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The challenge of succession
...one of the big things globally
that everyone is struggling with is succession—how do you transfer wealth from
one generation to the next generation; how do you do it properly without
causing a lot of issues within the family and sometimes breaking up the family?
Globally I think Australia is probably leading the way as far as that is
...people need to be educated as to
benefits and the consequences of a great succession plan...[F]rom my experience
and from what I have seen, people who have the foresight and thinking get to
where they need to go, because they plan to get there.
The fourth article of this inquiry's terms of reference relates to the
structural, cultural, organisational, technological and governance challenges
facing family businesses. Arguably the most significant challenge that family
businesses must address is the challenge of succession: preparing for and
passing the business on to the next generation.
Indeed, many argue that it is this challenge that defines the success of
a family business and distinguishes the business from non-family businesses.
Representatives of the family business sector, academic commentators and
families in the sector identified succession as 'a major issue'.
The 2010 Australian Family and Private Business Survey found that
matters affecting succession were among the more critical issues confronting
Succession was listed first among the challenges identified by KPMG:
The key issues facing family businesses are: management and
equity succession, fostering and support of the complexity within the business,
recognition and support of the complexity facing families in business as the
owners and managers, the conflict inherent in family business where you have an
overlap of ownership, family and business in management.
The challenge of succession is common to family businesses across a
range of sectors including transportation,
agriculture and primary industry,
Succession appeared as an issue common to all businesses in the family business
sector regardless of their size.
Family Business Australia (FBA) told the committee:
It is an enormously difficult task to find something that all
family businesses completely agree upon, but I would say that there are certain
fundamentals in common. One of them, for example, would be the issue of
succeeding to the next generation and how policy can affect that positively.
There is also a perception of the family business sector as a global
community, with succession challenges common to family businesses regardless of
[O]ne of the big things globally that everyone is struggling
with is succession—how do you transfer wealth from one generation to the next
generation; how do you do it properly without causing a lot of issues within
the family and sometimes breaking up the family?
The succession challenge was depicted as an issue of ongoing concern. Mr Christopher
Lowe, Chief Executive Officer (CEO) of Bus Association Victoria noted that
'succession has been an issue in my industry since year dot.'
PricewaterhouseCoopers argued that succession required continual management as
economic and legal frameworks change:
Succession planning is not new in any sense but it is
something that needs to be looked at anew given the post-World War II
complexity that came about in business regulation, not only with family law and
succession law from a wills and estates perspective.
Strategies to assist intergenerational business transfers
Evidence varied on the essential features of viable succession plans.
Research by MGI Australasia recommends that succession plans contain the
- documentation of buy-sell agreements providing clearly defined
and fair ownership options;
- a designated mandatory retirement age for all senior executives
and owner managers;
- the appointment of a family leader to perform the role of
supporting the family emotionally; and
- a definite date for the transfer of leadership responsibility and
control to the next generation.
Family businesses appearing before the committee noted varying features
including the use of family trusts, family constitutions and transition periods
to allow for graduated transfers of control.
Mr Albert Beard, Chairman and Managing Director, A H Beard
Manufacturing, spoke of the necessity for clear documentation:
How you join the business and all those sorts of things will
be documented, they will have a much better understanding how the transition
Deloitte Private defined succession planning as a process of
establishing measurable objectives and clear parameters on the roles and
responsibilities of family members. It was further submitted that the process
could usefully involve external expertise:
Families need to clarify the qualities, educational
requirements, work experience and expectations they have of the next
generation. They also need to consider what support they will provide, i.e. a
number of our clients have found using an independent mentor to work with
next-generation family members is very helpful as a mentor is able to provide
objective feedback free of family bias and uncluttered by family issues. It is
also important to clarify who the next generation will report to, how they will
be compensated and the performance criteria they will be measured on. It is
critical these expectations are articulated from the outset and measures are as
objective as possible.
Professor Mary Barrett emphasised that while approaches may differ, the
key is that succession planning takes place:
What the research seems to say is that it is not the actual
succession planning or the involvement of the next generation in strategic
planning that actually makes a difference; it is more the fact that it happens.
It is more the fact that it is addressed. It is not so much that the solution
might be really fantastic, but more the fact that somebody's paying attention
and attending to the issue.
Barriers to managing succession
The evidence before the committee is that many family businesses are
under-prepared for the challenge of succession. KPMG's 2009 family business
survey (see chapter 3) indicated that the majority of family businesses do not
have in place succession management plans. Of the family businesses surveyed in
2009, only 15 per cent reported having formal secession plans. A further 31 per
cent reported 'they were currently working on one'. The Australian Bureau of
Agricultural and Resource Economics and Sciences (ABARES) advised of a 2006
survey of Australian farms which indicates that less than 10 per cent have
established documented succession plans:
ABARES included questions on farmers' succession planning in
the National Farmer Survey 2006 undertaken to review the Agriculture Advancing
Australia (AAA) package. The survey targeted farms with an estimated value of
agricultural operations (EVAO) of $22,500 or more and the industries surveyed
were: crops, mixed crops–livestock, sheep, beef, mixed sheep–beef, vegetables,
fruit, sugar, cotton and wine grapes.
In this survey, 52 per cent of farms indicated that they
expected to pass the farm to a family member. Around 25 per cent of farms had a
written business plan and a succession plan was included in only 35 per cent of
Pitcher Partners Consulting Pty Ltd identified 'a hesitation about
succession, a reluctance to engage in what is seen as an uncomfortable
discussion, uncertainty about how to proceed, and the resulting delay in
commencing or engaging in a meaningful way in the process of succession'.
Recognising the need for a
The committee heard of several reasons why family businesses may be
hesitant to engage with succession planning issues. Mr Peter Taylor, a member
of the Queensland chapter of FBA, identified a fundamental reason:
One of the biggest difficulties we have in family businesses
is owners who are yet to work out that they are in a family business and they
need to work on succession. I have no idea how you get that light turned on in
people's heads. I was fortunate in that I went to a family business gathering
on Hamilton Island with about 500 other people. While I was there I sort of
realised that this is not my business; this is a family business. The moment
people recognise that they have a family business all these other
opportunities—such as getting succession happening in a logical way, which
might take a couple of years—can start to be taken.
Conversely, it was put to the committee that businesses that identify as
family enterprises may not be actively considering the role of future
I am the second generation, and a third generation is in the
business. Up until 10 years ago I was really not conscious of necessarily
passing it on to the next generation. It might have been there in the very
background but there was no clear intention or plan or anything. It was only
when I joined FBA and started learning about succession that I became aware of
Balancing future planning with
immediate management needs
It was acknowledged that predominantly family businesses are 'time
KPMG noted that time pressures can compromise planning, particularly in the
area of succession:
[Research] suggests that the main reason why family
businesses fail is a 'failure to effectively and thoughtfully communicate' and
finding the time to develop strategic planning involving multiple generations
of the family, when faced with the day to day demands of the business itself.
The failure to communicate typically revolves around the
question of the future management and control of the business e.g. the capacity
of the current owners to step aside, the confidence of the current generation
in the ability of the next generation, the dilemma of moving from a
dictatorship to a democratic environment.
Family business owners noted similar time pressures. As Mr Matthew Power,
manager and owner of the Canberra-based family business, Iken Furniture, explained:
You go into a family business, you start the business, you
have come out of a job and you probably have a small amount of cash. You are
really working hard, you have brothers, sisters, mums, children and whoever to
help you get going and you are working weekends.
You start to see some cash, which is great. But then there is
compliance and you have to do the minimum because you are selling and doing
whatever you need to do. Then the next thing comes along and you do a bit more
compliance, and then you start to put in place some procedures. A lot of this
takes time. It is not even about the cash you are generating, it is the time to
get your head around it. You are so busy trying to keep the business rolling
along and getting the next order, whatever that order is, that is what tends to
be the situation.
KPMG identified that immediate business pressures can limit an
enterprise's capacity to plan for succession:
[V]ery often, when people are in business they do not have
their minds on what is going to happen 20, 30 or 40 years out. They are
focusing on growing the business and making the business work.
Indeed, research conducted by KPMG in 2011 indicated that:
main reason why family businesses fail is a failure to effectively and
thoughtfully communicate and finding the time to develop strategic planning
involving multiple generations of the family, when faced with the day-to-day
demands of the business itself.
In this context, the committee notes the implications of family business
failure for family members' superannuation arrangements. In particular, it is
of concern if family businesses presume that their assets are the best form of
retirement savings. Should the business fail, those assets may need to be sold
to cover debts, leaving family members without adequate retirement savings.
The willingness and capacity of the
next generation to manage the family business
The perceived and actual capacity of the next generation to assume
ownership or management positions can also be a challenge to effective
succession planning. FBA has noted research indicating that the success or
failure of intergenerational transfers can be affected by the level of trust in
the abilities of potential successors and the level of interest of potential
successors in the business.
This research is consistent with the views of submitters to this inquiry.
The evidence before the committee highlighted concerns among the current
generation that the next generation is not qualified, or is unwilling, to
continue the family business. PricewaterhouseCoopers noted concerns that the
next generation may not possess the requisite expertise:
The proverbial, 'The first generation starts a business, the
second generation consolidates it and the third generation loses it altogether'
is a maxim that we would not want to be part of perpetuating, but there is some
truth in some of these things.
The committee was referred to research indicating that approximately 50
per cent of family businesses will be 'unable' to transfer ownership to the next
generation 'due to lack of qualifications'.
Similarly, Deloitte Private advised that the current generation may consider
delaying succession due to concerns that family members are not qualified to
operate the business:
They advise us they don't feel ready to hand over their
business because they don't believe their children are ready to manage and grow
Commenting on the decline of the next generation's interest in assuming
responsibility for the business, MGI Australasia noted anecdotal evidence indicates
that succession management practices have had to change to accommodate changing
[T]here is a change of the attitudes in the community or
perhaps in the younger generations. Once it was almost assumed that if mum and
dad had a business, the children would take over. That has certainly changed
due to a number of things including the fact that business has changed so much
now. The traditional business, the local supermarket or whatever, was never
much different. All of a sudden there are all these other things out there now
so people are finding that the next generation does not necessarily want to
take on mum and dad's business.
Within the family business sector, there is a view that ownership is an
entitlement not a privilege. As a family business adviser Mr Mark Cleary
[T]here is an assumption that I am part of the family I am
going to manage it. Well, here is some news: not necessarily. That is not
genetically passed on. There is no right.
Mr Cleary argued that succession planning must prioritise 'commercial
imperatives' rather than family ties:
[T]here are commercial imperatives that I think some family
businesses are light on because they have not been exposed at that tough edge
of the world. They are full of heart, they are full of family values, but until
they get that commercial edge I think that is an inhibitor. That is what I was
getting at, that they need to be forced out and told, 'There is no place here
for you until you earn a place at this table.'
Mr Beard also spoke of the priority given to skills. He linked
qualifications to financial stability and the capacity to raise necessary
Because our business relies very much on cash flow lending,
the quality of the people looking after the business is very high on the
agenda, without involving bricks and mortar. So yes the qualifications are very
important to what I know about the ANZ Bank. They are probably already ticking
those boxes themselves.
There is an expectation by some family businesses for prospective owners
to acquire skills outside the family business.
As Mr Desmond Caulfield, Director, MGI Australasia, noted family
business advisors may encourage family members to gain experience outside the
When the younger generation start getting into the business
we will suggest to them that they need to go and do some outside training, even
to the extent of saying, 'Perhaps it might be worth going to work for someone
else for a while, just to see how somebody else does things.
Similarly, Deloitte Private advised:
Some of our clients insist family members must gain outside
experience before being allowed to have a role in the family business, which
gives family members an opportunity to prove themselves free of actual or perceived
nepotism. They can then join the business with more to offer, having gained
confidence and self-esteem from working in and proving themselves in an
However, outside training and skills development does not appear to be a
well-established practice in the family business sector. MGI Australasia conducted
research in 2010 which indicates that 58.4 per cent of family businesses do not
require family members to gain external experience prior to employment with the
Submitters also noted that the success of intergenerational transfers
can be affected by the willingness of the next generation to take
responsibility for the family business. Some submitters were quite positive
about the willingness of the next generation to be part of the business:
[Y]ou have to get the next-genners engaged in the business;
that is No.1... I have seen young next-genners—people in their 20s—willing to step
up and take on those roles.
Mr Justin Taylor, Director of T & T Corporation, argued that there
are factors that can encourage and motivate the next generation to be involved
in the business. He explained:
It starts quite early. It depends what sort of family
business you are in. The entrepreneurial spirit is alive and well in some of those
families. It has a lot to do with your upbringing and whether you work inside
the family business for a little while or whether the family lets the kids go
and make mistakes on someone else's money and time. It is about bringing those
experiences back into the family and encouraging growth and the concepts you
get from outside the family to help the family business grow internally.
In contrast, Mr Michael Stillwell of Stillwell Motor Group, argued that
engaging the current generation is a key challenge for family businesses:
The challenges for us in taking over the business were
putting in place an effective governance regime and an effective reporting
regime. Today we find that our challenge is one of engaging the third
generation and making sure we can educate them and provide them with the
professional development that they need to run the business going forward.
The committee was advised of factors that could deter the next
generation from assuming responsibility for the family business. In particular,
it was noted that difficulties in communicating expectations relating to the
role of running the business could hinder the succession process by creating
uncertainty for the next generation. Pitcher Partners Consulting Pty Ltd
Our research to date has identified...[a]n overwhelming view
that children are not expected to follow in the family business and that they
do have a choice, combined with the belief that they also do not have a natural
entitlement to ownership and control. These views create uncertainty on both
the part of the existing and new generation with neither being sure what the
The problem of an apparent lack of interest among the current generation
appeared to be particularly marked in rural areas. The National Farmers'
Federation (NFF) reported that succession arrangements for Australian farmers
have been affected by 'a decline in the rate of entry of young people into
ABARES also reported a decline in interest in family-owned agricultural
There is a lot of concern, too, with young people leaving the
farm and a lot of people not wanting to come back to farming, so part of the
succession planning is the fact that the next generation is not necessarily
always wanting to go back to farming.
The willingness and capacity of the
current generation to relinquish control
The capacity of the next generation to take over, however, is only part
of the necessary ingredients for a successful intergenerational transfer of the
family business. It was argued that the willingness and capacity of the current
generation to relinquish control is of equal importance. The 2010 Australian
Family and Private Business Survey found that financial security of the
current generation can influence succession strategies. A 'substantial
proportion' of the businesses surveyed reported that they are 'relying either
on the sale of the business or continuing family business ownership for the
cash to fund their retirement'.
Similarly, KPMG's 2011 survey records the view of family business owners that
succession planning needs to provide for the current owners in their
retirement. As one owner commented:
No one is going to move aside for the next generation unless
they know they're secure actuarially for the rest of their life. As John D.
Rockefeller said, "I worked out how much it's going to cost me for the
rest of my life to live and I am going to add a nought to it and make sure I
Evidence before the committee also captured the impact of succession on
the current generation's ongoing financial security. Generally, it was noted
that owners and operators of family businesses can be confronted with the
challenge of funding retirement. Mr Michael Stillwell, Director, Stillwell
Motor Group, reported being confronted with the challenge to 'fund our
retirement out of the business'.
The Power Family Group also noted the challenges of funding retirement,
submitting that succession places additional financial demands on the business
without increasing the business' asset base:
The next thing that challenges family businesses are equity,
equity sharing and equity transfer. This is going to become particularly
difficult over the next 15 years as the baby boomers, who have generated so
much wealth and have been so successful, now want to transfer that wealth onto
the next generations, and want to know how that is going to be achieved in a
manner which both keeps the businesses as viable, going concerns and keeps
people employed—which is the nature of where it is up to—so that it does not
get continually divested, cut down and split as we go along.
In addition to financial constraints, the committee's attention was
drawn to concerns that the current generation may be unwilling to transfer
ownership. Ms Pamela Low of Pamela Low and Associates reported that
family businesses can be affected by an '[u]nwillingness of patriarchs and
matriarchs to relinquish control and change habits'. Similarly, Mr Justin
Taylor, T & T Corporation Pty Ltd, argued that successful
succession planning should also focus on 'getting the incumbent willing to let
go'. This aspect was identified as presenting challenges for family businesses.
KPMG has noted a correlation between individual identity and business
identity. As one participant to KPMG's 2011 family business survey commented 'I
need to retire, that is a fact. But if I'm not that business, who am I?' The
NFF also suggested that the link between personal identity and involvement in
the family business may deter the current generation from relinquishing the
There are many obstacles to be overcome while developing a
sound succession plan. For example, parents passing the farm business on to
their children may be concerned that they will be marginalised.
Management structures and family conflict
Two further and related issues were put forward as having the potential
to derail successful succession planning. The Institute of Chartered Accountants
Australia submitted that businesses with poor or informal management structures
are less likely to successfully manage the succession process:
Many family businesses, especially those in the SME sector,
have little depth of management and the retention/attraction of key managers is
critical for the successful transition of the business from the current owner/manager.
Regional Development Australia Pilbara also noted the importance of
appropriate management structures to the succession process:
A key challenge for family businesses is the transference of
ownership and management when leaders are seeking to retire or leave the
business. Succession may be passed to family members, if there are any suitable
and willing, yet there can be resistance to changes brought in by new family
management. Ideally, family businesses need to balance the founding family
values and culture that drive the business with an appreciation for new ideas
and the changing business environment. These issues are also relevant when
family businesses are sold or external professionals are introduced to run the
Submitters also argued that family conflict can present a barrier to
successful succession planning. Deloitte Private identified the following
opportunities for conflict arising out of the succession process:
- Sibling competition, e.g. where
all children want to be CEO of the business
- Parental expectations which can
lead to feelings of unworthiness
- Inequality, both emotional and
monetary, which can lead to conflict and unresolved issues among family
Ms Pamela Low, Principal, Pamela Low and Associates, also referred to
the potential for family conflict to derail the succession process. The
committee was advised that succession is one area where private family dynamics
can influence the business operation. As Ms Low stated, it is this challenge of
addressing family dynamics within a business governance model that
distinguishes family from non-family enterprises:
The additional challenge for family businesses is this
dynamic of the sense of entitlement of people that are members of the family
outside the family [business] and the jostling for position in that
organisation, status...That is the additional challenge for them.
Ms Low went on to argue that communication between family members is a critical
component of managing the intergenerational transfer of family business.
Transferring the business to
There is a divergence of views on the merits of transferring ownership
or management of the business outside the family. Pitcher Partners Consulting
Pty Ltd argued that selling the business or otherwise incorporating non-family
members are valid strategies to manage succession:
Succession planning is often thought of only in the context
of transferring a business within a family. However succession takes many forms
and can comprise the outright sale of the business to third parties, merging
the business with others and the sale of the composite business, the sale of
the business to a management team and employees, the closure of the business
and sale of assets, or in some cases doing nothing and facing the gradual
decline of the business.
In contrast, KPMG conceptualised a family business as an entity that is
retained within a family:
To help support the long term stability and sustainability of
family businesses, government should adopt policy measures that recognise the
benefits of long-term multi-generational ownership by specifically recognising
that on succession whilst individual ownership may change the family's
ownership does not.
PricewaterhouseCoopers indicated that KPMG's concept of a family
business may be more in line with the views held by businesses within the
family business sector. PricewaterhouseCoopers advised that there is a
reluctance among Australian family businesses to involve non-family members. Its
research indicates that almost 40 per cent of the businesses surveyed
intend to transfer business management and ownership to the next generation.
The remainder are twice as likely to sell or float rather than transfer
ownership of the business to the next generation but assign management of the
business to persons outside the family unit.
The data suggested that the concept of 'family' is intertwined with the concept
of 'business'—the business cannot be viewed apart from the involvement of
family members. As KPMG submitted:
Central to all family businesses is the need for control to
remain within the family and to have a mechanism in place that is sufficient to
allow for the next generation to take over the family business.
It was also argued that there may be limited opportunities to sell the
business to non-family members. The committee heard comments that, in the
absence of willing buyers, transferring ownership to third parties is 'not a
viable alternative succession strategy'. Dr Chris Graves, University of Adelaide,
Professor Mary Barrett, University of Wollongong, and Dr Jill Thomas,
University of Adelaide, argued that the number of family businesses unable to
transfer the business to the next generation exceeds the pool of third parties
with the capacity to buy the businesses.
The problems associated with the absence of available buyers appear to be particularly
marked in rural and regional areas. The Department of Regional Australia, Local
Government, Arts and Sport identified particular challenges in selling
businesses in rural areas given the absence of buyers.
Growing expertise in succession management across the family business
Despite the challenges confronting family businesses, it was also
evident there is growing expertise in the area of succession management. Mr
Lowe from Bus Association Victoria advised that succession matters have
received increasing attention over the past decade:
When I look at my current membership of 470 bus operators, 95
per cent of them are third or more generation, so grandad or great-grandad
started the business. So it is something that is not new to them. They have
been working on succession planning in a very unsophisticated, non-academic
manner for some years but in the last, say, 10 years we have seen a move by my
membership, the 470 bus and coach operators, to adopt a more formal and
documented process of succession planning.
KPMG noted that preparing and training a successor is an issue of high
to very high importance for 59.5 per cent of the family businesses surveyed by
KPMG in 2011.
Data from the 2009 and 2011 KPMG surveys indicate that succession planning is
increasingly on family businesses' radar. In 2009, 19.3 per cent of family
businesses surveyed had established succession plans for the CEO.
In 2011, this figure had increased to 35 per cent.
The number of succession plans for other senior positions held by family
members has also increased, from 18.4 per cent in 2009 to 28 per cent in
The committee heard there is momentum within the sector to address the
challenges of succession. As Deloitte Private advised, family businesses are
seeking to increase skills relevant to managing the succession process:
Deloitte Private believe educating the next generation of
family members is the key to ensuring the successful transition of family
businesses to future generations. In the majority of our Client Service Assessment
interviews, the patriarchs/matriarchs of our family business clients ask us
whether we have a program to educate their next generation.
Similarly, Family Business Australia noted interest in professional
development, advising that the organisation has instituted 'the first
comprehensive Succession Planning Course designed to address both transactional
challenges and the important emotional challenges of "handing over",
whether it's a family (inter-generational transfer), non-family (external CEO)
Family business owners told the committee that the sector is developing
sophisticated approaches to succession management that respond to the
businesses' needs and the economic and legal environment. Mr Peter Levi of
Colorific told the committee of his strategies to transfer the management and
ownership of the company.
Mr Sam Kennard of Kennards Self-Storage spoke of the benefits of planning for
both the transfer ownership and the transfer of management.
Mr Andy Kennard of Kennards Hire advised that his business is 'quite
structured now in our succession planning', adopting measures that include a
Mr Graham Henderson, the managing director of a long-standing
family business, and Director of Family Business Australia, also highlighted
the significance of succession planning for businesses' success:
With increased education maybe this would reduce the level of
business failures in Australia. Business failures cost the economy lots of
money, so education is very important and certainly I would encourage greater
education in the area of family businesses and things like succession planning
and governance. Those things I believe are very important.
Education is seen as the key to fostering a culture of proactive
succession management within the family business sector. Family business sector
representatives, family business advisors and family businesses were united in the
view that education is critical to the longevity of family enterprises.
Deloitte Private argued:
We believe any efforts from the government to support
education and assist family businesses and intergenerational wealth transfer
would be very important. Training is key.
Advantages of family trusts for
In addition to education and training, the committee heard of a number
of options to assist the intergenerational transfer of family businesses. These
include removing existing shareholder limitations in order to attract suitable
and the creation of a family trust.
The committee heard that family trusts play a legitimate role in the
management of the intergenerational transfer of family businesses.
Notably, it was argued that family trusts are integral to successful succession
The reality is that a family business is not just the
individuals currently running it; it is a family business, which means it is
for the children and the grandchildren. There needs to be a mechanism whereby
this family business can be transferred for the future generations to grow up
and work in it. That is what the family trust really achieves. It enables that
successful succession planning. It enables assets to be held for future
It was argued that family trusts possess features that facilitate
business transfers. These included the apparent capacity of family trusts to
provide structure and order to the succession process:
[I]t can enable transition of control as well as transition
of profits and entitlements from the company to be done in a structured and
meaningful way over a period of time.
Additionally, family trusts reportedly 'keep the business intact' by
retaining family control. Mr Simon Le Maistre of KPMG argued that family trusts
in effect encourage businesses to remain family enterprises as, in contrast to
a company structure, a family trust structure does not provide family members
the opportunity to divest their interests to third parties:
If you had this in a vehicle like a company, the challenge is
that it is likely the interests will be sold off, and very often those
interests will be sold outside the family group. That will then change [the
business] fundamentally. It will go from being a family operated and owned
business to being something that is shared and owned amongst a variety of
partners – and that changes very much the structure and the whole ethos behind
what the family business is. If you keep in a trust it forces those involved,
the family members, to work together...the ownership and control, ultimately, are
not split amongst many.
Similarly, Mr Robert Powell, a Partner at Grant Thornton Australia, told
I have also found that having family business assets in a
trust is a way that people try to keep the family involved in the business. It
is quite difficult to cash in your share of the trust. In fact, it is difficult
if not impossible a lot of the time.
This view was shared by several of the family businesses that contributed
to the inquiry. Mr William Winter, BW Business Development, provided a personal
account of the effect of not operating under a family trust structure:
I will tell a story about me. When my father died, he did not
leave a will. There are five children, as well as in-laws. We picked up on a
phrase that you might have heard before: 'Where there's a will, there's a
relative.' It was so true in our case. If he had had some kind of trust
structure set up, my brother and I would probably still be running that family
It was also argued that family trusts can remedy the barriers to
successful succession planning posed by capital gains tax (CGT). Family
business owners and advisers have claimed that CGT can undermine the prospects
of a successful succession process, as CGT rules are 'restrictive and impact on
their [family businesses'] ability to structure to continue to operate into the
Family trusts were presented as a legitimate means to avoid the financial implications
of CGT and, thereby, reduce the financial impact of a succession event:
When you operate outside a trust you face many challenges –
capital gains tax, stamp duty – with trying to transfer your business. Within
the environment of family trust, this can be done when it is commercially right
with minimal tax costs.
However, it was further noted that due to changes to the Income Tax
Assessment Act 1997 effective as of 1 November 2008 family trusts could no
longer operate to protect businesses from incurring capital gains tax when
transferring business ownership to the next generation.
This issue is explored in chapter 6.
In contrast to views that family trusts provide, or could previously
provide, an optimal means of ensuring intergenerational business transfers, the
committee heard evidence that family trusts present challenges to the
succession process. The challenge of funding the retirement of the current
generation remains for family businesses trading as family trusts.
It was also suggested that family trusts may impede a family business from
evolving. Mr Stillwell commented that the family trust structures may reflect
previous business needs rather than current business practice:
The importance of trust structures has been touched upon
today. My father did set up a trust when he went to work in the USA for 10
years back in the early 1980s. That structure has now passed on to us. The
structure is out of date and we need to change that to modernise it and reflect
custodianship from generation to the next generation going forward.
Is succession necessary?
As chapter 4 observed, representatives and members of the family
business sector have argued that family businesses are the bedrock of the Australian
economy. By extension, the argument was put that continuing family businesses
is necessary to maintain a productive and growing economy. As Dr Graves,
Professor Barrett, and Dr Thomas argued:
...a successful transition of family firms (e.g. to the next
generation, via management buyout or sale) is critical to national economies
because a successful transfer is estimated to conserve, on average, five jobs,
whereas start-up generates on average two jobs.
Mr Levi reiterated this view, arguing that family business closures that
result from a failure to successfully transfer the business jeopardise the
health of Australia's economy:
If we can encourage the next generation to come through, take
control and truly feel ownership of the business, that is going to benefit the
employee, so there is a multiplier effect, because the business will not only
continue but also flourish and continue to grow. If we do not do that, we are
really at risk. I think it is a massive issue for this economy.
Mr Levi argued the need for government policy and legislative support is
required to assist the succession process. As he told the committee:
I think it is vital, not only to the business – in this case,
our business – but the economy as a whole that legislation supports the future
of family business. Without a fair and effective transition mechanism, it is
not going to be possible. There have been so many points raised today where it
has been highlighted how family business adds value to the economy.
The Institute of Chartered Accountants Australia also called for
government policy to actively support the continuance of family businesses:
We need to make sure that we do everything possible, as
stated earlier, to put in place policies that help support and promote the
viability of the family business sector in the future.
The statistics indicate that a significant portion of family business
owners are intending to retire in the coming decade. The Institute of Chartered
Accountants Australia submitted that responding to the retirement of the baby
boomer generation, and the resulting consequences for the family business
sector, is one of the most significant challenges confronting Australia's
In this country we do have, as the committee would be well
aware, a number of economic challenges, one of the most significant challenges
related to demographic profiles our economy and the workers in our economy.
There is cause for concern for us in this particular area if we are staring
down the barrel of the situation where a very significant number of small
businesses of family businesses are looking to exit the economy, in effect – to
stop trading, to stop conducting business, to stop employing people and to stop
making profits upon which they pay tax.
Mr Levi argued that with the impending retirement of the baby boomer
generation, support for the succession process is a pressing priority:
[I]f, as I understand it, 70 per cent of Australian businesses
are family businesses and 80 per cent of those are going to transition [in] the
next 10 years, then it is a major issue for the Australian economy.
The Institute of Chartered Accountants claimed that it is a priority
issue that requires deliberate government intervention:
There is certainly an argument that market forces will do
whatever job they need to do in order to pick up gaps or fill voids. But I do
not think that it is appropriate to leave all of the hard work to markets.
There is an equally important role for policy to help guide and shape the way
in which the market responds to various issues. If we get the policy settings
right and put in place the right frameworks to help support rather than impede
the growth of the family business sector then that can help.
Pitcher Partners Consulting Pty Ltd concurred:
As you are aware family businesses are among the most
important contributors to wealth and employment creation in virtually every
country in the world. They are a critical part of the Australian economy. It is
forecast that family businesses valued at some $3.5 trillion+ will change hands
over the next decade as the baby boomer generation pass their businesses on. The
smoothness of this transfer will impact the prosperity of the Australian
economy but no government policy exists to support the effectiveness of this
Statistics were provided to support the view that the retirement of the
baby boomer generation will significantly affect the family business sector
and, by extension, the Australian economy.
The 2006 MGI Australasia Australian Family and Private Sector Survey estimated
that 80 per cent of family businesses owners will retire in the coming
decade. In citing this statistic, Pitcher Partners provided the following data:
Commonly cited statistics from The MGI Family and
Private Business Survey 2006 are:
- 97% of businesses are privately
- Average age of owners is 55 years
of age (and therefore in 2012, the average age will be closer to 60 years)
- Percentage intending to retire in
the next 10 years is 81% (but most likely delayed by GFC)
- Owners with no exit strategy is
And when considering the demographics of the Baby
- Comprises persons born between
- In 2012 their ages range from 48–66
years of age
- In 2020 they will be between 56–74
years of age with the weighting heavily towards the higher end.
The 2006 MGI Australasia Australian Family and Private Sector Survey
reports that '84 per cent of CEOs plan to retire within the next 10 years'.
The survey draws on information received from approximately 1000 Australian
businesses, both family businesses and non-family enterprises. The definition
of family business, or the methodologies used to distinguish a family
enterprise from a non-family business, is unclear. While the survey report
outlines various definitions of family businesses, the report does not indicate
which definition was used for the purpose of the survey. However, the report
does assert that the responses 'can be seen as representative of Australian
privately owned enterprises'.
More recently, the 2010 MGI Australasia Australian Family and Private Sector
Survey did not speculate on the number of family business owners intending
to retire in the coming decade. However, the survey report noted that 45.2 per
cent of family business owner-managers are intending to work beyond 65 years of
Chapter 3 of this report discussed submitters' views on the KPMG
estimate that 61 per cent of family business owners plan to retire by
The KPMG survey states that '26 per cent intend to retire within five years and
35 per cent between 5 and 10 years'.
With six years having passed since the survey was released, this suggests that
less than half, indeed approximately a third, of Australia's family businesses
will be affected by the retirement of the baby boomer generation.
Hunter Business Chamber and Regional Development Australia Hunter
queried whether it was applicable to family businesses in the Hunter region,
stating that 'we do not have on hand enough detail of the Deakin Uni's [sic] 2006
findings to know for sure if the data apply to The Hunter.'
Accordingly, further data collection was recommended:
Given the potential impact of the statistics, and our roles
as representatives and information providers to policymakers, it would be
preferable to have current and local data regarding the intentions and future
plans of the family business sector in the Hunter over the short, medium and
The significance of the impending retirement of the baby boomer
generation was also challenged by views that succession is not necessary to
ensure a viable, growing economy. It was suggested that there is a natural
evolution in the life cycle of family business. The committee received
representations from Mr David Smorgon, Director, General Investments Pty Ltd, that
their family businesses can take various forms and, consequently, their success
may not require sustaining the business within the family:
When you talk about family business, clearly dealing with
succession goes hand in hand with that. But there is life after a family business.
One of the things it is important that the committee understands is,
particularly with the larger groups which may go through to the second, third
and even the fourth generation, if the family business then sells out, for
whatever reason, there is still life after the family business for the next
generations, albeit in a different form.
Deloitte Private concurred, arguing that the family business sector is
broader than a conglomerate of individual family businesses. Mr Peter Pagonis
argued that a family business can evolve into a 'family office':
[i]t goes from a business to a family office, which is the
Smorgon story. But it gets even better than that...All these family offices do
help the next generation of new family businesses. That is the key point.
Mr Smorgon noted that family businesses can divide and in doing so
strengthen the economy through supporting further business initiatives:
To highlight the point I made earlier, since then there are
now probably up to 30 different Smorgon family offices—I will not call them
business—set up for the seven branches of the family. This is because, once the
funds were distributed to the seven families, each of those seven families then
split up into brothers and cousins. So today I would estimate that there are up
to 30 of them, all out in the marketplace, all doing their own thing, but
making a contribution to the community as well.
The committee acknowledges that succession is a key challenge that
separates family businesses from non-family businesses. The challenge relates
not only to the governance of the firm, but also the underlying dynamics and
culture of the business including its perception as a family business that can
be passed on. Family businesses are unique in that they not only face the
economic and financial hurdles common to all businesses, but in addition they
must plan and time a succession that leaves the business with the requisite
skills, knowledge and leadership.
The extent to which business ownership and management within the family
business sector will change in the coming decade as a result of the retirement
of the baby boomer generation is unclear. Without sufficient longitudinal data,
the economic consequences of this generation's retirement are largely unknown. The
committee reiterates recommendation 2 of this report, which draws the attention
of the proposed IDC to the issue of succession and whether a public policy
response is needed. To this end, the IDC must also consider whether it is
necessary to quantify the extent to which ownership of family businesses will
be transferred in the coming decade as a result of the retirement baby boomer
The committee recommends that the proposed IDC consider the need to
quantify the extent to which family businesses will be transferred or closed in
the coming decade as a result of the retirement of the baby boomer generation,
and the policy implications for the economy.
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