Preparing the next generation for Australia’s largest wealth transition

Rebecca Archer

Welcome to Beyond the Numbers with Grant Thornton, a podcast delving into marketplace and business trends. I'm Rebecca Archer, and today I'm joined by Private Business, Tax and Advisory Partners Kirsten Taylor-Martin and Kirstin Stewart. As Australia's population ages, we are close to witnessing one of the largest generational wealth transfers in history. Yet it's estimated that 70% of families will lose inherited wealth by the second generation and 90% by the third. So, with National Family Business Day just around the corner, today we're discussing how Australia's ageing population will help or hinder succession planning of family businesses in this country. Welcome, Kirsten and Kirsten.

Kirsten Taylor-Martin 

Thank you for having us.

Kirstin Stewart

Yeah, thank you. It's great to be here.

Rebecca Archer

Now, Australia has an ageing population, as we know. What does this mean and how does this translate in family business?

Kirsten Taylor-Martin 

The ageing population has two major impacts on family business. So, firstly, we're seeing at the moment that there's three generations that can be working in a family business at one point in time, and four generations alive. So, using a very simple family tree, that could mean up to 16 people that they need to take on the journey. 16 people to have an aligned vision, 16 people to all agree on the same family values, and 16 people to communicate with. And where that can get quite difficult, is not all family members work in the family business. Some will have careers outside of the family business, so they're not aware of what's going on in the business on a day-to-day basis. So how do you actually keep them engaged and make sure that they have a desire for the family business to continue? Then when you start to add in laws and take into consideration divorce, deaths, second marriages, step-children, blended families, it's really easy to say that was already quite a challenging task. Is becoming even more challenging.

Kirsten Taylor-Martin 

And the next part is that the stakes just got a whole lot higher. And the reason for that is that the baby boomers have created so much wealth. What we're seeing is in the next 20 years, we're going to see approximately $3.5 trillion transfer to the rising generation. So it's more important than ever now that we are firstly educating the rising generation so they have the financial acumen and the business know-how to build upon the wealth that their current generation, the baby boomers, have grown.

So at Grant Thornton, we run training sessions for our rising generation, so that the attendees not only benefit from the education, but also they benefit from the opportunity to network with other people in the same position as themselves. And the second thing is that the succession plan and the estate plan, they need to be aligned, but they also need to be communicated and really well considered, because the aim is we want the family business and the wealth to transition to the family members, not to their solicitors.

Rebecca Archer

And there is an increased urgency or demand to be prepared with a succession plan, of course. Can you explain what a succession plan tangibly looks like?

Kirstin Stewart

Thanks, Rebecca. So, look, a succession plan should really be broken down into two main components, and that's the succession of management and the succession of ownership. When we talk about management succession, that often covers the business aspects only. And it's those roles within the business that can usually be documented and a successor appointed. Now, that successor that's appointed to manage the business can be a family member, and sometimes it can be a non-family member, but also someone internally or externally, is also a consideration. And it may be just what's available or of interest to that business at that time. Now, the succession of ownership is often handled separately, and usually it happens after the succession of management, but not always, because every business is different. So it may be that the succession of ownership happens when you are looking at estate planning, but there are some instances where owners may wish to hand over the baton before they pass the away.

So the ownership transition should be planned carefully to ensure that any financial, legal and any taxation matters are considered and addressed, and other costs or implications are not inadvertently triggered if the change of ownership is not implemented effectively, and does.

Rebecca Archer

Training for the next generation who will inherit the business need to always be quite formal training? Could it be on the job or regular catch ups? How does that look?

Kirstin Stewart

Look, it really can be formal or informal. It may be different for different businesses based on their industry. You know, some industries may require certain formal skills or education. There's other courses like the AICD directors course, and Family Business Association also has some formal courses. At Grant Thornton, we have some educational courses as well that Kirsten mentioned earlier with our rising gen education course. But informal and on-the-job training is essential. I mean, in reality, most people learn from doing so a succession plan should also include a timeframe of apprenticeship, if you like, and that term or that timeframe should be discussed and agreed.

And that, of course, can be matched to the existing skills and experience of the person to ensure that all areas of business and ownership can be covered, to make sure that the transition to the next generation is considered successful.

Rebecca Archer

And what about legal and estate planning? 

Kirstin Stewart

When it comes to look at this broader issue of succession planning, no succession plan is going to be done without seeking adequate legal advice and having that estate planning documentation addressed. Look, a lot of that is prepared by lawyers, so a degree of discussion and review of formal documents is going to need to happen. But succession, whether it's planned or unplanned, it's still better to have some documentation in place to ensure that in the event of a death or incapacity, that the family business or management of the family assets can continue. Look, there really is no doubt that going through that process formally can be difficult and it can raise some issues and discussions that can be sensitive in any family, really. But having some document and some plan in place is better than nothing at all.

Rebecca Archer

The Intergenerational Report that was released in 2023 considers five major forces affecting the coming decade, where the ageing population was one of those factors. Now, it noted that the number of Australians aged 65 and over will more than double, and the people aged 85 and over will more than triple. What can you tell me about those statistics?

Kirsten Taylor-Martin 

That now is the perfect time for families to discuss what their vision is for the future and to start taking the necessary steps that they have time. But the thing that we don't know is how much time do they have? So, unfortunately, the conversation, as Kirsten mentioned earlier, it can be a really uncomfortable conversation for a family to have. They don't want to consider or contemplate that something could happen to one of their family members, but it's just a necessary conversation to take place. It's important to understand what each family member, not only what they're thinking, but why they're thinking it, and to be able to have the conversation and to also understand that there's no right or wrong answer in any of the questions. 

So, for example, what we see is some of our clients, they want to leave the business to the family. Others want to leave the business, maybe to a son and all their personal assets to their daughter. Some families want only to have family bloodline, family members, there's inside the business and no in laws to work in the business, whereas others, they'll pick the successor to be a son in law to take over the business. So I feel that people want to know, like, they're scared because there's a right or wrong answer, but there's not. 

Every family's different. What they want the future to look like is all going to be different. But what we do find is that every family wants it to be fair between all family members. And most importantly, they want family harmony. They want the family to continue to get on. And that's why it's so important that they have the communication. So the best way to achieve it is to have an accredited family business advisor facilitate the conversation, because this ensures that everyone has a voice, everyone gets heard, and the family meetings are regular, they have a set agenda, and all the family members are kept up to date, whether they work inside the business or outside the business. And most importantly, it just makes those really difficult conversations just that little bit easier for the family.

Rebecca Archer

And what about you, Kirstin? What's your sort of thoughts or experience with this?

Kirstin Stewart

Look, as Kirsten mentioned, the first place is really for a family business to start is just to have a conversation. You know that saying of failing to plan is planning to fail. But family businesses can also consider other roles for the incumbent generation as they exit the business, because this is often the challenge around what does the next step look like? And that can actually be mentoring the rising generation. You can have a place on a family council or a family board. There might be other tasks that those family members can be a part of, such as putting together a family charter or documenting the family values. But one of the other things that we often see that a lot of family members like to be a part of is documenting or enhancing the documents or story that might already exist. And that just tells that family business story. And that can all be worthwhile and rewarding.

But the skills and wisdom and the experience of the older generations after they leave the business really are invaluable. And they can be utilised to continue to educate the next generations.

Rebecca Archer

How should family businesses look to replenish and nurture the next generation?

Kirsten Taylor-Martin 

We're finding that family businesses have had substantial growth from the founding generation. So the future generations don't really get the opportunity to grow and learn with the business, as the business is already quite substantial. So what they've got to do is their role is going to be very different. The shoes that the parents and the grandparents are leaving behind are actually like really big shoes to fill. So what I mean by that is some family businesses, they started in their garage, so if any machine breaks down, they know how to fix it. They often know all of the employees and they can go and talk to them about their family. But now that these businesses have hundreds of employees, you can't expect the next generation to come in and know how to fix a machine or know every single family member. 

So it's really important that they encourage their children to follow the field that they're really passionate about, to gain qualifications and work experience outside of the business so they can bring a real expertise to the business and understand that they're probably not going to fill their parents shoes, but they're going to be a real expert in a field and they're going to have to have a really strong leadership team around them to navigate what's now quite a substantial business to the next stage.

Kirsten Taylor-Martin 

So what you can do from the really early stages to nurture the rising generation is to invite them to family council meetings and in those meetings discuss the opportunities and the challenges that you in the business have faced over the last quarter. What we've found is this can be really beneficial. Usually the rising generation, they want to be mentored, but we're finding a lot of the incumbent generation because they were never mentored, they just don't feel comfortable around mentoring. So if they can talk about opportunities and why it's an opportunity and what they've done to make sure that they're successful in winning the opportunity, or alternatively the same for the challenges, why it's a challenge and what they've done to what steps they've taken to overcome the challenges that next generation can really learn from the sharing. 

So often when we interview family members, the comment they make is they just want to put a GoPro on their parents head because they actually don't understand what they do on a day to day basis. So just by this sharing, you're starting to give them a little bit of an insight into what you're doing on a day to day basis and what your thought process is. So it's like an unofficial mentoring and the next step. And I know we are sort of really harping on about this, but can't begin to explain the importance, but it's just that financial acumen training for the rising generation they say in statistics that only one in 20 family members actually make more wealth to pass on to the next generation than what they inherited.

So I just talked about four generations, could be 16 people. So there's a huge opportunity within that four generations that no one, unless we give this training to them, no one's going to actually increase the wealth to pass on to that fifth generation. So it's a point that we're going to keep talking about, but why we see it so important that we really train them in that piece. So they are standing to inherit a business and substantial wealth, and we want them to be able to understand how to continue to grow it for future generations. So we find parents are, at the moment, providing their kids with the very best private school education, university qualification. But what is often missing is how to read the financial statements of the business. What does it actually mean? How to apply for a home loan, to like, apply to a bank for a home loan, the importance of diversifying your investments, because a lot of, at the moment, they put everything into the family business, but if we're talking about keeping it for generations to come, they're going to need to diversify their wealth. They can't have it all in the business.

And I think Covid really taught a lot of businesses that as well. If they had it all in the business, and such a huge shift in the economic conditions, and the fear that they could have lost it all because they didn't have it diversified. And lastly, asset protection, particularly with so many family members. You know, I mentioned really early on, divorce, deaths, second marriages, stepchildren, blended families. Asset protection is just so important with so many generations in that business.

Rebecca Archer

And what, if any, other strategies are there that can encourage and empower that next generation in family business?

Kirstin Stewart

Yeah, look, I really think that there's so much opportunity in terms of encouraging ideas and innovation. So business ideas really should encourage the participation. And those ideas from the rising generation, even if they're first respond, may be, look, we tried this before and it didn't work. This encouragement can build confidence, and it is the entrepreneurial spirit of trying new things that can build successful businesses. So just providing that safe space for a rising generation member to try and you know what, fail sometimes will help build the skill set required to future proof that business. Look, technology and the world around us, it's always changing. And it's changing so quickly that businesses who innovate really are the ones that will find themselves more successful in the years to come. 

Look, there's a client that I've been working with more recently. It's a long term Grant Thornton client, and now they have. Their second generation is currently in charge of that business now. The ownership hasn't transitioned as yet. It's just the management now. It was the implementation of technology that has really changed the face of what this business is doing. It was in a mature, declining product type of market, and that business is really now making more profit than it's ever done. And it's expanding into new integrated service offerings. And it's really just shown how much that demand of growth has, has had for them because they've actually now just also expanded into the property next door because their business premises is not able to meet their current demand.

And I think what happened there was that the incumbent generation really gave that management control over to that second generation and allowed them to try different things. And in this instance, after maybe a couple of, you know, tries and fails, they've really hit their strides. And I think that's a really good example of where engaging with innovation has actually been very successful for this business.

Kirsten Taylor-Martin 

I've seen that a couple times as well, where they're just so innovative, the next generation, and sometimes also as one generation leaves the business, they get a little bit conservative because they're heading into the retirement phase and the younger generation are willing to take a few risks and to innovate. But the thing you've got to then be careful of is you can sort of go through a real hyper growth phase, and that sort of creates new challenges that they need to work through as well, because they need to make sure they got the infrastructure ready for that kind of growth.

Rebecca Archer

So what are some common strategies for transitioning ownership of the business between generations? Does the state of the broader economy affect that transition?

Kirsten Taylor-Martin 

In many instances, we see that the ownership can transition through the estate. So as Kirsten was speaking, we often see that it will be a management succession, not necessarily an ownership succession. And this is why estate planning is such an important part of the succession planning process. In the instance that the owners don't have sufficient financial security outside of the business either. The business needs to find a way to fund that generation in the later years. Otherwise, they may be looking for a sale to the next generation, or just a sale so that they can fund their retirement. What we often find is if the incumbent generation haven't considered their financial security and don't have money outside of the business, in many situations, the rising generation coming up also don't have sufficient funds to be able to buy them out of the business. Another instance where we see a sale take place to transfer the ownership is when the business is not transitioning to the whole family.

So we often refer to this as trimming the tree, and we're talking about the family tree. So, for example, if a family has four children, but only two children want to be involved in the business and want to continue with the business, and the other two don't have any interest at all, what we can find is that the two children will buy the parents out. So what's really important here is there needs to be a fair valuation, an independent valuation done on the business. Obviously you need really open communication with all of the children so that they are comfortable that it's a fair price and that the parents have enough funds to retire on. It also enables the parents to distribute their estate evenly amongst their children because there's no longer a business involved in this instance, the next generation wishing to buy their parents out. The economy can play a really important part in the timing of that taking place. So we can see that sometimes it's hard to get financed depending on the different economic climate. It can impact the independent valuation depending on your business and how it's impacted by the economy.

And also we can sometimes find the interest of the rising generation may not have the interest in acquiring the business due to the economic climates at that point in time. So the options that are available in acquiring the business off the parents is firstly vendor finance. And we do see this a lot more in family businesses. And it is, if the parents can afford to do it, it's their way of helping the next generation in acquiring the business. So this is where the purchaser pays by instalments and the ownership transfers upon the last installment. The second way of acquiring the business is traditional debt. So this involves the, the rising generation going to the bank and financing the acquisition. The key, as always, is open communication between the two generations, making sure you have an independent valuation so that it's all fair and finding a funding mechanism that's going to work for both generations.

Rebecca Archer

What happens in a situation where no one from that next generation is interested in taking the business over?

Kirsten Taylor-Martin 

We're actually seeing this happen more and more at the moment. And I think it's just because there's so many new career paths and a lot of the young generation aren't necessarily interested in taking on their parents business. And it's interesting because the parents are actually quite okay with this as well. If they're seeing that their children are very happy in their career and they're quite successful in their career in many situations, we're finding they're not actually putting pressure on the children to, to join the business. They just don't want to force their kids to give up something that they are enjoying doing. The alternatives can be the business could be sold, or the other alternative is the family could actually employ a CEO who is not a family member to run the business and the family remain the owners. This keeps the family business in the family for future generations, because sometimes what we'll find is it might skip a generation. So it could be the following generation where there's a family member who's really keen to get involved in the family business.

Kirsten Taylor-Martin 

The real challenge around having a non-family member running a family business is to find someone that shares your family values and runs the business the way that you would run it yourself. So I often find when you hear family businesses talk about having an external CEO, you'll hear them speak again years later. And it was sort of only a one-year stint that they were there, and then they put a family member in. And the reason for that is it is quite challenging to find someone that is going to share your family values and run it as a family member would. So the recruitment of that person is very important.

Kirstin Stewart

And can I just add to that too? I think, look, generations ago, it may have been expected that children did take over their parent’s business, not only because that's just what you did, but jobs were scarce, and this gave the next generation a guaranteed career path. And it's whether they wanted it or not. But as we know, each generation is more educated than the one before. Look, high school completion and university education rates are higher than ever before. So the expectation to take over the family business has never been lower. And each generation having their own career path and ambitions is encouraged, as Kirsten mentioned earlier. But the world is also smaller and working interstate or overseas is more attainable. So with many more options available to the next generation, the family business may have been less appealing than it once was.

But what we really are seeing is that whilst a lot of children and grandchildren might like to spread their wings and try other things, they do end up returning home, as they might say. And as they grow older and have families of their own and the familiarity of the family business, and that family legacy does become more important.

Rebecca Archer

Can part of succession planning mean making a decision among the family members to sell the business, if that's truly what the family is desiring to do?

Kirsten Taylor-Martin 

Absolutely. Succession planning can mean selling the family business. And this is why the communication piece is just so important and ensuring that all family members are on the same page. We've worked with a client, and dad actually sent all of the family members, including some of the children who were overseas, advising them that he was going to sell the business. And I'm actually very grateful that he sent the email because it actually started the conversation, because it prompted a couple of the children to reach out. And they had always dreamt of working with their dad and one day running the family business, but no one had ever discussed it. So Dad just assumed, because no one was working in the family business at that point in time, that they had no interest. So it just shows just how important it is to have that conversation.

Kirsten Taylor-Martin 

And in family business, it's that allowing people to assume is just what can cause so much of the problems. So it's important to just ask the question and make sure you're on the same page. But the other thing that we've actually seen is we saw a client put their business up for sale and they actually received multiple offers and far more money than they ever possibly imagined. And they opened themselves to due diligence. And at the very last minute, one family member said, I always thought we'd keep this business in the family like I'd never thought we would sell. And they actually pulled the business off the market and the business is still running today. But the thing is, it's really costly. So we would prefer families to have these really challenging conversations up front so that whatever money you're spending, you're spending it on the future that the family wants.

Whereas in this particular instance, they spent so much money on getting the business ready for sale and the whole sale process to ride at the last minute deciding that they wanted to keep it in the family. So it would have been lovely to have invested that money back in getting the next generation ready and continuing on with the business. So they're two examples of why the conversation is so important at the beginning and making sure that everyone's on the same page and they're going to go through this process together.

Rebecca Archer

That 2023 Family Business survey showed that most respondents over the age of 55 considered succession planning to be a very important topic. So what are the next steps?

Kirstin Stewart

Yeah, Rebecca, so what we do when we work with our clients, when we start this process, we introduce our freedom framework, and this is seven hurdles we see that can get in the way of a successful transition. So F. The first F from freedom is financial security. This applies to the incumbent generation as we've. I think we've touched on this already, but ensuring that they have sufficient funds outside of the business to sustain the lifestyle that they're accustomed to. And then R from freedom refocus of life plan, does the incumbent generation have something to move on to? I mean, you know, we see it when they say that they're going to be doing some gardening or some golf, that it's quite common that they end up being back in the business. But it does take a lot of thought because for many business owners, this has been their life, and it's very difficult for them to see what could be next for them. 

So E is electing a successor.I mean, who have you decided to pass the baton to, and do they even want the role? The next E is education and support. Does the successor need mentoring, support, or any development or training in any areas? The D disaster and unplanned events have you planned for the event that something unexpected can occur to any of your family business members? And a really good example at the moment is the british royal family. I mean, we've seen this year that they have the unexpected planning of two senior members with fighting cancer that they're having to deal with. O are the objectives aligned? Are the objectives of the generations aligned? Kirsten mentioned a bit about that just before m managing communication. And again, we already touched on this, but is there frequent and open communication with family members working in the business and those that are out of the business? Because when communication is not clear and concise, this leads family members to make assumptions and that, you know, that often means that people can assume the worst. And even the comment that Kirsten made earlier about the dad looking to sell the business and assuming just because the children weren't in the business, that they weren't interested. So what we do is we would run through these seven hurdles with a family. Often we find that there's about two or three of the different areas that each family needs to work through, because every family is different and has their own challenges.

And so then what we do is help the family to set out a plan to tackle each of those hurdles. Look, we will work with that family to hold them accountable, and because there's no point in having a plan if you're not actually going to action it.

Rebecca Archer

So if there is someone listening to this episode today who thinks, look, this is something that could really benefit me, what are the next steps that they should be taking?

Kirsten Taylor-Martin 

Please remember, these conversations are really hard for a family to have. Our job as an accredited advisor is just to be independent and to assist the family with the process and just make it just that little bit easier on them. So our contact details are available on the Grant Thornton website. And we've kept it really easy for you because you've got Kirsten Taylor Martin and Kirsten Stewart. You just need to look up Kirsten, and we can help you with your family business.

Rebecca Archer

Well, Kirsten and Kirsten, thank you so very much for being part of today's episode. Any final thoughts that you'd like to share?

Kirstin Stewart

Probably just to echo what Kirsten just said in that it really needs to start with a conversation, and these conversations can be difficult, but it really should start somewhere, because if you don't do anything, then you're most likely going to see some sort of event happen or something that you can't deal with or something that you haven't planned for, and then that often doesn't equal an optimal situation for the family.

Kirsten Taylor-Martin 

Yeah, the stakes are just too high.

Rebecca Archer

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