Finance

Transforming the family business

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Most entrepreneurs in family businesses believe that having to sell up means they have failed to engineer a smooth succession. But a sell-down or partial break-up of the family business might be a way to diversify and grow the family’s interests. By TOM M

By Tom McKaskill

Family business

Most entrepreneurs in family businesses believe that having to sell up means they have failed to engineer a smooth succession. But a sell-down or partial break-up of the family business might be a way to diversify and grow the family’s interests.

Most multi-generational family businesses have no intention of selling out. Unless they are forced to sell due to a lack of a successor to manage the business, a breakdown in relationships within the family or a business crisis, their intention is to continue to pass the business down to successive generations.

However, they generally fail to take into account generational differences which inevitably undermines most family enterprises. Instead of avoiding selling out, they should embrace it as part of the family business renewal process.

Traditionally, the majority of family businesses were started in agriculture, light industry or basic services sectors. The owners generally worked long hours to accumulate wealth which was mostly tied up in the venture.

One of their major objectives was to create a base of income and wealth so that their children and grandchildren could live better lives than they experienced themselves as children. They desired to give them a better start in life than they had. Thus education was important.

That being said, it also channeled their offspring into more skilled occupations and into the professions, well away from the wealth creation skill base of the family business. Few of these children then wish to return to the family business.

Without a successor to take over the core business, the family enterprise will be sold.

Instead of this route, families in business should look at how their accumulated wealth and wisdom can keep the family in business through the interests of their younger generation.

One asset that they probably have in abundance is wisdom in business. Since most small businesses fail through lack of knowledge of basic business skills, senior family members can mentor and coach younger members in new ventures. Instead of sticking to traditional industries, the family could embrace the business interests of their children and help them develop ventures in IT, media, professional services and electronics, or whatever drives their passion.

Wealth tied up in the traditional business could be released through a sell down, partial breakup or outright sale to create a family venture fund. The funds could then be used to invest in various ventures of the younger generation. Money could be recycled back into the fund though dividends, trade sales or IPOs. New ventures could be assigned a board of advisers or board of directors to help navigate the venture to profitable growth.

A further advantage of this family venture model is that it would allow a diversity of investment models to be employed. The family could own all or a part of a new venture. Joint ventures with outsiders could occur as well as investment by venture capital or private equity.

Family members might be allowed to buy out the family interest to gain greater control and enable funds to be recycled into new family ventures. Funds not in use could be invested externally until needed.

Families in business need to find a way of tapping into the intellectual capital and passion of the next generation. It is doubtful that they will do it by insisting that they enter a traditional business. The family venture fund model allows a great deal of flexibility while ensuring that accumulated business wisdom and wealth are better exploited for the family’s benefit.

 

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.

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