Introduction
Succession planning is a critical aspect of any family business, especially in Perth and Australia, where family-owned enterprises represent a significant portion of the economy. Unfortunately, many family businesses overlook the importance of this process, leading to conflict, legal and tax complication issues when it comes time for a change in leadership. In this blog, we’ll go over some common mistakes we have seen as tax accountants in Perth made by Australian family businesses during the business succession planning process and offer insights into how these pitfalls can be avoided to ensure a smooth and successful transition.
These mistakes can just as easily apply if you are getting the family business sale ready.
Mistake #1: Procrastination and Lack of Planning
One of the most common mistakes made by family business owners is failing to start the succession planning process early enough. Many assume that they have plenty of time, only to find themselves scrambling when a sudden event forces them to confront the issue. To avoid this, begin planning well in advance, allowing ample time for discussions, negotiations, and identifying potential successors.
Mistake #2: Ignoring the Need for Professional Advice
Another common error is neglecting to seek professional advice from legal, financial, and tax accountants in Perth. These experts can provide valuable insights on the legal, tax, and financial implications of various succession options, as well as guidance on the best strategies for implementing a smooth transition.
As an example: getting the tax structuring done properly decades away from succession with advice from your business accountants is important. Often the tax structuring done upfront does not properly consider long term succession and the cost of changing structures later on is prohibitive.
Mistake #3: Poor governance
The succession of the family business requires a succession of knowledge together with clients. So having strong cloud accounting, clear documented processes that explain the financial and tax systems including items like the BAS preparation process, HR Compliance and payroll tax returns will make the transition easier.
If the controls are currently held within one person, and the tax advice provided to the family business by your Perth tax accountant is effectively only verbal it is much harder for the next generation to take over.
Mistake #4: Inadequate Communication
Open and honest communication among family members is essential for a successful succession plan. It’s crucial to involve all stakeholders in the process and to ensure that everyone’s opinions and concerns are considered. Failure to foster open communication can lead to misunderstandings, conflicts, and resentment, which can be detrimental to the business.
Mistake #5: Not Considering the Skills and Qualifications of Potential Successors
It’s important to objectively assess the capabilities of potential successors and to select the most qualified individual for the role. Many family businesses make the mistake of prioritizing family ties over qualifications, which can result in an inexperienced or unqualified leader. To avoid this, establish a set of criteria for selecting a successor and involve independent advisors in the decision-making process.
Mistake #6: Overlooking the Importance of Training and Development
Preparing the next generation for leadership roles and giving them a financial education is critical to the long-term success of a family business. Many businesses, however, fail to invest in the necessary training and development programs, resulting in successors who are ill-prepared for the challenges that lie ahead. To mitigate this issue, ensure that potential successors are provided with the resources and opportunities to develop their skills and gain practical experience in the business.
A preliminary step in this process is engaging your tax accountant to address and deal with your next generation when your statutory tax returns are due for signing.
Mistake #7: Failing to Address Conflict Resolution
Family businesses can be prone to conflicts, particularly during times of transition. It’s essential to have a conflict resolution plan in place to address disputes and prevent them from escalating. Failing to do so can lead to a breakdown in communication, a negative working environment, and even the potential demise of the business.
Engaging an independent third party like your Perth tax accountant or business accountant as a mediator can help in this process.
Mistake #8: No profits
It is important to acknowledge that for the family business to be attractive to the next generation it needs to generate cashflow to appeal to that generation. If the forecast cashflow for the business (possibly prepared by your Perth tax accountant) is looking grim a good succession strategy might not be transitioning to the next generation: it might be selling stock and equipment off at the auction and shutting the business.
Conclusion
By being aware of these common mistakes and taking proactive steps to address them, Australian family businesses can significantly improve their chances of a successful succession. By engaging in thorough planning, seeking professional advice, fostering open communication, and investing in the development of future leaders, family businesses can ensure that they continue to thrive for generations to come.
