Family Businesses Crucial to Success of Economy

Family businesses crucial to success of economy

Family businesses are estimated to represent 75 per cent of all firms in New Zealand, providing around 80 per cent of all employment and 65 per cent of GDP. Their importance to the economy is indisputable, but the issues that family business owners face are exclusive to them.

Family businesses often have long term perspective and altruism that are beneficial both to the business and the community. Research carried out in the 1990s by the London Business School showed that publically listed, family-controlled companies outperformed the overall stock exchange index by nearly 30 per cent.

However, the majority of these businesses only have a life cycle of 24 years. Research shows that only around a third of family-owned businesses handover to the second generation, and less than 20 percent to a third generation says Staples Rodway Senior Manager Tracy Hickman.

“The failure to transition many family owned businesses to the next generation is depriving our economy of the productivity, employment opportunities and long term perspective that those businesses can provide,” she says.

Dr Christine Woods, Senior Lecturer at the University of Auckland Business School, agrees and describes the challenge that faces many family businesses as a tension between the “burden of responsibility and the legacy of opportunity”.

Family business owners are balancing the demands of business, ownership and the family, and the business may be the family’s largest asset, with funding secured against the family home.

“Other challenges include that business rarely stops at 5pm with ‘shop talk’ continuing around the dinner table, having to deal with under-performing employees who are also family, and not forgetting that the relationships and key knowledge about the business may reside in the family business owner’s head as opposed to being formally documented,” says Ms Hickman.

It is easy to understand why a family business owner would prefer to sell the business rather than see their children dealing with the same problems that they have faced. The good news is that help is at hand to help address these issues and prevent this kind of business break down.

“Good governance can assist with decision making and help in the event of business disputes that risk affecting family unity. An independent director can undertake performance and remuneration reviews of family members, both areas which are open to disputes. Conflict resolution can also be addressed by using formal Shareholder Agreements in a family business, particularly where siblings or cousins are in business together,” says Ms Hickman.

“Family businesses with an independent director and board structure are also more likely to have engaged in strategic planning, and they also tend to start succession planning processes earlier than those businesses going it alone.”

When it comes to succession planning, a key to getting it right for family businesses is to start the process early enough, ideally at least five years prior to transition. The planning process will enable identification of likely successors, or professional management until the right successor can be found. It will also enable the owners' sufficient time to work out an equitable course of action if the business is unable to support all of their offspring.

“Starting the process early allows time for sufficient training, and will give finance providers greater comfort that the transition will go smoothly. Statistics show that family businesses that have prepared a succession plan tend to experience an easier transition and not experience a drop in performance when the successor takes over,” says Ms Hickman.

ENDS

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