Where is your business going? #3 Family businesses

Setting the ground rules for a family business can be more complicated than other businesses because of the emotional issues involved. Family businesses are a large part of the Australian economy but they often fail to deal with the way that  personal relationships affect the business.

In 2004 27% of firms listed on the Australian Stock Exchange were family controlled. It is estimated that the wealth of family business is Australia is A$3.6 trillion.  But, raising concern for succession planning, 33% of small business owners were aged over 50. (Source: Monash University: Family Business and Succession Planning July 2004). The Monash report gives examples of different family business models.

Most small businesses are family-owned, with the obvious large family businesses such as the Smorgon, Pratt and Packer corporations.

Every family business needs to decide what comes first: the family or the business? This will influence every decision that is made about the business from deciding who to employ (and dismiss) to how the business will be financed.

Is family harmony more important than business success? Is the business a short term proposition (develop and sell) or is it to be kept for the long term? If the founders want their children to keep running the business, who will pay for the founders' retirement?

How will the family business be managed?  Who makes the decisions: one person or a family council? Will an external expert manager be employed?

Who owns the business? Is ownership restricted to bloodline descendants? Will it ever go public?

How much are family employees paid? Market value or are they expected to contribute to the capital of the family business by accepting a lower salary? Is everyone paid the same regardless of the effort they make and skills they bring?

Is every family member guaranteed a job? Is every family member expected to work in the business?

Whether it’s the Packer family or two brothers working with dad on a small manufacturing business, eventual control of the family business is a vital issue that every family business must deal with. Who will be the next CEO?

Most family businesses are weak at succession planning. Most do not make it past the first generation, with only three out of ten making it into the second generation.

As the original founders of the family business become older and less involved in the business, the question of who will replace them becomes a major concern for their mature-aged children who are involved within the business. In order for the business to succeed, this issue needs to be carefully considered. There used to be an old saying that “One generation will build an empire, the second generation will fight over it and the third generation will sell the empire and spend what’s left.”

To put the issue into perspective, it's worth reading this article about a son who went into his family's business to please his family, when he really didn't want to.

It's also worth reading about the De Bortoli family and the other families profiled in ABC TV's Dynasties.