Succession planning for family businesses can be complex. We asked BDO Partner Susan Rix AM how to get it right when choosing a successor and what are the risks involved.
1. What can incumbent family business owners do to prepare the next generation for wealth/knowledge transfer?
Preparing to let go is more than putting a succession plan in place and identifying a successor. For the transfer to be successful, and to enhance the probability of success, successors need to be developed and nurtured over time.
In establishing a plan for knowledge transfer within family firms, there are four ‘L’s that are important to keep in mind:
- 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’; and
- Successful multi-generational firms are more adept at managing the steps for transition – ‘learning to let go’.
Successful transitions also require soft skills such as communication, knowledge transfer and learning, in addition to building industry, network, and entrepreneurial skills. It’s crucial that the incumbent family member has imbedded a culture and desire for multi-generational stewardship within the firm.
Given the potentially far-reaching economic impact of the looming family business wealth transfer, it is important to ask ‘are we ready?’ and, if the answer is no, ‘what should we do to get ready?’.
There needs to be significant planning with the next generation. Control and ownership can be two different things, so directors or owners are likely to determine who is best placed to be the successor while keeping ownership within the family, who will then have various options to still be involved in the ownership of the business and ensure the wishes of the family are carried out.
2. What are the potential economic impacts of family business wealth transfer?
A successful transfer of the family business allows the next generation to have the confidence to lead and grow the business. The previous generation can then retire knowing that a transition has taken place.
3. What are the risks associated with directors and owners of family businesses passing on their business to second or third generations? Are there tax implications?
There are significant tax implications and advice needs to be taken as to how shares or assets are transferred to the next generation. There are significant stamp duty and capital gains tax implications.
4. What steps can family business owners take to find an appropriate successor outside of the family?
Through our own research and what we’ve observed, a majority of business owners plan to transfer wealth outside the family.
At BDO, we have a methodology that takes the family through a process to determine who the successor should be. Following discussions and evaluation, we then determine if there is anyone with the right skillset within the family, or if there needs to be someone outside the family who is best placed to be the successor.
5. What characterises a sophisticated succession plan for family businesses?
A succession plan doesn’t need to be highly sophisticated. Instead the family needs to consider all its options in relation to management and ownership. A plan needs to be documented and inclusive, to ensure that there are no surprises and most family members, if not all members, are aware of what will happen.
6. A BDO report found 21% of family businesses have never been formally valued. Why is formal valuation important and how does a formal valuation aid a successor?
If families are looking to ensure that assets are spread evenly across a family group, then having valuations is very important as it gives an indication of what the respective values might be when assets are bequeathed to various family members.
7. How can Australians learn from overseas experience of managing this kind of wealth transfer?
There are a number of Australian and overseas institutions and organisations who research the topic of family business. Their information can add value to families who are looking for reference material. A starting point is https://www.familybusiness.org.au/ and https://www.ffi.org/.