29 Jan 2014
Words Tim Admin

Family Business: Economic Lifeblood Brings Unique Challenges and Rewards

Family. It is the fundamental unit of society. For many, it is also the foundation on which their business is built. Family businesses, in all their shapes and sizes, dominate the private sector in Australia. Few might stop to think global giants like Toyota and Samsung are family companies. In Australia, the names Pedder (automotive), Angove (wine), Cooper (brewing), Haigh (chocolate) and Kennard (equipment hire) are substantial family brands. They are part of our $4.3 trillion family business sector, the nation’s biggest employer. There was a time when a ‘family business’ was the only kind of business. BDO Australia (accounting) reminds us family business has dominated commerce since the dawn of trade. “The family business model is the oldest and biggest business model in the world. When Japan’s Kongo Gumi closed its doors in 2006, it ended more than 14 centuries of continuous family operation. The company had been in the business of building Buddhist temples since the year 578, making it the oldest family-operated business in the world. Family Business Australia (FBA) tells us family businesses account for 70% of all businesses in Australia. So the sector has a major, direct bearing not only on the strength of private enterprise, but on the health of our whole economy. Recognition of this has grown only fairly recently in Australia. The sector is now gaining more attention from the wider business community, academia, and finally government. As Informer goes to print, a Senate inquiry into family business is preparing to table its report in Parliament. “This inquiry aims to put the spotlight on the family business sector and to provide Parliament with the information it needs to support Australian family businesses into the future,” said Deputy Chair Senator Sue Boyce. According to the Federal Department of Tourism, which lodged a submission, a significant number of Australia’s 238,000 tourism businesses are family-operated. Families are certainly a driving force in the accommodation industry, where a family partnership can be the ideal model for handling 7-day operational demands. Best Western Wyndhamere Motel in Shepparton, Victoria, has been owned by the Mangiameli family since 1979. Current hosts Sebastian and Cam grew up in the industry, gaining a strong work ethic from their parents Sam and Rosa, who handed over the business in 1997. Now Sebastian and his wife Connie, and Cam and wife Angela, have taken the business to new heights. A wing of executive spa suites was added in 2006, along with a major upgrade to Sebastian’s Restaurant. Then followed a new motel façade, development of Wyndhamere Apartments, and refurbishment of all remaining rooms. “The business has undergone major changes throughout the years, but the one constant you can guarantee is that the Mangiameli family will continue to provide the service guests have come to expect over the years, well into the future,” the family says. That level of pride and long-term view is perhaps the greatest difference between family businesses and the rest of the commercial world. “As they tend to take a longer term view, interested in growing the family wealth and having a different set of strategic goals compared to non-family-owned private companies, their long term economic contribution is significant,” KPMG’s 2012 Private Companies Survey concluded. “For many family businesses, the ability to plan long term can give them a huge competitive edge.” Resort Brokers Australia managing director Ian Crooks agrees. He has discovered the overwhelming personal and business rewards family involvement brings. For more than 20 years, Crooks was solely responsible for steering the company ship. Now, with his wife Karin, three grown children and a son-in-law all in senior roles, Resort Brokers has emerged from the GFC stronger than ever. And Crooks doesn’t mind telling you he’s happier and more motivated than he’s ever been. “There are six people who care deeply about the business and about our staff’s welfare and wanting them to do well. By sharing the load, we are far stronger, and it’s the happiest situation I’ve ever worked in.” KPMG’s survey also showed family companies were often able to be more innovative. ”The agility with which a well-run family business can take decisions quickly means that many are in a better position than the corporate sector to ride out economic downturns.” Richard Jay Laundry Equipment, established in 1969 by the late Richard Jay and his wife, now has the second and third generations working in the business. Australia’s only family-owned national commercial laundry equipment supplier has been quick to expand and diversify. Richard Jay imports and distributes the quality Maytag range. More recently, the family launched Equipe Solutions to import dispensing solutions, became the Australian and NZ distributor for LG commercial laundry equipment, and established a third company to offer finance and breakdown service packages on new laundry equipment. “All three companies are growing and we are always on the lookout for more opportunities,” said marketing manager Libby Baldwin (nee Jay). For many of the 38 organisations, advisers, academics and family businesses who made submissions to the Senate inquiry, the sector is long overdue for attention. “Australian governments have thus far failed to recognise and appreciate the importance of the family business sector, let alone introduce innovative policy,” FBA told the inquiry. At the very least, the inquiry is almost certain to call for more official ABS data to be gathered to inform policy debate and decisions. Currently, virtually all information on family businesses has been gathered or sponsored by the sector itself. So let’s look at what is known. One of the key challenges is communication between family members. Differentiating between work and home – maintaining family harmony balanced with the competing demands of business – can be tricky. Crooks says, while the family hasn’t laid down formal rules at Resort Brokers, conflict is avoided because each family member has a distinct role. “We respect each other’s expertise and don’t stray into the other’s field. “I will admit, though, it can be all consuming. We are always talking and thinking about work. Sometimes it can be hard to get some proper downtime.” A 2010 MGI Survey found 86% of family enterprises do not have set rules, 72.1% do not hold regular family meetings, and 57.7% do not have a formal board of directors. Richard Jay is one company that does. “We have a board and management team which meet every month,” Ms Baldwin said. “It is most important to have an effective business plan along with a board and management team.” Some submissions to the inquiry spoke of a lack of appreciation for the importance of business structure, governance and risk management. As one put it, family enterprises often grow “organically and reactively rather than proactively.” It remains to be seen whether the government might attempt to address this through either regulation or education. Ultimately, generational change is expected to raise the level of formal management. A 2010 KPMG Survey of the Next Generation of Family Business showed a high proportion of the next generation has tertiary qualifications, and most are more highly trained than their predecessors. The survey also found the next generation’s top priorities for change and growth were business strategy, governance and management structure. Which brings us to the next big issue concerning family business – succession planning. Some have gone as far as suggesting Australia is facing a looming leadership crisis, with control of most family businesses vested in aging owners. FBA says studies show 81% of owners intend to retire in the next 10 years, generating a wealth transfer worth $3.5 trillion. Family business exit planning is essential, but also fraught, given the relationships involved. Surveys show around 40% intend to pass on the business, but 60% would consider selling. Sometimes the interests of both the current owner and the wider family might be better served by selling to realise the business value. That’s not the case at Resort Brokers. “We definitely have a written succession plan,” Crooks said. “It is vital to set up the business soundly and to get professional advice.” What comes into play here are the other issues that dominated virtually all inquiry submissions – funding and taxation challenges unique to the family business situation. PWC Private says most family businesses think there are unfair obstacles that threaten their long-term competitiveness. “Family businesses want the government to level the playing field in regards to accessing finance, and removing the tax advantages enjoyed by (public) corporations,” PWC said. Many are hoping the report will call for a review of tax rules affecting trusts, which are commonly used in private family businesses as a way of protecting the family’s assets. Family businesses can be hit with stamp duty and capital gains tax bills on the transfer of assets, even though the transfer to the next generation may not generate cash in the same way a regular business sale does. Deloitte Private recommended the government consider “structural reform of the taxation of trusts and the taxation of family groups to create certainty and simplicity.” Submissions also called for the appointment of a Minister for Family Business, greater promotion of family business-specific education, and helping family businesses source qualified independent (non-family) directors. What is clear is how much Australia needs to value and support its family businesses. Research has shown the attributes of family business are viewed very positively and many people prefer dealing with family businesses. The Senate inquiry has at least shown the government wants to be better informed so they can tailor policy specifically to a sector that is literally the nation’s economic lifeblood. To access family business resources, visit www.fambiz.org.au.