Dennis Jaffe is a founding partner of Relative Solutions.
Known for their pragmatism and bluntness, Australians inhabit a vast island nation where family enterprise is deeply influenced by a harsh natural environment and social history. Dennis Jaffe investigates the succession issues facing the Aussie family businesses
In the last couple of months the second generation members of powerful Australian families have been making the headlines. First, James Murdoch, younger son of media tycoon Rupert, became head of Asian and European operations at News Corporation and was widely cited as his father's successor. Then just a few weeks later, James Packer (pictured), son of Publishing and Broadcasting Limited founder Kerry, announced he would be teaming up with Lachlan Murdoch, eldest son of Rupert, to purchase the outstanding shares of his father's company, which he now runs. These events could give the impression that next generation business leaders are easy to come by and that succession is not an issue for Australian families. However, this is not always the case.
Business down under
Family businesses are not a novelty in Australia. The oldest family businesses in a list compiled by Business Review Weekly, began in the mid-19th century and include firms in industries as diverse as natural resources, food and agriculture, manufacturing, and trading companies that brought resources to the rest of the world. The natural environment is the defining force in the nation. Twenty-one million people are clustered in a crescent of cities and towns along the southeast coast, while the growing metropolis of Perth stands as an outpost in the west. Most of the land, however, is scrub that is very sparsely populated with struggling native settlements and abundant natural resources. Australia, while huge, has a delicate environment – large parts of which will not support population. Water is a national challenge, and water supplies are scarce, making farming difficult.
The country is prosperous, and increasingly looks toward Asia for its economic partners and trade. Population is only growing at about 1.5% a year due considerably to overseas migration by the country's youth. And while there is a flow of skilled and educated immigrants from Asia and commonwealth countries, many of whom start new ventures, there is no pool of young families who are available to take over or purchase the many smaller family businesses that do not have a next generation within the family.
There are therefore some looming challenges for the next generation of Australian family business. The post-war infrastructure contained many thousands of service and manufacturing family businesses but their founders want to retire. In 2006, the Royal Melbourne Institute of Technology University's annual national study of family business found that two-thirds of Australian businesses were family business (with two-thirds of those being in the first generation) with an average annual revenue of AU$12 million (€7 million). RMIT found that most owners wanted to sell their business, and do not expect their children to succeed them. Many report they do not feel that the next generation is available – or inclined – to succeed them. But with the country's limited population, buyers may not be found for many of the smaller businesses.
Parents' family business do not seem very attractive to young Australians and they have a custom of taking off after secondary school, for one or two years of travelling around the world. Inevitably, some of them do not return. When they do return, young people often go to the large cities – Sydney and Melbourne – where professional qualifications, often not attained by their parents, are valued. Some join mining companies, which pay very high wages for scarce unskilled labour. No matter the size, the social and economic attractions of the family business are often not clear to them when weighed against shorter-term possibilities. Business owners are also finding that there is no pool of younger workers who they can attract as apprentices or entry level employees to take the jobs their children do not want. So there is a human resource shortage along with the natural resource shortage, which challenges family business continuity.
These challenges to successful family business succession face many thousands of family businesses in Australia. As the elder generation begins to look beyond the business to retirement, owners wonder if the business will be able to support them. Some are fortunate to have family sons and daughters who can take over, but they are concerned about whether their businesses can support both generations. Other businesses have a next generation in the family who are uncertain about whether they want to commit to the business, or whether it is the kind of life they want to lead. As a country, the limited resources of human capital for the next generation are as much a challenge as the lack of water. If the family does not have an available family successor they have limited options. They want to sell the business, as the RMIT study showed, but who will buy it? There are few local young people who can afford to buy a business, and a limited pool of young families from other countries.
In July 2007, four companies were given awards as Family Business of the Year in South Australia. Each of the companies had grown over three or more generations to become large and well-known, with a reputation for quality and service. In accepting the awards, members of several generations from each family shared their stories. One of the running themes of the narratives was the need for the second and third generations to take risks and innovate.
Spring Gully Foods started after World War II as an orange orchard. Founder Edward McKee found that his Christmas gifts of home-grown pickled onions were wildly popular. The next generation made the shift from corner stores to supermarkets and from pickles to other types of food. More recently, they have gone international with several brands, throughout the Asia Pacific region. At the awards ceremony, the second generation talked about how the founders allowed them to use their business knowledge to take risks and bring the company into new markets, while members of the third generation talked about how they were preparing themselves to move into the company.
Two third-generation family members from Spring Gully, and young people from a half dozen other long-standing family firms, recently gathered together to meet intensively for several weeks with young members of government to recommend some of the ways that family business could support the involvement of the next generation. They presented their recommendations at a meeting attended by family business leaders. Their goal was to suggest some of the ways that families could "transfer their knowledge, power and wealth effectively to continue successful family businesses". They suggested that family businesses provide an exchange programme for next generation members to have internships in other family businesses, and a mentor programme to help them develop their skills.
Such programmes are becoming important as there are significant challenges facing young people who try to sustain their family's business. For example, one young fourth-generation heir to a large citrus farm in South Australia has grown his family business into a major producer and name brand. Despite very low margins, he has begun to work with several other family farms to market his fruit in several other countries, even though it is difficult to find capital to grow his business. He makes it clear that he feels a deep commitment to the family but that he and his family are clear that they are making far less than they would in another business.
A second-generation winery, run by a group of siblings, is facing the retirement of one of the brothers and the inability of the business to find a successor, or to buy him out. Facing the retirement of the others in the coming years, there is very little they can do but consider selling the brand to a large manufacturer, and selling the land to a developer.
Help and guidance
Families such as the ones above look for help from the state and national government at both the state and national levels. Each offer a number of helpful educational, social and economic programmes and policies. People look to the government for social programmes that support business development. There is a network of government funded vocational education programs and resources, which help business owners develop the basic skills they need to run a business. However, only a few are specifically aimed at family business.
Australia also has a private organisation called Family Business Australia, which offers educational resources to help family businesses continue. With chapters in each state, the organisation sponsors many activities, including forums and small groups of family businesses that make a commitment to meet monthly in an intimate and confidential setting. These forums have been important learning experiences for many family business leaders in larger family firms. When a group of families facing similar challenges are able to get together on a regular basis, sharing their challenges and working together to implement effective policies, each family is able to develop a successful response to their unique challenges.
Some forums are explicitly organised for next generation family members. The organisation works closely with several university-based family business programmes, developing workshops and courses, and sponsoring research on family business challenges.
There is no magic bullet to sustain the thousands of family businesses in Australia, or in any country. But, as we have seen, the challenges they face come partly from the demographic, social and economic conditions of the country. The key element for successful families has been their ability to innovate and transform themselves as conditions change. The creation of social policies that support the next generation, and the provision of support and educational resources to help them move forward, represent a second element for family business sustainability. In Australia, these resources have evolved into a partnership among families, government, educational and consulting resources.
A professional "thinker" in oz
For 10 weeks last year I was appointed "Thinker in Residence" for the state of South Australia. In this unique programme of social innovation, each year the state selects a topic of critical importance and invites a global resource to visit the state, learn about their needs, and work with a task force of "partners" to develop a long-range plan for dealing with that issue. I was the 13th such "thinker" and my challenge was to help them design programmes, policies and activities that would support the future of their largely family business-based economy.
It was a great challenge for me. Instead of having a single family as a client, my client was a whole region, and my task was to develop ways to help all businesses together. I had been invited by a team who represented all the stakeholders – leading families, government, financial services and consultants, and education – and they provided me with background, contacts and a committed and diverse group as a home base.
In my 10 weeks there, I talked to several hundred people and visited a dozen regions, where I met with groups of family businesses. I also worked with a number of stakeholder groups who influenced family business. There was a group of family advisors who represented consultancies and financial services who were learning how to work with family businesses. There was a group of young people from families and government who conducted their own research and offered their own report on succession challenges. There was a group of leading families, a group of family business educators, and a group of education and social services who served teenagers, all of whom offered perspectives on the problem.
In a state with a population of just over 1.5 million, the estimates are that there are more than 50,000 family businesses. I was able to view the whole eco-system of resources that influence business, and to make some recommendations that would enhance the odds that more family businesses could be sustained.
Our report was delivered to the Premier and Cabinet for their support and action. While we made many recommendations, the centerpiece of our proposal was for a network of resources that would support family businesses in their own local areas, and a central resource center that would help these local centres develop programmes. The families I met at these centers talked about the personal nature of the advice, and the opportunity to learn from other businesses. These centers focused on start-up and entrepreneurial businesses, but we found that they very often met family businesses, and with additional training and educational programmes, they could be expanded to become centres for family business support. The larger and more established family businesses in the area were able to act as mentors and guides to smaller and more recent ones, sometimes creating a local learning community of businesses helping businesses.
Our recommendation was to create a clearinghouse at centres like these where young people could meet family business owners and learn about them as job and career opportunities. We found that there needed to be opportunities for successors from within a family business to learn together, in a small learning group, and other opportunities for young people who were not from family businesses to meet each other and potential family businesses they could enter. The focus of business education, even in local communities, was on larger public companies, leaving young people unaware of the special nature of the opportunity to work for a family
business. We suggested a secondary school program where family business owners could talk and even offer internships, and considered how potential immigrants from other countries could be made aware of opportunities, such as buying a family business. Over the coming year, my team of partners will help to make sure that the recommendations are followed up, and work with the government to fund them.