Getting the picture
Sue Prestney's August article
Every few years RMIT University conducts an extensive survey on the practices, concerns and motivations of family and private businesses. The recently released 2013 MGI Australian Family and Private Business Survey is the eighth in what is the longest running longitudinal study of its type in Australia and provides us with a unique insight into the changes in this important sector over a long period.
The 2013 survey report includes a snapshot of findings of the four MGI-supported surveys over the last decade. This tells us a lot about the changes experienced by the average private business owner and his business from 2003 to 2013. I have used “his business” deliberately because one thing that has not changed over the decade is the percentage of female owners which was 10% in both 2003 and 2013.
Therefore I am going to refer to my average business owner as Joe. Joe was born in Australia (86% of respondents in 2013 were born here). He is 58 years old, and has tertiary or post secondary education qualifications. He is not only the owner of his business but also the CEO and Chairman of directors.
Since 2003 Joe has become a worried man. While around 27% of the survey respondents in 2003 had concerns for the future financial performance of their business, this increased to 58% in 2013. Joe is also now worried about the future of his industry - in 2003 only 15% of respondents were concerned about their industry but this has increased steadily over the decade to 55% in 2013. It is surely no coincidence that 40% of survey respondents in 2003 were in manufacturing, compared to 20% in 2013.
Joe’s concerns are well founded with around 75% of 2013 survey respondents having experienced no increase in profitability or market share in the last three years and only 40% expecting core market improvement over the next 12 months.
Joe’s options for his exit from the business appear to be becoming more limited. The percentage of survey respondents who would seriously consider selling their business if approached, or who plan to sell, has fallen since 2003. It is telling that, of those who plan to sell, only 6% state that it is because sale price exceeds expectations which contrasts markedly with 20% in 2003. Whereas in 2003 only 8% were planning on selling their business because of concerns for the future, this is now 25% which is not a good basis to take a business to market and indicates that it is highly likely that this 25% will not be able to extract a good selling price – assuming potential purchasers are reasonably astute.
So if we now have a minority of business owners planning on selling their businesses, and selecting a successor has become much more of a concern, what is Joe at the age of 58 likely to do?
It seems he is just going to keep working, with 58% of respondents indicating that they will be working beyond 65 years of age. Already 25% of the owner-managers are aged over 65.
It is also notable that there has been an increase in the percentage of owners that do not have an adequately funded retirement program (27% in 2003 to 34% in 2013).
So we see Joe staying in the business past usual retirement age which is not a time of life when most people take entrepreneurial risks. In the last three years there has been an increase (to 60%) in the percentage of owners intending to keep their businesses small, which explains why funding for growth is not seen to be a major concern in 2013 (only 16% are concerned by this).
A fall off in involvement of the next generation in the day-to-day running of the business may underpin this tendency for conservatism. In 2003 49% of business owners had their sons involved in the business but by 2013 this had reduced to 36%. (The involvement of daughters was 9% in both years).
The sad picture is of Joe at the age of 58 being much more concerned about the future than he was a decade ago, looking ahead to a longer working life with apparently fewer options for a successful exit than there were in 2003.
But despite Joe’s concerns, he does not appear to be changing his practices. The 2013 survey indicates, as it did in 2003, that the majority of business owners do not have a strategic plan. Adoption of best practice in management and governance remains low, as it was in 2010. Joe, along with 62% of family businesses, does not have a formal board of directors. Of those that do have a board, 72% do not have non-family executive directors.
The problems that Joe is experiencing may be indicative of post GFC fall-out, leading to a general lack of confidence in the economy, and compounded by the high Australian dollar which had impacted the profit margins of 43% of the 2013 respondents. In this case his situation may simply be cyclical.
Alternatively, Joe may be experiencing the result of more permanent structural changes arising from developments in technology including e-commerce, in which case doing nothing will not solve his problems. Joe needs to take control – to do some serious strategic planning, have an active board of directors with the skills he lacks, and seek input from smart high-tech advisors from the next generation. Because unless he does something, that business he intends to work in past 65 may simply not be able to provide him with the funding he needs to retire, if it is still going at all.
Sue Prestney | EXECUTIVE CHAIRMAN MGI AUSTRALASIA
August 2013
Article written by Sue Prestney for 'Charter', the magazine of the Institute of Chartered Accountants in Australia. Sue Prestney is a Senior Partner with MGI Melbourne and current Chairman of MGI Australasia. Article reprinted with the permission of the Institute of Chartered Accountants in Australia, www.icaa.com.au