Keeping a family business prosperous and afloat through generational change is a task for a management structure that understands the dynamics of family and private businesses. Lauren Thomsen-Moore reports.
EMSO Marketing is a family affair. Co-owner Corinna Herbert is General Manager. The other owner is her husband Noel, the company’s Marketing Manager. The couple started producing Snug as a Bug baby products including The Original Multipurpose Baby Wrap at home two and a half years ago. They now operate out of a commercial premises, employ four staff, supply more than 400 baby outlets nationally, and have commenced export sales to Canada, South Africa, Taiwan and Japan.
Last year, EMSO was named Micro Business of the Year at the Australia Post West Australian Regional Small Business Awards.
Corinna is currently completing a Graduate Diploma in Small Business Growth Management at Curtin University, with plans to progress to MBA. She says it is important for small businesses to work as a team and to use management, staff, family and friends to bounce ideas off and to brainstorm with.
With two children under the age of five, the Herberts have a room at their warehouse that has been decorated and made into a playroom for their children and their office manager’s children.
We actively encourage our children to get involved in the business; they love to stamp envelopes and to pack boxes, and our five-year-old is already trying to negotiate wages. How’s that for entrepreneurial spirit?
The Herberts say that their company goal is to create a long-term sustainable business that is profitable and has a nurturing environment.
Corinna and Noel Herbert are among thousands of other Australians involved in family and private business a vital part of the Australian economy.
The wealth of family and private businesses is estimated at $3.6 trillion, according to the Australian Family & Private Business Survey 2003 , conducted by RMIT University and chartered accountants Boyd Partners Ltd.
Professor Kosmas Smyrnios, Director of Research at RMIT University’s School of Marketing, believes more attention needs to be paid to this sector, Particularly given that the market capitalisation of this sector is about five times that of the ASX.
Professor Smyrnios, an international expert in the area of family business, says family firms generate 50 per cent of Australia’s employment growth, account for 40 per cent of Australia’s private sector output, and are a seedbed for innovation and the formation of large corporations.
Business face changes
According to the Australian Family & Private Business Survey 2003 , seven out of 10 family- and privately-owned businesses are facing generation change over the next 10 years.
Professor Smyrnios says this leaves the potential for significant negative effects on the economy, given the contributions they make.
There are a number of contributing factors to the generation change, he says, including ageing baby boomers nearing retirement age, children wanting to move in to the business, and serial business owners who want to move on after having developed a sound business formula.
The study shows that almost 48 per cent of first generation owners report that their retirement is dependent on the realisation of business assets. However, very few owners are planning for this process.
It’s important that owning families view it as a process rather than an event that has to be planned for over a number of years. This process requires multidisciplinary input: accountants, lawyers, psychologists… Professor Smyrnios says.
Family businesses in particular need to have appropriate structures and processes in place that address ownership, management, involvement of incoming and outgoing generations, leadership, governance, and family matters such as communication for example, having a family assembly and family constitution, he says.
According to the Australian Family & Private Business Survey 2003 , three out of four family- and privately-owned businesses have no written plans for the future (75 per cent do not have a Future Ownership Plan and 77 per cent do not have a Management Succession Plan).
Once again, Professor Smyrnios highlights the importance of long-term planning as critical.
Added to this is communication to, and involvement of, all members of the family, rather than it being a fait accompli by the owner/manager(s), he says.
Di Lorenzo Ceramics recently received the Family Business Australia (FBA) 2004 NSW Family Business of the Year, First Generation Award, which is based on aspects of innovation and entrepreneurship.
The company, established in 1983 by Jack and Sally Di Lorenzo, has put into place human resource policies which ensure their business employs the right people this also applies to family members.
The business started supplying European fix tiles for the Sydney building industry and now employs 48 staff 44 full-time and four casuals including eight family members. The Di Lorenzo’s four daughters and two sons-in-law comprise the family contingent working in the business.
Office staff participate in one-on-one mentoring when they first join the company and ongoing training is encouraged for all staff members, including management training for family members. New appointments are advertised internally first and then advertised externally if a suitable candidate cannot be identified.
Family members are encouraged to pursue outside experience and are only able to join the business if a position is available. Positions are not created for family members but rather as a requirement of the business expansion.
Rewarding family ties
FBA is a national, member-based, not-for-profit organisation for family business owners and their professional advisers. It was established in 1998 following the merger of the Family Business Council and the Foundation for Family and Private Business.
The FBA awards are open to all Australian businesses (both public and private) which are substantially owned and operated by a family, or group of families, in categories including first, second, third, and fourth generation.
Australia’s top family businesses were recognised in August at FBA’s 2004 National Family Business of the Year Awards held in Queensland.
The awards were presented in four categories and the winners were:
- First generation (innovation and entrepreneurship) Victorian landscape developer, Normark Landscapes.
- Second generation (formalisation and growth) New South Wales coffee manufacturer, Cantarella Brothers.
- Third generation (business renewal) Victorian company, Tobin Brothers Funerals.
- Fourth generation (sustainability into the future) Queensland leather wholesaler, Packer Leather.
The second generation winner, Cantarella Brothers (known for their Vittoria brand coffee) was started in 1947 by brothers Orzio and Carmelo Cantarella and the business is now owned by their children.
According to the awards report: This private company [has] succeeded because they have focused on employing the very best people for the job, with ongoing training and education seen as vital for all staff members. There are now 200 full-time employees in the business, including four family members.
All family members face the same criteria as everyone else and must come to the business with relevant education and experience. Every employee is employed by the Board and all individuals must prove a desire for skill development and passion for the industry regardless of if they are family members or not.
New South Wales FBA Deputy Chairman and Director of the family real estate business, Raine and Horne, Angus Raine says the winners were chosen on a range of criteria based on their business models, and their approach to performance, professionalism and service.
Raine said the need for family businesses to choose staff wisely and put the right processes in place to retain them is one of the most important factors for a business to succeed.
Succession planning is also a critical aspect in helping to ensure the success and direction of a family or private business, according to experts.
But three out of four family- and privately-owned businesses have not sought external advice in developing a Succession Plan, according to the Australian Family & Private Business Survey 2003. Family and private business owners also appear to be unaware of the complexity of the succession process; only 23.9 per cent have it in writing and 27 per cent indicate that it is implemented.
Professor Smyrnios says that it is crucial for family businesses to seek external succession planning advice to get it right.
For example, review ways of minimising capital gains, setting up of trusts, explore issues of management versus ownership (inheritance) succession, the development of family constitutions, ways of dealing with conflict, passive versus active family members.
There are a plethora of matters that need to be taken into account involving family, business, individual, financial, legal, estate planning, psychological/behavioural, and leadership, Professor Smyrnios says.
Graham Connolly FCA AFAIM, Managing Director, Family & Private Business Advisors Group, says the findings of the RMIT survey are in line with the previous four Family and Private Business studies conducted by Monash University that he was involved with.
Though the wealth of Australia’s family and private businesses has increased from the $1.2 trillion reported by Monash in the 1997 survey to the current $3.6 trillion according to RMIT family business owners still need to address the management succession and the future ownership of their business, Connolly says.
Author of the book The Private World of Family Business (FT Pitman Publishing), Connolly has worked with family and private business owners for more than 20 years. His consultancy brings together the knowledge and skills of its people for the continuing success of family and private business owners and managers.
According to Connolly, succession planning is crucial for successful family and private businesses and accountants should be raising this issue with their family and private business clients.
Tomorrow we’re all going to be a day older. As the older generation is slowing down, it’s important to have a business plan and vision for the future, Connolly says. It’s like the son who’s badgering his father about [developing a succession plan] and the father says, Well there’s plenty of time to do that’, and the son says, But I’m going to be 65 next week’.
Connolly says he has worked on more than 300 assignments developing succession plans with family and private business, and has found that no two families are the same.
Family and private business is a witches brew a combination of love, greed, jealousy, and money; the sort of stuff that can create family wars.
Connolly says that succession planning can cost family and private businesses up to $25,000 but believes external advisors are worth the expense.
We can reduce the influence of the personalities and can be totally objective because we are not family members. We are not scared to provide honest assessment or comment.
It’s necessary to seek external advice when developing a succession plan because family businesses can’t be independent. They need someone who can be objective and puts the business first. Often it’s the most outspoken and dominant personality from the family that can rule the roost’, whereas we can speak to them individually and as a group to find out their wishes, concerns, and aspirations for the future, Connolly says.
Karen Doyle, Executive Officer, Family Business Australia, NSW Chapter, says the most important preparation for succession is to start talking about the process now. Don’t wait until there is a crisis in the family. By then your options will be limited. Family businesses should seek advice from an objective professional who specialises in working with family businesses.
Doyle says the pressure of succession planning can be minimised by early preparation, communicating with family members and key non-family members of your business and working with an appropriate adviser.
According to Doyle, one of the reasons why seeking external advice is recommended by Family Business Australia is because it takes the pressure off the current management to appoint the successor and, instead, goes through the process of identifying the qualities and skills needed for the management positions and identifies whether someone in the next generation is the most suitable person for the position.
Formal management structures are lacking particularly among family businesses, according to the Australian Family & Private Business Survey 2003.
More than 36 per cent of family business owners reported that they do not have a management structure in writing, compared with only 18.6 per cent of non-family business owners. Professor Smyrnios says that formal management structures are lacking particularly among family businesses because of the focus on informality.
Owners keep them in their head rather than as part of a complete written plan, focusing on all important aspects of the business.
FBA’s Doyle says in many family businesses, the business grows faster than the ability of the founder to manage it professionally and informal management structures develop and are accepted as part of the culture of the business.
Sometimes the entrepreneur who has built the company lacks the business skills to implement the systems and processes which ensure the professional operation of the business.
This is often accepted until the business reaches a certain size. When the business has grown to include non-family members, the pressure is often there to review the structures of the business, Doyle says.
Meanwhile, EMSO Marketing’s Corinna Herbert says that her and Noel’s biggest challenge is handing over control and delegating duties that they have done in the past.
It feels as though we are losing a part of ourselves, which is silly, as the process will allow the expansion of our business. We are changing the business from an us’ business to a systemised business.
We believe strongly in teamwork and the ability to identify our own shortfalls; in this I do not mean that we accept second best, it is that we can pinpoint areas where we are not proficient and, in so doing, are able to bring in the specialised people to get the best result, Corinna says.
Key concerns of family- and privately-owned businesses
- Growth strategies and tightening margins
- Dealing with competitors, particularly large national and multinational cartels
- Effective business planning
- Recruiting the best people for their organisations
- Retirement to rather than from the business
- Succession and estate planning
- How to sell their business effectively
Source: Professor Kosmas Smyrnios, Director of Research, School of Marketing, RMIT University
The Australian Family & Private Business Survey 2003 results:
- The average age of CEOs is 53 (versus 52 years for non-family firms)
- One in five owners (21%) are over the age of 65
- Seven out of 10 are facing generation change over the next 10 years
- 68% of CEOs will retire in the next 10 years
- 62% have not identified the next CEO
- Three out of four have no written plans for the future
- 75% do not have a Future Ownership Plan
- 77% do not have a Management Succession Plan
- Only 6% have implemented a Succession Plan
- 50% will sell 16% want to sell now
- Three out of four have not sought external advice in developing a Succession Plan
- 32% will succeed from first to second generation and 16% second to third
Source: RMIT University and Boyd Partners