The AXA Family Business Succession Planning Model is named after the Global AXA group, supporters of family business research. The model shows the two key protagonists in the succession process: the current owner and the potential or designated successor who represent the present and subsequent generations. The model shows that owners and their heirs are not alone during this process. Other significant people and structures are involved, and the key protagonists are in relationships with multiple and complex connections. Owners and successors are linked to two further subsystems: the business and the family.
The domains of the owner, successor, family business and accountant are described in detail in the following articles and should be viewed in terms of the developmental life cycle and organisational changes described in other articles.
The owner
The successor
The business
The family
The owner
When working with family businesses, most professionals focus predominantly on owners. While there is no doubt that owners are an integral part in the equation, they are not the only important element. An exclusive or undue focus on owners is not only misguided but also potentially self-defeating.
Generally, owners view the business as an investment from which they want to receive a reasonable return. Their expectations stem predominantly from their rights as owners. Owners are also dominant players in all other subsystems. They therefore have a pervasive influence over the enterprise.
When the circumstances and the environment are propitious to succession, owners will, in most cases, go along with the natural process. However, most owners tend to perceive the succession issue as too complex and do nothing usually because the environment is not conducive, and in response to their own ambivalence and to the ambivalence expressed by other stakeholders.
Background of the owner - Effective succession includes everyone involved in the family and the business. All constituents face particular issues and have their own goals and expectations. Australian family businesses are patriarchal by nature. However, it is noteworthy that increasingly women are starting up new businesses and in some sectors (e.g. service areas) this rate of start-up exceeds that of male proprietors. With respect to education, slightly less than half of Australian family business proprietors hold tertiary qualifications. About 30% of proprietors have academic qualifications below year 12.
Planning to ensure that the business can outlast the owner - In order to complete their life's work and pass it on to their heirs, owners face a very difficult task of implementing workable plans to guarantee that the business can last beyond their lifetime. Without doubt, failure to plan makes it difficult for owners to influence the future of their business. Succession planning means making the preparations necessary to ensure the harmony of the family and the continuity of the enterprise through to the next and hopefully subsequent generations. These preparations can be thought of in terms of the future needs of the business and the family.
Critical challenges involve developing and putting in place appropriate strategies and structures to make sure that the business grows, and that succession is addressed early and approached constructively.
Obviously, continuing the family business is not desirable for every owner. However, when it comes to succession planning there are a number of questions that owners should address when considering the long-term viability of the business including:
- Do I want the business to remain a family business?
- Am I willing to do what is necessary to ensure it remains a family business?
- Is continuing the family business desirable?
- Is the business an important enough financial asset to me and my family to be worth a major continuity effort?
- Do I want any of my children or heirs to succeed me at the helm of the business?
- Is anyone interested in succeeding me at the helm of the business?
- In my opinion, are the heirs capable?
Effective succession planning will not be possible unless owners respond positively to these fundamental questions.
However, in the final analysis, it is very unlikely that a firm can mobilise itself for succession planning unless an owner is willing to do so. Owners have the power to perpetuate or dismantle their life creation right up to the very end.
Starting the process of letting go - For owners, giving up business control entails finding new outlets for involvement. The task is to plan retirement so that it is viewed as retiring from but rather retiring to something. Many CEOs, especially entrepreneurs, have devoted so much of their lives to the business that they are quite unable to contemplate the notion of retirement. When they do imagine this eventuality, they picture endless days of boredom rather than pursuing creative and satisfying goals and activities. For many, during their working lives, holidays have been brief and far between. Even when they have taken holidays, business matters have been at the forefront of their minds.
An extremely important consideration at the retirement stage is for owners to develop interests and engage in activities outside the business that they can look forward to. These activities can act as incentives for the efforts required to undertake the succession planning process. Unless there are other interests beckoning, the process of gradually letting go will not occur. Owners need to appreciate that there is a life after the business; the knowledge of which can motivate them to embark on (and persist with) the succession planning effort.
The ongoing role of owners in the family business - The ongoing role of owners in the family business following retirement is yet another important consideration. While many owners retire gracefully to other interests, it is not uncommon for other owners to want a meaningful role in the family business following retirement. For those who decide to continue in the business in some capacity there are a number of alternative possibilities that can be pursued including continuing as chairperson of the board, gradual phasing out of day-to-day management and becoming a mentor for family members participating in the business. Effectively, owners need to have an exit strategy for themselves.
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The successor
As emphasised in The AXA Family Business Succession Planning Model, it is essential that issues surrounding the successor are not only considered in depth, but also addressed accordingly. The significance of business planning, and having sound financial and legal structures in place goes without saying. While these processes and structures are critical for the success of any organization, effective continuity planning involves examining the behavioural and interpersonal aspects including selection of a successor, communication of the decision to all relevant parties and grooming of the successor.
The importance of interpersonal relationships - The family business is a living asset. Whilst its ownership can be left to one's heirs without their active participation, the management of the business cannot. If the business is to survive, the best person must be prepared to carry it on and be capable of doing so. Succession must be developed, nurtured and installed in a considered way. In the end, succession planning is about the personal and interpersonal aspects of designating a successor, communicating the decision, and mentoring and developing a successor rather than a strict focus on economic, financial, business, legal, and estate matters such as the drafting of wills.
For adult children, decisions to join the family business are normally associated with parental relationship issues. Unless heirs and parents understand what is going on, any decisions can threaten not only the parent-child relationship but also the business. It is important for young, and for that matter older, adults to know what they want to do. This is particularly an issue for those successors who might be struggling with establishing their own identities.
Timing and mode of entry - Timing and mode of entry is another important consideration particularly in relation to successor development. Should heirs adopt a low-level entry or delay their entry into the family business until they have acquired some experience in the workforce? Low-level job entry into the firm provides successors with valuable knowledge of the intricacies of the business.
Should children work elsewhere early in their careers? Work outside the family business before joining the family firm can be valuable. Outside experience can broaden their knowledge and experience. It can also help them overcome doubts about doing it on their own, and earn legitimacy amongst family members, employees, and business associates Bacharach, A., Ganitsky, J., Carson, S., & Doochin, B. op. cit. However, the main thing is for successors to know what they want to do.
How does one go about the process of choosing the best successor?
- Rules for bringing family members into the business should be established.
- Early selection is essential.
- Coming to terms with the issue of what is best versus equality. Most parents believe that equality amongst the children is of prime importance. However, is this in the best interest of the longevity of the business? Aronoff, C., & Ward, J. op. cit.
- It can be extremely valuable establishing governance structures such as a Family Council, a Board of Directors and a Management Team. The outside Board can act as a catalyst in the selection and mentoring process. Notwithstanding, consensus among family, the Board, and management is paramount. These bodies provide excellent venues for discussion and problem solving.
- Consideration should also be given to the advantages and disadvantages of employing a nonfamily CEO.
Questions the successor should consider - When making the decision to join and subsequently manage the family firm a potential successor should consider a number of questions:
- What do I want to do with my life? This question requires successors to think about many more things than just the family business.
- What do I want out of the business?
- What am I prepared to contribute to the business?
- Do I want to be the boss and have all the problems that go along with it?
- Do I realise that working in a family-owned company is not a job but a way of life: living and breathing the business?
- Do I really want to join the family firm?
- Would I enjoy it?
- Am I prepared to join the family firm?
- Do I have the education, qualifications and necessary experience to join the family firm?
- Would I benefit from a stint (experience) at another company?
- What alternatives do I have?
- Can I work with my parents, relatives, and key personnel in the company?
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The business
The recurring theme in family business literature is that of an owner-manager who through years of hard work has built a successful and valuable enterprise and then, by failing to address certain critical business continuity issues, endangers the long-term health or even the existence of the enterprise.
Most stage models describe the linear development of firms. An alternative way of conceptualising business is by viewing them as incorporating three components: the owner, the firm and the strategy. Below is a list of factors associated with these three components.
- The resources of the owner or entrepreneur:
- Levels of motivation
- Education
- Age
- Prior business experience
- Gender
- The firm:
- Age
- Sector
- Size
- Legal structure
- Ownership
- The strategies of the firm:
- Planning
- Exporting
- Competition
- Technological sophistication
- New products
- External equity
These components can be viewed as overlapping and it is the combination of these factors that contribute to the development of a firm. Firms that develop successfully and quickly are those where all three components intersect. Firms that might not develop rapidly, not grow at all, or decline, may have an abundance of characteristics in either the owner, firm or strategy domains, but it is the amalgamation of these three areas that contributes to growth and development.
Depending on the stage of development of the family business various issues are foremost in the minds of owners and managers. In the subsequent paragraphs is an exploration of a number of the issues associated with family business development and survival.
Family businesses struggle to survive the first generation - Consider the common adage: clogs-to-clogs in three generations (anonymous). Family business research statistics throughout the world indicate that the family business survival rate from first-to-second generation is approximately 30% and from second-to-third generation approximately 15%. Approximately 70% of family businesses will not make it past the first transition and an even greater number will not make it past the second transition.
What is the significance of these statistics? Should we mourn the demise of the many businesses that do not make it past the first generation or should we marvel that a number survive in spite of overwhelming odds?
A number of reasons have been proposed for the low survival rate of family businesses including:
- Many family businesses are small, and lack the staff and financial strength of larger companies.
- The family is a stumbling block as the rigours of business sharpen such problems as sibling rivalry and generational succession.
- The funding of family estate/tax planning, retirement and divorce, as well as the funding of personal projects often tempts business owners to harvest profits rather than to reinvest them in additional business growth.
- Many owners of family businesses lack a conceptual framework for assessing their company and planning for its futures. Most owners do not take advantage of modern analytical tools (the most critical of which is planning) that can help them to overcome the challenges of family business continuity and to guide both the company and the family.
Changing family influences - There is an overlap between family and business. The business developmental progressions we have described should not be looked at in isolation of what is happening in the family. Changes in the business are often mirrored by generational and family developmental changes.
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The family
The family constitutes one of the fundamental social units of society. The family is the earliest and most persistent influence on its members. Most of an individual's experiences are shaped, perceived, understood and responded to according to core foundations established in the family unit. In most societies, the family comprises an economic unit providing defined roles, status, and expectations that influence the relationships between its members and between its members and society. It is for these reasons that the business cannot be understood properly without consideration of the critical role played by the family.
Different family types - Families can be classified in virtually any number of ways: as patrilinear or matrilinear, patriarchal or matriarchal, patrilocal or matrilocal, monogamous, polygynous, polyandrous, or nuclear or extended. Families can also be categorised according to various rules of exogamy which influence the selection of partners. Other family types are based on marriage or non marriage such as reconstituted or blended families, stepfamilies and single-parent families as in the case of widows, divorced persons, unmarried, and gay or lesbian families. In recent times, families have been constituted on the basis of so called new types of marriage or substitutes for marriage including two or more couples living together in order to share housekeeping and childcare responsibilities, or homosexual marriages, or contract marriages based on prior provision for separation.
Many entrepreneurs establish businesses in order to support their families, and as their families mature, spouses and children become increasingly involved in the day-to-day running of the business. A recent life-style survey of family business owners carried out by the Professors Claudio Romano and Kosmas Smyrnios at Monash University revealed that it is not uncommon for partners (i.e., wives and husbands) of owners to be employed in the business. Interestingly, size of enterprise and age of owner pose no barriers. This study found that almost 60% of spouses of business owners are likely to work in the business. Most interestingly over 50% of firms have children working in the firm.
To operate appropriately, the family requires a number of functions including unity of objectives, leadership, the maintenance of group morale, subservience of some individual needs to those of the family unit, interdependencies among members, maintenance of clear boundaries between generations and clarity of roles. These qualities and corollaries derived from them, establish requisites for the various individuals and subsystems (e.g. marital, sibling) that make up the family system.
The family affects the business - Workplace structures affect family life in a number of ways and vice-versa. Almost 20 years ago, researchers in the United States stated that the influence of the workplace on family life can be heightened when roles are similar across work and family domains. This situation is particularly characteristic of family businesses where the politics of the firm can be inseparable from the politics of the family.
- Spillover of business issues into family and social life - Many family business owners indicate that their business interferes with meeting family and household obligations. Business life can also impact on family and social relationships. Recently, a number of academics have highlighted how work and the rest of life are entwined and can spill over into each other. Sizeable proportions (i.e. over 40%) of owners report the negative effects of the business on their relationships with their partners (i.e. spouse), children and social life.
However, it is important to review these findings in light of the organisational and life cycle stages of the business and owner, respectively. For example, proprietors in the over 65 year age bracket comment on the positive effects working on their business has on their relationships with spouses, children and social life. In contrast, owners less than 40 years of age emphasise negative consequences.
- Work family complexities - A recurring theme running through this manual is that family management and ownership bring unique qualities, challenges and complexities that permeate the business and the family. These complexities can precipitate problems in communication, intergenerational feuds and difficulties in separating family matters from business issues. This is despite people's attempts to have a successful business and a happy family.
Families are emotional support systems. In contrast, businesses are supposed to be rational and market driven. Jaffe indicated that most conflicts and misunderstandings in family businesses have their origins in the patterns of relationships of families. The personal dynamics within families can influence business strategies, financial results, the business culture and ultimate performance of the business. A goal for every family business is to limit the possible negative effects of family issues on business matters, and vice-versa.
This is one reason why it is important to discover and understand the family dynamics behind the business structures. An understanding of family history often holds the key to resolving business issues. Both at work and in the home environment, families bring with them not just the issues at hand, but also a history of patterns of relating.
- Work and family role conflict - According to a number or researchers managing conflict between work and family demands is challenging not only for individuals, but also organisations. The family business literature is dominated by references to various forms of conflicts and problems associated with being part of a family firm. This body of literature documents stresses associated with not being able to get away from family members at or after work, being involved in multiple roles in relation to family members (e.g. as a father, CEO of the business, friend, colleague), as well as incompatible role pressures between job and family, such that participation in one role is made difficult by virtue of participation in another.
Healthy family business relations begin with developing healthy family structures, as well as keeping in touch with what each person wants, what the family stands for and what the family wants from its business. To build an effective business, families not only need to develop business plans and goals, but also systems that will ensure effective communication mechanisms including how to deal with conflict and how to work towards achieving shared goals.
Communication - There is a rich array of communication difficulties that occur in family businesses. Problems often arise owing to the dual relationship of being both a family member and business colleague. Conflict can also emanate from other sources including feelings of inequality, unfairness, powerlessness, not being listened to, confusion relating to different roles, lack of acknowledgment of one's contributions to the family and business or problems of communication.
Family business members almost uniformly report that their most pressing concern is poor communication within the family constellation. Styles of communicating, or lack of, can take on many forms: not having enough time to spend with people, not listening, lack of empathy, being aggressive or even withdrawing. In light of different communication styles, more often than not, concerns over communication are usually about control. That is, individuals attempting to get another family member to do what they want, or alternatively individuals feeling that others are placing undue pressure or influence on them.
A secondary communication issue is the difficulty family members have listening to one another. Effective communication is about listening to other members and respecting differences. Communication problems invariably build up over a long time and involve attitudes about people and the relationships. A number of processes such as Family Forums and Retreats can be set in place to enhance communication and to assist in the resolution of family conflict.
Succession: Source of conflict - Often the subject of succession is not discussed during the transferor's lifetime. When the topic is not discussed, the process of succession can be filled with misunderstanding owing to subtle differences in perception, assumptions, if not guesses about the other generation's intentions. Sometimes communication is cryptic and occurs in inappropriate places like on the shop floor or between only a few members rather than involving all family members.
When parents do not raise the issue of succession or suggest that discussing this matter would be a problem, this stance can suggest that a problem already exist. Families often fear that an open discussion of issues of inheritance along with the economic future of the family might only serve to fuel invidious comparisons among heirs that could destroy the fabric of the family. It is not unusual for family members to harbour very negative expectations of what might happen if succession issues were to be openly discussed in the family.
The life cycle of the family - It is also important to consider the life cycle stage of a family at the time of succession. Owners typically enter the last stage in the life cycle around sixty years of age. Many of the developmental challenges of this stage interfere with the family's ability and willingness to engage in an open discussion of succession issues. Moreover, most Western cultures have norms regulating family behavior that discourage parents and children from openly discussing the future of the family beyond the lifetime of the parents, especially in relation to economic and financial matters. Discussing estate planning is likely to be viewed as a breach of respect or as an attempt to feather one's nest, self-interest, avariciousness or as a lack of mutual trust.