Business Too much too Soon? The Modern Family Business

Does "too much too soon: exist? Or is the next generation of family business ready for anything we throw their way?

Let's start by looking at a case study:

In a small suburban garage, a mother and a father began building their business. Mum tested new recipes while Dad made the product and drove around distributing it. Even when the business moved to a factory, Dad knew everything about the process. He knew all the staff, he knew how to fix the machines and he knew how to grow the distribution. When their only son finished high school, Dad gave him an office and the title Managing Director.

Welcome to the business, he said and left the son to his exciting new role.

Bewildered by his new responsibilities, the son just sat in his office. He had no experience and no knowledge of the business; he had never worked on a factory floor. The staff didn’t respect him and the general manager simply used him as a voice to get decisions across the line.

Dad became more and more frustrated and the son was increasingly unhappy. After several unproductive years, the son left the business to try something new.

Although, like many family businesses, the father in this scenario had the best intentions, his failure to think through and discuss the steps involved in bringing his son into the business was ultimately damaging to the business.

So what could this family have done differently?
  • Qualifications. Mum and Dad could have ensured their son received further education, a degree or a trade.
  • Experience. The family could have encouraged the son to travel and gain experience in other businesses both in Australia and overseas.
  • Exposure. The son could have been involved in the business earlier to expose him to different areas of the business.

In our scenario, had the son furthered his education and gained experience before joining the business, the outcome may have been very different.

As it happened, the son was interested in marketing, a skill set that could definitely have been used in the business.

Once he became suitably qualified and experienced in marketing, the son could have applied for a marketing position in the family business.

Formalising entry Informality abounds in family businesses.

Sometimes it’s that very informality that causes dissension and upheaval in the family. To ensure your family business prospers, it’s vitally important you take time to discuss and document entry rules before a family member joins the business. Family business entry rules may be detailed or presented in a somewhat abbreviated format.

The important thing is that entry rules are in place and that these rules have been documented. Written entry rules go a long way towards eliminating some of the fuel that creates the fire of conflict in family businesses.

Successful succession
  • Ensure family members first gain experience working outside the family business.
  • Employ family members based on their qualifications, experience and merit. Remunerate family members employed in the business at market rates.
  • Appraise family members performance in the same way as other employees. Employ the best candidate for the job.
  • Qualify entry into the family business as an opportunity or privilege rather than as a birthright.
  • Invite family members to join the business without pressure.
  • Prepare family members for a future in the family business by teaching them about the business early.
  • Establish a mentoring program both inside and outside the business for family members.
  • Encourage and empower family members to become future leaders of the business.

To ensure your business flourishes, while at the same time provides opportunities to family members, you need to think ahead.

Your future:

First, you need to ask yourself what you, as the owner, want for the future of your business.

  • Do you plan to grow and sell?
  • Or do you wish to keep the business in the family?

Whether you intend to sell or pass on the business to future generations, you’ll need different structures, different remuneration models, and different advice. For example, for many family businesses, family harmony is of greater importance than small business tax concessions or capital gains tax (CGT).

Your business structure:

If your business has been operating for several years, it’s important to review and understand the structure. For example, a relative may have contributed funds in the early days of the business and received shares. Over time, you may have forgotten who still owns part of the business and the implications of this.

Special considerations:

All families are different. For example, if one sibling wishes to join the family business and the other doesn’t, how can you be fair to both children? How do you remunerate those in the business? Do you want to provide for those children, not in the business? Do you want them to receive a share of the profits? How do you structure your will to ensure the business continues and that your children have been treated equitably?

The next generation:

Before bringing the next generation into your business, you need to have certain important conversations. Does the family member feel the same way about the business as you do? What are their aspirations? Depending at what stage your business is, you will also need to establish education and experience (if any) requirements for the next generation entering the business.

Getting help

Family businesses can and do thrive and survive over many generations and it’s not uncommon these days for two generations to work side-by-side in the family business.

To avoid heartache and frustration we strongly recommend you seek help from a specialist family business advisor. After all, you’ve worked hard for your business – it’s the least you and your family deserve.

If you'd like to talk to the expert who wrote this article, email Kisten Taylor-Martin at Grant Thornton Australia