Recent data from the Grant Thornton Family Business Report puts the scale of the problem in stark terms: only 19% of Australian family businesses have a documented succession plan in place. The remaining 81% operate on verbal agreements, unstated assumptions and the hope that family goodwill will carry them through.
Family goodwill is important, but it is not a substitute for planning. The well-known 70% failure rate for second-generation transitions is rarely a failure of financial viability or market demand. More often, it occurs because ownership, control and family expectations were never properly aligned before the transition began.
Before exploring why succession plans fail, it is important to understand what succession planning actually involves. It is not simply deciding who will take over when a founder retires, it is the process of determining who will own the business, who will run it, how family members will be treated fairly and how the transition will be documented and managed over time.
Without clear answers to these questions, even successful businesses can face significant uncertainty when leadership changes.
Understanding the three parts of a family business
A successful business succession plan requires more than deciding who takes over the business. It requires recognising that a family business operates across three distinct areas: the family, the ownership structure and the management of the business itself.
The family is shaped by relationships, history and personal expectations. Ownership is concerned with equity, distributions and long-term value. Management focuses on operations, performance, accountability and strategic direction.
Problems often arise when these areas become blurred. A decision that appears fair from a family perspective may not make commercial sense for the business, while a sound business decision may create tension within the family if expectations have not been properly managed.
One of the most common examples is where siblings hold equal ownership interests, but only one is actively involved in running the business. The sibling working in the business may believe they should be rewarded for their contribution and responsibility, while the sibling outside the business may expect an equal financial return because ownership is shared equally.
Neither position is necessarily wrong, but without clear structures and agreed expectations, these competing interests can quickly become a source of conflict.
This is why effective succession planning starts long before a transition takes place. Clear governance documents, shareholder agreements and family arrangements help define roles, responsibilities and expectations before disagreements arise.
Common succession challenges for family businesses
While every family business is different, there are several challenges that regularly emerge when succession planning is left too late.
The next generation is often already established
Many successors are no longer early-career family members preparing for future leadership. Industry research shows that more than 30% of next-generation family business members are between 44 and 64 years of age.
By this stage, many have developed significant professional experience and leadership capability. When there is no clear pathway for increased responsibility or ownership, frustration can build and valuable opportunities for knowledge transfer may be lost.
Business wealth is not always easy to divide
For many family businesses a significant portion of value is tied up in operating assets, commercial property, equipment and goodwill rather than readily accessible cash.
This can create challenges when multiple family members are involved in the succession process. Unlike other assets, a business often cannot be divided equally without affecting its operation or long-term viability.
The business remains dependent on the founder
Many successful businesses have been built around the knowledge, relationships and decision-making of a founder.
While this is often a key reason for the business's success, it can also become one of the greatest barriers to succession. If clients, staff and day-to-day operations remain heavily reliant on one individual, transferring ownership alone may not be enough to ensure a smooth transition.
Effective succession planning involves gradually transferring knowledge, responsibilities and key relationships so the business can continue to operate successfully beyond the founder's involvement.
Why early planning matters
Australian courts have repeatedly dealt with disputes involving family businesses where succession arrangements, ownership structures and decision-making responsibilities were not clearly defined.
One example is Truss v Truss [2015] FamCA 544, which involved a multi-generational family business where different family members held various classes of shares. While ownership interests had been distributed among the next generation, the founder retained significant control through the company's governance structure.
The Family Court found that, despite shares being held across different generations of the family, the founder's governance powers gave him the practical ability to control key decisions within the business.
The case highlights an important lesson for family businesses: transferring ownership does not necessarily mean transferring control. Passing shares to the next generation may form part of a succession plan, but without a clear framework for decision-making and leadership transition, uncertainty and conflict can remain.
Disputes of this nature do not generally occur because families fail to care about one another. More often, they develop when expectations around ownership, management and control have never been clearly defined or discussed.
Building a successful transition plan
Succession planning is not usually a single event. In most family businesses, a successful transition takes place over several years and involves a combination of governance, operational planning and legal preparation.
While every business is different, there are several practical steps that can help create a smoother path for both the outgoing and incoming generation.
Establish clear family governance
One of the most important early steps is creating a formal process for family discussions that sits alongside but separate from the day-to-day operation of the business.
Many families choose to document key principles in a Family Charter. While often non-binding, these documents can help establish expectations around matters such as employment within the business, required qualifications or external experience, succession pathways and how family members who are not actively involved in the business will be treated financially.
Introduce independent perspectives
Family businesses can benefit significantly from external advice during the succession process.
Independent directors, advisors or mentors can provide objective commercial input and help separate business decisions from family dynamics. They can also offer a neutral perspective when differing views arise, helping discussions remain focused on the long-term interests of the business.
Reduce reliance on the founder
Documenting key processes, strengthening management systems, formalising client and supplier relationships and clearly defining leadership responsibilities can all help reduce reliance on one individual and improve business continuity.
The more knowledge and responsibility that can be transferred before a transition occurs, the stronger the business is likely to be afterwards.
Align your legal structures
Legal documents should support the succession plan rather than operate independently of it.
Shareholder agreements, trust deeds, constitutions and estate planning documents should be reviewed regularly to ensure they reflect the intended transition pathway. Matters such as ownership transfers, valuation methodologies, decision-making authority and buyout arrangements are often worth documenting in advance so expectations are clear if a transition occurs.
Tax, accounting and financial considerations should also be reviewed as part of the succession process to help avoid unintended consequences for both the business and family members.
Tax and structure considerations
Many family businesses operate through discretionary trusts, companies or a combination of structures that have been established and refined over many years. While these arrangements may have worked well historically, succession planning provides an important opportunity to review whether existing structures remain appropriate for future generations and long-term business objectives.
Recent Federal Budget announcements and ongoing tax policy discussions have highlighted the potential for future changes affecting business ownership structures, trust arrangements and the taxation of wealth transfers. While the final shape of any reforms remains uncertain, business owners should be aware that tax and succession planning decisions made today may be influenced by future legislative developments.
For this reason, succession planning should not focus solely on current tax outcomes. It should also consider flexibility, governance, asset protection and the ability to adapt as tax laws evolve over time.
Obtaining legal, accounting and financial advice early in the succession process can help ensure ownership structures remain aligned with both family objectives and an evolving regulatory environment.
Protecting your legacy
Succession planning is not simply about deciding who takes over the business. It is about protecting what you have built, preserving family relationships and creating certainty for the next generation.
At Aubrey Brown Lawyers, our Commercial and Family Law teams work together to help business owners navigate the legal, structural and personal considerations involved in succession planning.
If succession planning is something you have been meaning to address, the best time to start the conversation is before it becomes urgent. Call our office to arrange an appointment on 4350 3333.
