A Guiding Hand For Family Businesses

There are many advantages and disadvantages of running a private family business compared with a listed company, and an adviser like your accountant may just be the person to help you avoid the pitfalls.

Benefits of private family enterprises include privacy, lack of scrutiny, and lower costs owing to reduced compliance expenditure. Businesses are thus able to adopt a real focus on substance rather than form, and take a long-term view, whilst employing patient capital.

However, the Federal Government's obsession with the difference between the corporate and individual tax rates creates an unfavourable environment for successful family businesses. Elements of the current tax reform, like the taxation of trusts, are making it harder for family enterprises.

The utility of advisers is thus evident. The range of advice that family businesses want can be as wide as the families or the businesses they run - it could be straight business advice, family advice, organisational structure or business strategy. It is important to recognise that although consultants can indisputably add value to family businesses, they cannot be all things to all people.

Family business owners thus have to be aware of the strengths and weaknesses of each consultant, and be quick to seek recommendations to other advisers for areas outside their expertise. Hence, the best advisers for family businesses are those people without hidden agendas; people with perspective; and those with experience advising other family businesses. The accountant Frank Jones (formerly of Horwarths and now retired) became well known among family businesses. He never had his own family business, but spent all his working life with family businesses.

Consultants report that three prevalent problems are evident among family businesses are:

• a lack of communication within the business;
• a lack of professional management and, finally;
• a lack of professionalism with the board of management or the advisory board.

Resolving communication issues involves a unique approach for each enterprise. There is no one universal method as the impinging factors, particularly cultural influences, for each family have to be considered. For instance, Jewish and Italian families tend to discuss business at the dinner table whereas Anglo-Saxon families tend not to.

Introducing professional management to a family business should be done slowly, and not at the top. It is advisable to introduce professionalism further down the line, developing each staff function while systematically advancing towards the senior roles. This ensures that structures are in place to support a professional managing director.

As any business grows, it needs external experience to help sustain and contribute to further growth. A board of directors comprising some external members is often recommended. Family business owners should be prepared to experiment when professionalising the board. If the first board does not work, try again.

Another key issue faced by family business owners is the matter of succession planning. The key steps to sensible succession planning are communication, communication, and communication. All family members should talk together and discuss issues on a regular basis. Each family should conduct the meetings in their own unique way. Some families prefer formal meetings while others prefer informal meetings. Some might include spouses or outsiders.

Communication flows are especially difficult to establish once personal hostility develops. Hence, advisers also often recommend that a constitution for family businesses be drawn up. The document can be upgraded as the business expands and provides a mechanism for developing communication.

Nevertheless, one way of tackling the problem when tensions mount is to bring in an outsider. Depending on the degree of hostility, an outside adviser could be the family lawyer or accountant, a psychologist or a friend.

The second method is to start interpersonal problem solving with the secondary issues. By starting to resolve matters that the conflicting parties are likely to get some agreement on, trust and mutual understanding can be developed and built upon. In contrast, attacking the biggest problem first often tends to inflame situations and augment hostility.

In conclusion, if the survival rate of family businesses is to improve so that they can be passed down from generation to generation, it is crucial to deal with interpersonal family relationships and succession issues. Family businesses should not underestimate the importance of communication with other family members on an ongoing basis. They should have a process in place to deal regularly with any potential conflict areas, to motivate family members to work together effectively, and to foster family unity, values, and a family legacy.

Family business advisers such as accountants, lawyers and consultants offer family firms a resource to help negotiate these transitions, and increase their ability to survive. The ultimate beneficiaries will be our families, our communities, and our country's economy.

This article is partly excerpted and adapted from Naphtali, M. Keeping business all in the family, Australian Accountant, June 2000.

Yuen Ching Ho is pursuing her PhD in the Department of Accounting and Finance at Monash University, and is a Research Assistant at the AXA Australia Family Business Research Unit. Her thesis investigates leadership and governance issues within the family business context.
First published: 26 October 2000.
Last updated: 5 October 2005.