Postcards from Down Under

By Christopher Jay

The message of a big new study is that Australian family business owners are too busy to pay much attention to planning for continuity. Sound familiar?

Most social trends that originate in America take about 18 months to migrate across the Pacific to Australia. Interest in the study of family business has taken a bit longer. Although family business is the largest single sector of the Australian economy—with three times the total assets of listed public companies—the needs of these firms have not been extensively documented until now.

A survey of 1,039 family businesses by a team at Australia’s Monash University in Melbourne suggests they are more in need of help than many of their counterparts in the United States. Among the key findings:

• 49.3 percent did not have a long-term plan.

• 45.1 percent lacked an adequate management structure.

• 47.3 percent had no outside directors on their board.

• 45.2 percent did not have regular board meetings.

• 76.3 percent did not give family members performance appraisals.

• 82.9 percent lacked a clearly defined strategy for training and developing family members.

• 40.4 percent of owners did not have life insurance.

• 78.4 percent had no formal process for resolving conflicts between family and business interests.

• 62.4 percent had no instructions in their wills for the future of the business.

If one conclusion stands out, it is that Australian family business owners have not invested time and energy in developing formal, structural arrangements for managing conflict and planning for succession. Basically, the family is too busy driving the trucks, managing the production line, keeping the customers happy, and planning their next marketing campaign to pay much attention to ensuring continuity in the business.

The Monash University survey, supported by the large National Mutual Life Insurance Association, was based on a 250-item questionnaire. The researchers defined family business as companies with more than 50 percent ownership by a family or families; those effectively controlled by a family; and those with a majority of senior management drawn from the same family.

According to these definitions, there are about 312,000 family companies with employees in Australia (excluding so-called Mom-and-Pop businesses), with a combined wealth of $936 billion (U.S.). First-generation businesses in the survey accounted for 60 percent of the total, second-generation businesses for 25 percent, and third- and fourth- for 15 percent. About four-fifths of the respondents had revenues of $4 million or less, and only 2.8 percent had sales of $39 million or more.

In Australia, a constant stream of first-generation entrepreneurial startups are created and run by groups of family members. These companies consist of varied combinations of family members working side by side: husbands and wives, parents and their offspring, brothers and sisters, and so on. For several years, for example, people in Sydney’s suburb of Neutral Bay have enjoyed the photos in local newspapers of the three Rancan sisters advertising their gymnasium business. A wife and mother in Brisbane, Jenny Rixon, founder of the very successful Rixon Clothing Company, has enlisted her three children, daughter-in-law, and a nephew to assist her in the business.

However, one striking finding was that about half of the first-generation owners do not plan to perpetuate the business in the family. In fact, they never intended to do so in the first place. Their basic business strategy is to build up the value of the company and then sell it for as much as they can get. There is an Australian tradition of a husband and wife and their young adult children toiling for years to build up their sales and the value of their stock with the idea of eventually selling the company and then moving on. Frequently, after selling it, they take time out for a breather and then start some other business. This creates family wealth, but not a single, continuous family business.

The Monash University survey confirmed these findings. Of first-generation owners, 46 percent intended to sell the business, more than double the number of second-generation owners (20 percent), and more than triple the number of third-generation (11.1 percent). Interestingly, about half of the owners expected the present CEO to be succeeded by a nonfamily CEO, which suggests a considerable degree of realism about the interests and abilities of the next generation.

One reason that so many owners seem to be planning to sell their businesses is a lack of financial planning for retirement. The average age of business owners in the survey was 52, with more than 20 percent over 60. That means many will be nearing retirement in a few years. Although a large majority reported making adequate provision for their retirement, their responses to one question tell another story: A total of 23.7 percent of first-generation owners said their retirement funding depends on sale of the business. A total of 15.3 percent of the second generation and 5.8 percent of their third will depend on a sale to pay for their retirement. Still other business owners will continue to depend on income from the business—in the form of dividends, consulting fees, low-interest loans, and other devices to pay for retirement.

This could be a serious problem. The next generation in many of these families either won’t have a business to inherit, or the resources of the business they take over may be severely drained by the needs of the retired former owners.

Over the next 10 years, family business owners in Australia are expected to unload a total of $380 billion (U.S.) in assets. No wonder merchant banks, business brokers, and lending institutions in the country are starting to scent a major upsurge in transactions. The Australian survey overwhelmingly reinforces the experience of family business advisers around the world. Many of the cherished values and satisfactions of family business will be lost unless current owners decide in earnest to pass their companies to the next generation and get down to the hard work of succession and retirement planning.

 

Christopher Jayis an economist and business writer in Sydney, and co-author of “The Private World of Family Business” (Pitman).

 

What Australian firms want

 

 
Generation of firm
Objective
1st
2nd
3rd
Accumulate family wealth
34.0
27.7
31.0
Increase value of business
30.1
35.3
38.1
Improve lifestyle
19.2
18.5
8.3
Employ family, make careers
5.0
10.9
7.2
Pass to next generation
3.0
0.5
8.3
Sell the business
46.0
20.0
11.1
Fund growth with personal assets as security
44.6
41.3
29.8
Growth through sales
35.2
35.2
32.4
Growth with new products
22.3
23.4
22.1
Growth through higher profits
20.0
22.4
20.3
Growth through acquisitions, joint ventures
15.4
13.5
21.0
Multiple objectives
5.4
5.4
1.2
Other
3.3
1.6
6.0

The current objectives of Australian owners, based on a 1996 survey by Monash University of 1,039 businesses. (Percentages add up to more than 100 percent because respondents could check multiple objectives.)

Help is on the way, mate

The profile of family business in Australia is likely to be raised by a new foundation that will be a source of information in the field and organize conferences and seminars. The new Australian Family and Private Business Foundation in Melbourne is supported by National Mutual Life, the country’s second largest insurance and investment company. It will be headed by Graham Connolly, an accountant with the firm of Horwath & Horwath for 30 years who has been a consultant to numerous family businesses.

The team at the Caulfield campus of Monash University that conducted the “Australian Family and Private Business Survey 1997” is also developing a range of courses in family business studies to be taught at the university, and is organizing a Family and Private Business Research Unit. In addition, Bond University in the State of Queensland, has opened the Australian Centre for Family Business.

-- C.J.

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Issue: 
Summer 1997

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