Family business evolution and how to avoid a forced sale

The next five years in Australia will see an influx of family businesses for sale or, perhaps more accurately, forced sale. The increase in supply of businesses on the market will have a downward push on the value of family businesses.

While the earnings of a family business may be maintained, the valuation multiple of the business will begin to erode and if the business is part of the retirement plan of the founder, the end result is to retire on less money.

It is important to take steps now, to ensure your business can maintain its value over the next business cycle, by properly managing the evolution of the business.

While the evolution of every family business is unique, there are some common elements.

During the start-up phase of a family business, the focus tends to be short-term, predominantly on ongoing financial performance and to a lesser extent, overall performance success.

As the business picks up momentum, consideration is then given to strategy, and more thought is put into the long-term success of the business, for the family.

Early stage “strategy” development for a family business generally focuses on the mission (what the business is about), the vision (what you want the business to become) and the values (culture) that the family business stands by, which is generally consistent with the values of the family.

Increasingly, early stage strategy development for a family business also focuses on the market beyond domestic, whether it has an adequate financial structure and, for those that have seen the impacts of a recession, survival and growth when the inevitable downturn happens.

Every successful family business eventually arrives to a “critical point”: governance. The term is widely used in the sphere of family businesses yet few family businesses successfully implement it. I call this part of the family business evolution cycle “professionalising the family”. So what is it?

Governance is associated with decision making, clear business goals, family ownership and control, and even human resources. It is important to delineate between the business itself, the owners of the business and the family members who do not have ownership or necessarily work in the business but have a lot to say about the day-to-day running of the business.

Once a business has good governance in place, it is well-positioned to reasonably maintain its value even in a falling market.

One big challenge for family businesses is family dynamics. These can become far more influential than the customers or suppliers of the business, and ultimately affect the worth of the business. Family values, commitment and conflict start to become the norm and can place strain on both the business and the family over many years.

Succession planning is key, and although many businesses pay lip service to the concept, relatively few have a concrete plan in place. Issues to consider include: Do you sell? Do you transition to family members? And what are the implications for your employees?

Unfortunately many family businesses in Australia will disappear over the next five years simply because the next generation family members are just not interested in taking over, for a variety of reasons.

Ultimately, businesses have the choice of having to make a “forced sale” of the business or a “for sale” where you will get what your business is truly worth. Only by planning for succession at least five years before your planned exit of the business, can this scenario be avoided.

Don’t let your death, or the death of your family business, be your succession plan.

 

# This article was first published on Inside Small Business on Monday 1st October 2018.