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Succession an issue for family businesses

FAMILY businesses account for a large proportion of the Australian economy, with an estimated 80 per cent of large and small businesses being family owned and operated. But, while a comprehensive exit strategy is a necessity, surveys show that only a small proportion of these businesses actually have a succession plan. According to the recent Survey of Family Business Needs 2005, conducted by accountants KPMG and Deakin University, 57 per cent of family business owners indicated they would retire within the next 10 years, but 68 per cent of them had not chosen a successor. As only 1.5 per cent of the 492 respondents indicated their intention to shut up shop when they retired, it is of concern that succession planning was not high on their agenda. In many cases, small business owners find the issue of succession planning just too difficult. In the past, it was more traditional for sons and sometimes daughters to follow their fathers into the family business. Today, it is less common for children to want to follow in their parents’ small business footsteps, because they have chosen to be independent; to pursue professions or follow other careers. Succession, or exit planning, should start very early by taking a long term approach to exiting the business. If this means selling the business, you should prepare for the future sale by ensuring your business is professionally run, and does not rely on one or only a few key people. During the life of the business, identify potential buyers from colleagues, staff, family, competitors, suppliers and customers. When you are ready to sell, these people should already know the business. Ideally, if you have several people in this position, you will be better placed to achieve a good sale. If the business is owned by more than one person, agreements should be put in place setting out the process and valuation method in the event that one party wants to sell, or if a party dies or becomes incapacitated. It is also important to consider insurance policies to fund the buy-out by one party in case of the death or incapacity of another. The timing of selling is also very important. Consider the implications of any capital gains tax, how to best structure the sale and what best to do with the proceeds – superannuation contributions or rollover. It is important to seek professional and legal advice on issues concerning taxation and selling alternatives. Whichever choice you make, be clear about expectations. Define what you want to happen, now and in the future. If the succession plan is for family members to take over the business, you need to consider your plans for the future, as well as those of your children. Relationship issues will need to be considered if you are planning for your children to take over the business. • They may not be interested in taking over, or there may be conflict because they all want to be the boss. • You may wish to stay involved in the business, but gradually ease away from the day to day running of it, in preparation for a total hand-over. • They may have strong ideas about how to grow the business by incorporating new methods or technology. There are issues of equity, training and experience which need to be taken into account. Will the sons or daughters taking over the business need to undertake managerial or other skills training before the handover? Introducing the intended successor to the company is also often not given the necessary time and care. Inducting a son or daughter into a full time role in the business should include exposure to all elements of the business, working at various tasks including a trial at the helm while the business owner is on leave or away on business. It is important to separate family and company issues, and commu-nicate in a way which maintains professionalism in the workplace and keeps family emotions in check. Family members working alongside other employees should be respectful of their expertise and learn all they can from those with the business experience. Succession planning is not an easy task and can take several months or even years to iron out the finer details that suit everyone involved. Basic agreement needs to be reached on whether the future of the business means selling, handing down to family members, growing or changing direction. There is also the personal element of relinquishing control to be considered in succession planning. The family business owner should prepare for the ultimate and inevitable step of relinquishing control. This is often a sensitive issue and family ties and feelings may be at stake. In the business of relinquishing control, the trick is knowing when to say ‘when’.The Small Business Development Corporation, in conjunction with Family Business Australia, will be conducting a family business forum on May 9 2006 at the Fremantle Maritime Museum. The SBDC has a number of publications setting out guidelines for strategic succession planning for small business.

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