to be carried on in its current form, and more about passing on a basis for the next generation to build on,” he says.

Have back-up in place

Roz Shaw (2)Insurance has a role to play in putting the success into succession planning because the need for passing on control of critical aspects of the business may be unexpected: due to an accident or sudden illness, for example.

"Having key person insurance for the people your business relies on to keep turning over protects your enterprise by maintaining cash flow, funding an executive search, realigning shareholdings or reducing debt," says Gallagher family business specialist Roz Shaw.

"If the leadership of the business is a partnership arrangement, business succession insurance ensures there are funds available to buy out your partner’s equity or shareholding if the enterprise is suddenly faced with restructuring its management.

"Similarly, having personal income protection insurance means your own family won’t suffer if you are unable to continue in your normal role or forced to take premature retirement," she advises.

Your business insurance broker can help you with the policies and terms you need to safeguard your business so that it can become a dynasty, not a dead end. Just call 1800 240 432 to chat with a Gallagher broker about your particular needs.

Contact your local insurance broker

This article is reproduced courtesy of Family Business Australia, where it was originally published.