Family Businesses That Closed: Why and What’s Been Lost?

1. Family Businesses That Closed:Why and What’s Been Lost? Paper by Associate Professor John Spoehr Executive Director Centre for Labour Research

2. Background to the study… • Australia will experience an unprecedented rate of business transfer over the next ten years as the baby boomers approach retirement. • Currently the average age of family business owners is around 56 and the median age around 53. • Estimated that nearly half of all family businesses intend to sell their business within the next 10 years - $1.6 trillion of wealth to change hands

3. Common knowledge… • Between two-thirds and three-quarters of family businesses either die out or are sold by the founding family during the first generation, and only 5 to 15 per cent continue into the third generation (Smyrnios et al. 1997).

4. Business exits… • Study was concerned with the exits of 'family owned businesses' from the market place. • A ‘sale’ that resulted in the transfer to a different ownership structure can be seen as the loss/closure/exit of a family business but what happens with (hopefully) the resulting capital/wealth. • Some exits from poor business practices

5. Study was the initiative of… • SA chapter of Family Business Australia in association with the Small Business Development Council of SA. • Funded by a grant from the South Australian Department of Trade and Economic Development

6. Reasons for exits, commonly identified… • Family businesses not adapting to changing environment • Internal resistance to change • Overspecialisation • Lack of competent successor • Poor leadership • Family dynamics • Lack of effective and timely communication

7. Positive reasons for exits… • Adapting to change and competitive pressure • Reinvent to accommodate developments in their product range • For ‘family first’ reasons We know a great deal about the reasons for family business exits but very little about the impacts

8. Plan for the future… • Consider what is right for your business, sale or succession • Future is the most significant change you will experience • Exiting is not a failure… if for the right reasons but there will be different strategic imperatives for which to prepare. • The key is to be able to have a choice rather than for an exit to occur by default

9. Who do business exits affect… • Owners and their families • Employees and their families • Suppliers • Economy (how ??) • Communities, local regional, national? cf combination of many business failures at once ‘contagion’ knock on macro implications of Asian economies in 1990’s

10. What are the effects… • Financial • Psychological • Flow on eg philanthropy, regional unemployment or under-employment, population, housing • Taxation… “Significant reductions in economic output, income and demand flowing from business closures are likely to result in a decline in revenue to government. This is likely to be most profound where significant out-migration to other regions arises from closures. Reductions in revenue are likely to increase the tax burdens on residents and businesses that remain and/or result in a reduction in services provided.”

11. Case studies • Manufacturing and retail • Turnover 3.5-15 million • Generations: 1st – 4th, ownership and mgt with family • Sales: 3 cases; Liquidation: 2 cases • ‘Growing’: 4 cases; ‘Static’: 1 case

12. Case study… Steven Marshall…

13. Reasons for family business case study exits… • Over borrowing due to payouts to other family • Staff recruitment and management • Admin/operational issues – late payments, expired patents • Competition from o/s –pricing and quality • Work life balance • Family issues – conflict, clashes • Payment delays • Lack of marketing skills • Non-supportive government policies

14. ‘Losses’ identified in the study… • A loss of entrepreneurial capital and entrepreneurial opportunity • Dilution of the capacity to re-invest in new productive enterprises with the division of proceeds among multiple beneficiaries ie loss to local economy • Employment losses • Losses to suppliers of materials and services • Financial losses • Losses in relation to customers, of intellectual property, of business efficiency related to the establishment of trust and ‘social capital’,

15. Losses (cont) • Loss of unquantifiable benefits to the community and to those directly affected in terms of personal fulfilment. • It is clear that family business closures have an impact beyond those directly involved.

16. However… • Some of the positive outcomes: • Growth enhanced with when inefficient and unprofitable business replaced by profitable ones. (Exits may facilitate using resources more effectively by current or future generations) • Learning experience from the exit – do things differently next time • Funds from sale may be invested more productively in other ventures • Family members ‘released’ from less than functional relationships that they felt trapped by

17. Future research • This small case study approach has helped to inform future research and policy development related to family business closure and development. • Undertake a wider study to identify the ways in which the entrepreneurial capital/wealth of families in business can be most effectively deployed for the benefit of its members, employees, the state and the community.

18. Conclusion • Concerns about high rates of business ‘failure’ take on new significance when the social and economic impacts of family business closures are better understood. • There is a pressing need, in the context of the ageing of family business proprietors, to better understand what role government might play in helping to ensure that as many family businesses as possible survive generational change and prosper.