After reading the title of this article you’ve likely got the lyrics to Neil Sedaka’s “Breaking up is hard to do” playing in your head. Whilst, on the surface, it might seem a strange choice of words for an article like this, relationships are intrinsic to business. They are what businesses are formed around, what they grow from and, as we discuss in this article, they require careful handling when it comes to succession.
This is particularly true for family businesses. Without a planned succession that is rolled out in a considered and respectful manner, it’s not uncommon for a family to experience a breakdown of a previously successful business, loss of wealth and/or damaged family relationships.
Thinking about this recently led me to revisited the Family Business Wealth and Knowledge Transfer report that BDO conducted with the Australian Centre for Family Business at Bond University a few years ago. It examined the intergenerational wealth and knowledge transfer intentions of more than 300 family businesses.
Learning to let go
The ‘4L’ framework is a great guide for any family business looking to navigate the succession journey:
- Learn business
- Learn the family business
- Learn to lead the family business
- Learn to let go.
Of these four, the survey findings highlighted that learning to ‘let go’ is the major contributor to the level of preparedness for wealth and knowledge transfer in a family business. It’s important to remember that unlike the other points, learning to let go is not an event focused step, instead it is a process of transition that can take some time. In fact, only 39% of those businesses surveyed had taken steps to put in place a succession plan.
It’s about more than who will take the reigns
Succession is a multi-period process. It’s not something that can, or should, happen overnight. It takes careful planning, open discussion and continual reflection to make sure the approach is fit for the business and the family behind it.
Let’s consider some other key succession findings from the survey.
There are a number of ways that the wealth of a family business can be transferred, the important thing is defining the right approach for your business.
- 93% of respondents intend to transfer business wealth within the family
- 7% of respondents intend to transfer business wealth outside the family
- Individual, Business and Beneficiary level considerations shape planned transfers.
Family business valuation – how much do we have to transfer?
In preparing to let go and transfer the wealth of the family business, incumbents need to know the ‘size of the pie’ - how much the business is worth.
- 21% of family businesses surveyed have never been formally valued
- Financial performance, risk and value of family firms is driven by unique family factors including level of professionalisation, generational stage and family involvement. An assessment of these factors should be undertaken by a specialised valuer with the necessary experience and skills.
The value of planning cannot be underestimated when it comes to putting in place an approach for a successful transition in business leadership.
- 39% of respondents have a complete succession plan that nominates a CEO successor
- A succession plan is noticeably less sophisticated for family successors
- More than 70% of respondents have no professionalised management or governance.
The transfer of family business knowledge is critical to the success of wealth transfer. Firms with formal succession plans emphasise:
- The successor’s formal education and work outside the business – ‘learning business’
- The successor’s networking skills – ‘learning the family business’
- Codifying knowledge, training in operational and financial management, and thinking strategically in the business – ‘learning to lead the family business’.
- Successful multi-generational firms are more adept at managing the transition steps – ‘learning to let go’.
If you would like to discuss succession planning for your business, or learn more about how your family can best prepare for the next stage in your business, contact a member of BDO’s Family Business team.
 A framework developed by Bond University.