Caitlin Sykes

Your Business editor of the NZ Herald

Small business: Intergenerational business - James MacQueen, BDO

James MacQueen is a partner in the Auckland firm of BDO - an independent member firm of the BDO network of chartered accountants and advisors - who specialises in family business.

James MacQueen, partner in the Auckland firm of BDO.
James MacQueen, partner in the Auckland firm of BDO.

What are some of the challenges succession presents for members of the older generation in a business looking to move on, as well as the younger generation looking to take up the reins?

One of the most daunting issues the older generation faces is letting go. Often, the main reason can be fear of change and the many emotional issues which arise from letting go. Other reasons include concerns over the ability of the younger generation to take over the reins and sometimes there are concerns over the adequacy of retirement funds.

In my experience, often the younger generation are eager to take up the reins and find the rate of change frustratingly slow.

Ensuring the structure of shareholding, board representation and makeup of the management team are appropriate play an important part in removing some challenges and creating the right opportunities.

What are some of the ways each generation can prepare for these changes?

The answers to this question are summarised in what we call the 'four Ls', representing the stages of progression of family members in their family businesses: learning business, learning our family business, learning to lead our family business and learning to leave.

Learning business can occur within the family business but it is beneficial to gain some experience in other organisations so that fresh ideas and approaches can be brought back to the family business.

As the next stage, family members planning to eventually take over the family business need to fully understand all aspects of their own business. This may include working in different parts of the business and should include attending management meetings so they can fully understand the challenges facing the business, the strategies being adopted to address those and, where appropriate, being closely involved in the implementation of some strategies.

Learning to lead the family business can be daunting. It is a gradual process that starts with development of leadership skills in an operational area of the business and progresses to more advanced roles - and always with the oversight of more senior staff members who understand there is a strategy of developing leadership and commercial skills in the younger generation.

Learning to leave is the hardest stage. In my experience, the older generation need a project or an activity to move onto otherwise they will be reluctant to let go. The other constraints, including having adequate retirement funds and confidence in the next generation, can be managed with good planning and communication.

Overarching these processes it is critical there is strong governance in the business and in the family. Governance processes include good planning, reporting, accountability and clarity of purpose and strategic direction.

Can you elaborate on that idea of governance in relation to family?

The family should have a clear plan setting out the obligations, expectations and rewards for family members in a similar way to how a business with multiple shareholders operates. The best way to achieve this is to prepare a family constitution. This will create a stronger framework to set the boundaries and in which to plan, implement and manage the 'four Ls'.

Do there need to be clear boundaries set between work and family time?

Family businesses often provide working family members more flexibility to juggle their work and family commitments than in non-family businesses. This needs to be properly planned and managed so it does not adversely impact on the business.

Where there does need to be a clear divide between business and family is in areas such as remuneration and decision making. Family members should be remunerated at market rates to reflect the value they provide to the business for their effort. I discourage paying wages to family members that are not at market rates as it crosses the boundary of business decisions and business actions being based on what is best for the business.

Over time artificial arrangements create disharmony within the family and the problems generally compound. Family members who don't work in the business can be remunerated through the dividend policy, either by them having some shares or more commonly the shares will be held in a family trust and the trustees can determine the additional remuneration paid to each family member.

I referred above to separate family governance. If this is well drafted and works in tandem with strong communication it can make a significant improvement in managing the conflicts in boundaries, preparing people for succession changes and, most importantly, establishing a framework to allow for harmonious family relationships and a successful business.

Coming up in Small Business: Cashflow is king, particularly in smaller businesses. So what are your tips and tricks for getting paid faster? If you've got some to share, get in touch: nzhsmallbusiness@gmail.com.

- NZ Herald

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