Family businesses are a cornerstone of Western Australia’s economy. They range from mining operations in the Pilbara to agricultural enterprises in the Wheatbelt and small businesses in Perth’s suburbs. Yet only about 30% of family businesses transition successfully to the second generation, and just about 12% survive into the third.
The reason is rarely commercial pressure or economic downturns. More often it is conflict within the family during succession planning.
With careful planning, open communication and the right structures in place, it is possible to protect both the business legacy and the family relationships.
1. Start planning early (much earlier than you think)
Succession planning is frequently delayed until the final years before retirement, often when the options are limited. Ideally, one should start thinking about business succession before the next generation is ready to be involved in the business.
An early start gives the next generation time to develop skills, pursue further education and gain outside experience before entering the business. It also provides parents with the opportunity to consider alternative management options if the children choose to take other career paths.
Succession should be seen as a process of at least 10 to 15 years, not a task that can be effectively accomplished in the final years before retirement.
2. Establish Clear Communication
Family conflict often arises from assumptions, unspoken expectations, and poor communication. The solution is structured communication in a manner where the family business discussions are kept separate from everyday family conversations.
Hold regular family meetings dedicated solely to business matters. These discussions should not take place around the dinner table or during family holidays. Consider using an external facilitator in the early stages to keep the discussions constructive.
Documenting the outcomes of these meetings is critical. What may seem clear communication can become disputed memories years later. Written records help streamline the decisions and prevent misunderstandings.
3. Define roles and responsibilities
Unclear roles are one of the fastest ways to generate conflict. Every family member involved in the family business should have a formal job description, clear reporting structures and performance expectations.
Being a family member should not automatically entitle anyone to a leadership role. It is often prudent to require relevant qualifications or formal work experience, which confirms demonstrated competence, before family members are given strategic responsibilities. Many families also require younger members to begin in entry-level positions, creating a culture of merit in the family business.
4. Address the “Fairness vs Equality” challenge
Parents often struggle to balance fairness with equality. Not all children may want to participate in the family business, and not all may have the necessary skills.
A written family employment policy outlining the requirements to work in the business is a useful tool. This may include criteria such as education, work experience and performance standards. Roles then go to the most qualified person, and not simply the most available person.
For children who are not involved in the business, families may consider alternative ways to provide equivalent value. These provisions can include property, cash payments, or investments. The key is open discussion about what “fair” means to your family.
5. Create proper governance structures
As a business grows, informal arrangements become inadequate. Establish proper governance mechanisms that can handle both business and family dynamics.
Many families establish a family council to deal with family issues and a separate board of directors for commercial matters. Independent directors can bring objectivity and help mediate disputes from an independent standpoint. This dual structure allows families to resolve personal matters without disrupting the business operations.
6. Plan for different scenarios
It is rare for any succession plan to unfold exactly as intended. Often circumstances change, successors lose interest or unexpected health issues arise. Your succession plan must be flexible enough to accommodate contingency scenarios.
Some options include appointing professional managers, selling the business to one child and compensating the other children, or implementing staged ownership transfers.
A flexible plan ensures that the business can continue regardless of changing circumstances.
7. Financial and tax implications
Family business succession involves financial and tax considerations that can significantly impact both the business and family wealth. These issues require professional advice and careful planning to optimise outcomes.
Consider strategies like family trusts, gradual transfers of equity or management buy-outs. Each approach has different consequences for capital gains tax, stamp duty and ongoing tax obligations. The right solution depends on the structure of the business and the family’s unique circumstances.
Sometimes the most emotionally satisfying succession plan isn’t the most tax-effective approach, requiring careful balancing of priorities. It is always recommended to seek legal and financial advice before committing to a course of action.
8. Manage the transition
The handover period is often the most challenging. The transition should be gradual, moving control carefully so that the successors can adapt to the position. This allows the next generation to demonstrate their capabilities while providing the outgoing generation comfort that the business is in good hands.
Consider having clear communication protocols so that the transition can flow smoothly without disrupting the business.
9. Conflict resolution
Despite careful planning, some conflict may still arise in family business succession. The key is to deal with the conflict promptly and constructively.
Professional mediators or consultants, who specialise in resolving conflicts amicably, may be of assistance. Such independent advisors can provide neutral perspectives and deflate rising concerns.
There is no one-size-fits-all solution to family business conflicts. At times, the sensible outcome may be that some family members should not be actively involved in the business. Other times, the business may need more flexibility to accommodate the changes that come with a new officeholder.
10. Role of legal advice
Don’t assume that family management is automatically the best approach for your business. Sometimes bringing in professional management while retaining family ownership provides the best outcome for everyone.
Professional management can remove family dynamics from day-to-day operations while preserving family wealth and legacy. This approach works particularly well when family members have the skills to be effective owners and directors but may not be suited for operational management.
11. The role of professional advisors
Successfully navigating family business succession typically requires a team of professional advisors including lawyers, accountants, business consultants, and sometimes family therapists or mediators.
The costs of good succession planning must be balanced against the potential costs of family conflict, business disruption or sub-optimal tax outcomes.
At Solomon Hollett Lawyers, we regularly work with accountants and financial advisors to design succession strategies that meet both legal and commercial needs.
Moving forward
A successful succession plan is about more than giving ownership. It is about transferring knowledge, values and relationships that have built your business.
By starting early, communicating clearly and seeking professional guidance, your family business can continue to prosper for generations to come.
If you would like tailored advice on succession planning for your family business, please contact our experienced estate planning lawyers in Perth at Solomon Hollett Lawyers. We can help you put the right structures in place to ensure a smooth transition.
