KEY POINTS:
It's a well-known fact that many baby boomers will be attempting to sell their family businesses in the next five to 10 years.
The MGI 2007 New Zealand Family and Private Business Survey, prepared by RMIT University, says two-thirds of family business owners intend to sell their businesses to non-family managers or to the next generation of family members within the next decade.
The only problem is, 53 per cent do not believe their businesses are "exit ready".
Family businesses have many things going for them - they are often community oriented, less cut-throat and more flexible about work/life balance.
Unfortunately, some of the things that make family businesses great, are not seen as attractive by those in the wider business community.
Business owners whose companies are not ready to go to the market are going to have to work a lot longer, especially if they can't get what they want for the business, warns Grant Raynor, principal of chartered accountants MGI Wilson Elliott.
Some of the areas in which family firms fall down are: transparency of management, the formal management structure and succession planning.
Compared with non-family entities, family firms are less likely to have business plans in writing, approved by the senior team and revised annually.
More than 80 per cent of family businesses surveyed did not have a documented succession plan for the future management of the business.
The HR side can also be a bit loose. Regular performance appraisals are often left undone in family companies. "Only 26.4 per cent of family businesses have performance appraisal systems for family members, compared with 60 per cent for non-family members," says the survey. And 42.5 per cent of family businesses do not carry out performance appraisals regularly.
Meanwhile, 34 per cent of family enterprises did not have job specifications for the management team in writing nor in place. Long-term planning seems to be put on the back burner too. Around 52 per cent of family business owners said they did not have formal strategic long-term plans to guide their firms through changing business cycles.
When academics have looked at the success factors that make for high-performing family businesses, long-term strategy has been a consistent common contributor.
Family businesses can sometimes lack ambition too. Only 56.8 per cent of those surveyed said they wanted to become major players in their industry.
Meanwhile, nepotism is alive and well. Against advice, a quarter of family business respondents say family members are "found a position in the business", says the survey.
Raynor works with families to bring their companies into line, making them more attractive to trade buyers.
Drawing up a family constitution, where the company's direction is made clear to the family and the employees, is one of his pieces of advice.
"Anecdotally, what happens with a lot of baby boomers, is they have a romantic illusion that they will pass the company on to the next generation, but they've barely talked about it," says Raynor. They think "Johnny" will take on the business because he's worked there in the summer but "Johnny" is not interested in the slightest.
"A family constitution brings a whole lot of issues to the surface. The business will be stronger as a result of going through that process."
It can be a good idea for the constitution to be facilitated by a coach or a personal adviser so that business owners are encouraged to step back, says Raynor.
Down through the generations, it becomes less and less likely that a company will stay in family hands. According to the MGI survey in Australia, 57 per cent of family businesses are first-generation, 30 per cent are second-generation and 13 per cent third-generation. "We expect the same to happen here," says Raynor.
"One of the things we are seeing is a real huge desire towards a trade sale. If you are wanting top dollar, don't sell to family."
New Zealanders don't seem to lose sleep over passing their business on to the next generation. Only 24 per cent of family business owners have a policy of definitely remaining family-owned, according to the MGI study. Around 53 per cent indicated that the current CEO is more likely to be succeeded by a non-family member. And around 54 per cent of family business owners are actively planning the future sale of their business, either now or later.
One of the areas that family businesses should be careful to manage is ambitious senior staff.
For non-family management, a family business can be a frustrating place to work, particularly if someone less experienced than them - the boss's son or daughter - is being groomed to take over as CEO.
In order to prepare their businesses for sale, family firms should look to have key staff on contracts so that someone coming in sees the key people are locked in to the business, says Raynor.
A family constitution will help the senior management team. Family members may have no desire to be CEO and a constitution puts that on the table.
Non-family members at the top are becoming more the norm. In the survey, while nearly 30 per cent of family firms have management teams entirely made up of family members, 61 per cent of family business owners say family membership is not important when considering senior appointments.
Executive coach Iain McCormick, of the Executive Coaching Centre, is a big advocate of family members working outside the family firm to get experience and other skills.
This way, they find their feet but not under the watchful eye of mum or dad.
"Finding their voice is incredibly important," says the coach.
The founder usually has strong relationships with key managers in the business; his son or daughter has to acquire respect from the senior management team.
"I think family businesses are going to increase," says McCormick, who is involved in a new board director evaluation service, www.evaluation.com
A lot of talented entrepreneurs will eschew working for corporates as more companies here come under overseas ownership.
"I think that out of this will spawn a big family business sector. That's our economic hope," he says.
"It does not lie in working for big overseas companies that are sucking out costs - there is a bright future for entrepreneurs."
* Gill South is a freelance business writer based in Auckland.
A family affair
* Among the family business owners surveyed:
* 24 per cent have a policy of definitely remaining family-owned.
* 54 per cent are actively planning the sale of their business.
* Just over half do not think their businesses are exit- or succession-ready, although 78 per cent would like them to be.
* 81 per cent have not documented management succession plans and 75 per cent have not documented ownership succession plans.
* 51 per cent do not think that younger-generation family members are as interested in the business as the older generation.
Source: MGI New Zealand Family and Private Business Survey 2007
