When families run their own companies, they need to think about transferring wealth and ownership as the leaders approach retirement.
For Australia's family businesses, the coming years will mark a significant period of these transitions, particularly as the large baby boomer generation reaches this stage in their lives.
Are family businesses ready for this step?
Intentions to transfer wealth
Many firms are anticipating the need to transfer their assets to the next generation within the a few years, according to BDO's Family Business Wealth and Knowledge Transfer Report.
Specifically, 40 per cent of family companies plan to make these transitions within the next five years, which gives a relatively small window for such a large number of organisations to prepare their succession strategies.
Most of these companies would like to keep the business in the family, with 93 per cent indicating they want to transfer wealth to a family member. Such transitions require incumbent leaders to be ready to pass down their wealth - but the need for preparation doesn't stop there.
The next-in-line must also be ready to accept professional responsibilities and manage assets in a manner that will support the ongoing wellbeing of the family and the business.
Shortcomings in preparation
Unfortunately, many companies aren't well-positioned to carry out these transfers.
In fact, the BDO study found that only 39 per cent have a complete plan in place, and over 70 per cent have not created formal management and governance structures. Yet they're still planning to embark on the complicated process of passing down the business.
What can families do to better position themselves for a successful transition? It starts with a comprehensive succession plan - one that nominates the next CEO and prepares everyone for the transfer.
Even when the next leader will be a family member, that individual must receive the proper information and training to lead the business effectively. This includes:
- Learning the family network and skills for managing it
- Codifying knowledge, including tacit information
- Developing operational and financial management skills
- Acquiring a strong understanding of business, sometimes through formal education and by working outside of the company.
On their end, incumbent leaders must know how much their business is worth so they can plan the transition effectively. This is best achieved through a formal valuation process, though few businesses have completed such steps. Now is the time to change that.
Preparing for the future
Throughout Australia, the time for many organisations to think about wealth and knowledge transfer is upon us, especially as the baby boomer generation speeds toward retirement. Otherwise, family businesses may find themselves unprepared for their future.
If you would like to talk to someone regarding how to successfully start the process of wealth and knowledge transfer, contact your local BDO family business adviser.