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Keeping wealth in the family

THE accumulated wealth of Australia’s family businesses far exceeds the combined value of stock market-listed companies, a new survey has found.

The overall wealth of Australia’s 362,000 family firms is estimated to be $3.6 trillion.

By comparison, the value of companies listed on the Australian Stock Exchange is about $680 billion.

The survey of Australian family and private businesses was undertaken by Melbourne’s RMIT University, with support from accounting firm Boyd Partners.

It found that 67 per cent of all Australian firms are family businesses.

Among the 800 respondents to the survey, 55 per cent were first generation owners, 25 per cent were second generation owners and 16 per cent third to fifth generation.

The generational ownership pattern was reflected in the longevity of family firms.

About 60 per cent had been established for up to 30 years, 19 per cent had been established for 31 to 50 years, and almost 20 per cent had been established for 50 years or more.

The report found substantial differences in the value and funding arrangements of family firms, depending on their longevity.

The average value of family firms increased with age, from $7.7 million for first generation businesses to $8.6 million for the second generation, and $10.9 million for the third generation.

Similarly, gross sales tended to increase with the age of the firm.

On the funding front, first and second generation firms utilise family loans to a much greater extent than third to fifth generation firms, which are more likely to use bank loans and bank overdrafts.

The report suggested that the progressive accumulation of retained profits makes family firms attractive to banks and enables them to access loans and other asset-based finance.

External equity finance was the least favoured source of capital.

Only 28 per cent of family proprietors were prepared to consider selling equity in their business to secure funding for growth.

Among proprietors of non-family businesses, a significantly higher proportion (40 per cent) was prepared to sell equity.

The flipside is that family proprietors (47 per cent) are more prepared to utilise personal assets to secure business funding than their non-family counterparts (40 per cent).

Among the surveyed firms, the average rate of growth in sales over the previous three years was 10 per cent.

The majority of firms (57 per cent) achieved growth between 11 per cent and 50 per cent.

However, a substantial minority (19 per cent) recorded zero or negative growth and a further 21 per cent recorded growth between 1 per cent and 10 per cent.

Collectively these two groups add up to 40 per cent – the same proportion that expressed dissatisfaction with their rate of growth.

An even higher percentage (69 per cent) reported having concerns for the future. The main reasons cited were the financial performance of their business, the state of their industry, and selection of an appropriate successor.

A substantial proportion of second and third generation family firms also expressed concern about family turmoil and lack of family interest.

This was not an issue for first generation firms.

The large number of family firms with concerns for the future could help to explain why three quarters of owners said they would seriously consider selling their business if approached.

When family business owners were asked to nominate factors that would influence their decision to sell, two responses stood out – retaining independence and maintaining lifestyle.

Retaining family ownership was also important, especially for third to fifth generation businesses.

On the subject of retirement savings, the report found a fairly even split.

A total of 52 per cent of respondents said their retirement plan was dependent on sale of the business or business assets, while 47 per cent said superannuation savings were adequate.

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