Family business succession: handing over without blowing up Christmas dinner

A third of Australian family businesses expect to transition to the next generation within five years (PwC Australia). Only 19 per cent have a documented succession plan (Grant Thornton).

The usual explanation for that gap is that the conversation is uncomfortable. Which is true, and it is not the main reason.

The main reason is that the conversation everyone is avoiding is the wrong one. Families argue about whether the kids are ready. The harder question is whether anyone could take the business over, including a highly capable outsider.

What is succession in a family business?

The transfer of leadership, ownership, or both, from one generation to the next.

Those two things come apart more often than people expect, and separating them early removes a lot of heat. A child can run the business without owning it. A child can own a share without running anything. Several children can own equally while one runs it. Deciding which of those you mean is usually more useful than deciding who.

Why do family successions fail?

The common diagnosis is capability. The successor was not ready, or was never going to be.

Sometimes that is true. More often the role was impossible before anyone was named to it.

If you have run the business for twenty-five years, your role covers sales, pricing, key relationships, final approval on anything unusual, and a quarter century of knowing which supplier will bend and which customer to chase personally. No graduate can absorb that, and no outside hire could either. The role only works because you have been doing it since before it needed defining.

So the family concludes the child is not ready. The child concludes they are being judged unfairly. Both are reacting to the same underlying fact, which is that the business needs the parent specifically, and nothing about that changes by choosing a different person.

our guide to key person risk covers what makes a role unfillable, and it applies whether the successor shares your surname or not.

Capability against entitlement

Two things are usually being weighed at once and they should be separated.

Capability is whether this person can run the business well. It is assessable, and outsiders can help assess it.

Entitlement is whether this person has a claim on the business by virtue of family. It is not about competence at all, and pretending otherwise is what turns a business decision into a personal wound.

Both are legitimate. A family can decide that a child has a right to an inheritance from the business without having a right to run it. That is a coherent position, and it is much easier to hold when ownership and leadership have already been separated.

What causes damage is treating an entitlement question as a capability question. "You're not ready" lands very differently to "the business goes to whoever runs it best, and your inheritance is not connected to that."

Money against fairness

Equal and fair are not the same thing, and families discover this late.

The child who has worked in the business for twelve years and the child who has not both have claims, and they are different claims. Splitting ownership equally may feel fair and can leave the working child with partners who do not work. Giving the business to the working child may feel unequal to everyone else.

Neither answer is wrong. The mistake is leaving it unresolved and letting each person assume the version that suits them.

Three practical things help.

Separate the business from the estate. Other assets can balance an uneven business split. This is your accountant's and lawyer's territory and it is worth raising early.

Value the business properly. Most family disputes about money are really disputes about an unstated number. our guide to valuing a business covers the methods.

Write down what has been agreed and share it. Silence gets filled with assumption, and assumption becomes grievance.

When should you start?

Earlier than you want to, for the same reason as any other transition.

One Australian adviser's guidance is that five years ahead of a family succession is good and ten is better (Altus Financial). That is longer than the two to three years we would suggest for a sale, and the reason is that family succession has an extra job in it: someone has to learn the business while the person who built it is still there, and that cannot be rushed either.

Set against the third of family businesses transitioning within five years and the 19 per cent with a documented plan, most families are starting the process at roughly the point the adviser would want them finishing.

What has to happen first

The same work as any other handover, and it comes before the family conversation rather than after it.

Break the role into parts. Write down what you do across a month. Decide which parts are one job, which belong to people already in the business, and which exist only because you have always done them.

Move decisions to other people, with stated limits, and let them make some of them differently to how you would. This is the step that determines whether anything changes.

Get it out of your head and into the business. Not just the steps, but the thresholds, the permissions and the reasons. our guide to standard operating procedures covers what separates a usable procedure from a description of your job.

Do that first and the family conversation changes character. Instead of "can you do what I do", which nobody can, it becomes "here is a defined role, who is the right person for it". That is a question a family can discuss without anyone being told they are inadequate.

It also produces a business that is worth more to an outside buyer, which means the family has a genuine choice rather than a default. our guide to succession planning covers the general version.

Frequently asked questions