Client Journey: No More Succession: Why doesn’t the next generation want to take over?

Historically, family businesses passed from generation to generation have been a core plank of the Australian economy. But this is changing, with fewer and fewer young people being willing to take over the family business. Here we explain the causes of this, and look at what business owners can do in response. 

Family business succession 

The HBO hit Succession follows the travails of adult children in attempting to take over their father, Logan Roy’s, media empire. In reality, modern offspring do not share the ambitions of the Roy children. According to succession statistics from the Family Business Institute, only around 30% of family owned businesses survive into the second generation, only 12% are viable into the third generation, and only 3% survive into the fourth generation or beyond. In the same survey, business owners themselves seemed to have a different idea — 88% believed that the same family or families will control the business in five years. 

Clearly for many family business owners, there is an emotional element to their desire to keep the business in the family: They want to build assets that will support the family long after they are dead. But even aside from this element, the inability to pass on a business to younger generation presents a problem. As many family businesses depend on the the active labour of the owner/operator for their success , they are not always easy to sell and when sold, the value may be modest (read more about the challenges in these kinds of businesses in “You’ve done the time to learn your craft”). 

What is the cause of reduced offspring interest in succession?

There are a range of potential reasons why younger generations may not wish to take over the family business. This includes: 

• Perceived long-term viability of the business. Many traditional family businesses may not be perceived as having good long-term economic prospects: Just look at how few Fish and Chip shops there are now compared to 30 years ago. 
• Isolation. Many Australian small businesses (e.g., farms) are located in regional Australia. Young people increasingly prefer to live in the city. 
• Business trends. Many young people would prefer to work in a tech startup than a traditional Australian family business. 
• Independence. Many young people today place less value on preserving a ‘family dynasty’, and more on forging their own path.
• Work-life balance. It is well-documented that many family businesses are labour intensive. Increasingly, Generation Z and Millennials are not interested in the long work hours that generally come with family businesses. 
• High expectations of employers. There is some research to suggest that Generation Z  (the generation that would be currently going into a family business) may have less realistic expectations about their employers than earlier generations. For example, when questioned what they want most from their boss in the workplace, Gen Z indicated a positive attitude (42%) and clear targets (37%). By contrast, Millennials prioritised first open communication and feedback (42%) followed by clear targets (38%). In turn, Gen X employers indicated that they were most likely to offer open communication (42%), less likely to offer a positive attitude (33%) and set clear targets (31%). What does this have to do with working in the family business?  Differences in expectations of employer and employee can become more fraught where family and business are closely intertwined. 

Some of these considerations assume that there has been a generational change in the values of young people — that Generation Z have different values than earlier generations. One piece of research suggests an interesting possibility as to why this might be: Generation Z teens are far less likely to hold a job than prior generations. In 1979, 60% of teens held a job, while in 2015, 34% of teens held a job and this is expected to drop to 25% in 2024. Furthermore, only one in five 15- to 17-year-olds in 2018 (19%) report having worked at all during the prior calendar year, in contrast to 30% of Millennial 15- to 17-year-olds in 2002. Why could this be? One possible reason is that Generation Z have grown up in more affluent households, and therefore were not pressured to work as much as prior generations.  Without prior work experience, it has been suggested that Generation Z in the adult workforce may have a focus on work-life balance, independence and other self-maximising values which is unrealistic. 

What should family business owners do?

Given the tendency of the younger generations not to take over the family business, owners need to consider how to best respond to this, including: 

• Putting in place an exit strategy. This should be in place well ahead of the family business owner’s planned retirement date. 
• Developing alternative operation structures. Consider ways in which the business might be preserved in the family without younger generations having a hands on role (E.g., put the farm in a trading trust and have it managed by a salaried farm manager). 
• Adapting the business itself. It might be worth considering ways that family business can be made more appealing to the new generation (E.g., adding innovative technologies to the existing business, such as a wind generators or solar panels on a farm). An upside of this is that the automatization and systematisation will make the business more saleable anyway. It may also be possible to create flexibility which would allow kids to take other opportunities in future if they wish. 
• Dealing with proceeds of asset sale. If the best option ends up being business and/or asset sale, it is important to consider how those proceeds can best be safeguarded for future generations (such as through a family trust structure).