Family Owned Businesses – Who will take over?
Australian family businesses are in the midst of the largest transfer of wealth in the nation’s history as baby boomer founders begin to retire and transition out of their businesses. Yet not all of these family businesses are being passed down to the next generation. We’re presently seeing a move away from business succession planning to wealth succession planning as a lot more business owners opt to push the sell button.
This is a relatively recent phenomenon because the last time family businesses were being offered deals at very high valuations back in 2007, many owners weren’t ready to sell. They envisioned themselves running their businesses for longer and passing the baton to a new generation.
The global financial crisis changed everything. In the immediate aftermath of the GFC the deals dried up. Buyers were offering more realistic prices and in the following years deal activity slowed right down. There was not much liquidity in the debt market, and private equity had gone to ground.
As the global economy stuttered out of the doldrums in 2012, money began surging back into debt markets and business valuations based on high earnings multiples began to rise, many owners’ interest in selling was finally piqued.
And this time a slightly older cohort of owners confronting their own mortality and the potential of another black swan moment similar to 2008 occurring became more amenable to selling. Suddenly, there was an alignment between the baby boomers and the market.
Beyond there being more liquidity in the market, many business owners have begun to realise there isn’t an obvious next generation to come into the business. If the next generation don’t have the skills or desire to go into the business, founders are becoming more inclined to put the business on the block.
Moreover, a lot of business owners confronted with a more competitive market regionally can see the value of selling. They’re not thinking so much about what to do with business succession but more about what’s right for the business and family long term.
An upshot of this newfound interest in cashing out is owners embracing the idea of professionalising their management structures by bringing in an external CEO. While this might be to prepare the business for a sale or IPO by putting some more structure and discipline around a business’s financial story, it can also be to ensure the business is run more smoothly and the family’s wealth is protected if they choose not to sell.
Business founders are separating themselves from day-to-day management and stepping into executive chairman or strategic roles. They’re examining the idea of setting up a board or advisory board while keeping a hand on the rudder.
Alternatively, if they do choose to sell and the family is confronted with a one-off wealth event, a whole different set of challenges present themselves. Suddenly the family business isn’t driven by years of relevant industry experience – it’s about managing wealth.
What’s more, the normal family dynamics that played out when the family was running a business are amplified by the wealth event. Simmering sibling rivalries based around a family member’s relative contribution to the business before the sale or their spending patterns can raise tensions.
At these times, it’s important families don’t lose touch with their values, as these are the compass guiding the family. Moreover, these values should be co-identified and co-created among family members. They should not be solely decided upon by the founder and they should form part of a continuing conversation.
Bearing all this in mind, it’s important we ensure Australia’s family businesses get their succession planning right. As strong wealth generators and massive employers across the country, they’re the often-unheralded powerhouses making up close to a third of the nation’s economy.
Source: Australian Financial Review. “Family businesses need to prepare for transfer of wealth”