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Building a Family Business that Lasts
A Family Wired For Perpetual Dependence by Tom Deans, Ph.D.
When the sale of a family business is all about a founder becoming wealthy and their children losing their jobs, you can see why so few ever put themselves in play and sell.
The CEO – the Chief Emotional Officer (Mom, and increasingly Dad) – just can’t stand to see the family pull itself apart. Killing the business with love has always felt like a better plan.
With a wave of aging business owners trying to figure out how they’ll fund their retirement, you can understand the temptation to simply throttle back on their day-to-day involvement and draw a salary while Junior runs the business until the final curtain falls.
Of course, as I’ve discussed in previous articles, with owners living longer, it’s improbable that Junior is going to hang around the business into his or her 70s, when Mom and Dad finally reach their 90s and hand over the reins of control – not operating control, I mean real control, control of the voting stock transferred when the last parent dies.
How About an Exit Where Everyone Makes Money?
But what if an advisor could frame the exit of the controlling shareholder as the day when all family members become wealthy? Far too often, death is the triggering event for the transfer of stock. Few children are offered an opportunity to risk their capital to buy the stock of their parents’ business at an early age. I recommend that when a child is 14, the parents and advisors begin the process of implanting the idea that the family business will be bought, not gifted, and that employment is different from ownership.
For a variety of reasons, the majority of parents signal that there’s no real or pressing need to recycle dollars in the family: “Hang around long enough, Junior, and all this will be yours – for free.”
Of course we know that nothing is ever really free and that while the ownership question is left hanging, there are as many underpaid children working in family businesses, as there are overpaid children. My experience on the speaking circuit is that few overpaid children ever risk their capital to buy out their parents. Why derail the gravy train? Parents who use their business to purchase and control family harmony do more harm than good and always pay the greatest price of all – a family wired for perpetual dependence.
Family Business Math
The dysfunction around the issue of compensation percolates and festers because the stakes have always been high. When Junior complains about low wages, some parents simply say, “If you don’t like what you’re paid, leave.” Emotionally and financially, it’s never been easy for a child to quit a parent’s business.
Child Quitting Over Compensation + Aging Business Owner = Less Inheritance For Junior.
You can see how family business math becomes really interesting when only one child working in the business quits and one or more siblings stay and toe the family line. Trimming the family tree, hacking off a limb, call it what you want, the family business too often becomes the fault line in relationships and turns financially advantaged families into emotionally bankrupt ones.
The equation for this scenario looks like this:
The Value of the Family Business When Child Leaves Over Compensation = More Money for Remaining Children
The Link Between Compensation and Wealth Protection Is Profound
What if the mathematics of a great exit has always been rudimentary? What if advisors could convince clients that all family members, both inside and outside the business, can build a great exit plan collaboratively? What if the key to this plan is asking children to risk capital and perpetuate the business for the right reason – because they think they can grow it and make money? Now there’s a novel idea.
For this to be successful, family members working in a business need to be paid for the value they add. There are significant risks to an owner’s successful exit when compensation for family members is too low or too high. Getting compensation right is one of the pre-conditions for leading a business to be sold to someone, either inside or outside the family – but sold nevertheless.
Dynastic Families Understand This Equation
Business Owner Paid Appropriately + Children in Business Paid Appropriately + All Other Relatives Outside the Business Not Paid at All by the Business = Business Sold, Wealth Protected, Happy Family
It’s simple addition – so simple it’s often overlooked. Treat your family business like a drive-thru ATM and pay family members not involved in the business for work not done, and your exit will be a tad complicated and painful. Keep treating your children as indentured laborers and you’ll get to the same place. If you’re a business owner, all of this can seem difficult. It is, but it’s not impossible and it’s definitely worth getting compensation right.
If you are an advisor, are you really prepared to leave your spreadsheets in your briefcase and talk to clients about important issues like compensating family members appropriately? Can you see the link between compensation and protecting your client’s wealth is an emotional issue? Can you see that the hard emotional issues are where advisors earn client trust?
Long Odds That Family Is Best Suited to Lead Your Business – Tom Deans, Ph.D.
It was on the 18th green that a friend who owns a successful executive search firm answered a question about family business leadership that had challenged me from the very first day I sat down to write Every Family’s Business. Finally the penny dropped.
As he stared at his improbable 60-foot putt he opined that his chances were about as good as filling a CEO position in only a week. His comment got me thinking about how difficult it must be to find the very best talent for the most important position in a firm – the CEO.
Picking up the conversation after he completed his painful third putt, I asked him how many candidates he would interview for a CEO position. His response surprised me. He explained that his staff would typically review more than 1,000 resumes, creating a shortlist of 100. A fresh set of eyes would then whittle that list down to 25 and subsequent telephone interviews would narrow the field further to 10 to 20 candidates selected for face-to-face interviews.
When I think about a process that starts with more than 1,000 candidates in a non-family business and compare that with a family with, say, four children, often with only the eldest male destined (ordained) for the corner office, the math seems a little lopsided.
You don’t have to be an expert in probability theory or regression analysis to discern that non-family businesses have the best chance of finding the very best talent. One only need look at the hyper-growth in the number of family business institutes and consultants obsessing over the grooming of talent to understand the magnitude of the problem, if not the futility of trying to hire the CEO exclusively from within the family.
The Family Still Needs to Oversee the Professionals
When the management gene pool in a family is shallow, you’d think that the obvious solution would be for the controlling shareholder to sell the business and protect family wealth to fund his or her long, expensive retirement and the financial future of the heirs. Instead, it has become fashionable these days for well-intentioned consultants to pander to the founder’s lust for legacy and to recommend that the family hire professional managers, thereby creating space and time for junior to grow into the position.
The juniors I meet in my audiences – who are often in their 40s, 50s, 60s and even 70s – tell me their hired-gun CEOs are there to stay – permanently.
The fatal flaw with this plan lies in the question of who will manage the hired gun. Thrusting the succeeding generation into positions of oversight when they have, or more precisely because they have, failed to demonstrate success in the leadership of the firm has got to be one of the most dangerous threats to a family’s wealth.
When a family has concentrated its wealth in one stock – the family business – you can see how high the stakes become. And just like a 3-putt, there can be no joy in placing children in positions of leadership and oversight for which they are ill suited.
Leadership succession planning is often confused with ownership succession planning – whether a leader is hired from within or from outside the family, the risk to wealth does not abate. The concentration of family wealth in one business remains a clear and present danger.
As a trusted advisor, how would you caution a family business client about their leadership choices, especially when it’s obvious that when the odds of landing the very best CEO are 1 in 1,000 with a proper search, the likelihood of finding that “one” when the search is limited to just the family is about the same as hitting a hole in one.
Should your son die at his desk too? by Paul Cronin
Whenever I read about people who say that they love their business or career and “will never leave”, I wish I could ask them, “so, you want to die at your desk, eh?” Some might say “yes”, or the equally foolish, “carry me out boots first”. I wonder, would they give that same advice to their son or daughter? Would that be the best that they could offer? “Son, I know you love your work as much as I do mine, I hope you get the pleasure of dying at your desk too”.
I rather doubt many fathers (or mothers) would be offering up that one. But if that is how you live and work (and you are undoubtedly your son’s or daughter’s role model), why wouldn’t they follow in your footsteps; right into the grave.
We know that many people equate retiring to a form of death, or at least a kind of withdrawl to a boring, meaningless life. There is no need for that. You need to spend some time planning various aspects of your life: volunteering, philanthropy, faith, income-producing work (notice I did not say a 60 hour/week JOB), leisure activities, activities with family, activities with spouse/partner, intellectual activities, etc., Next, you need to identify and learn to counter-balance your fears. Last, you need to learn how you make key decisions (your decision-making style), and realize that each style can bring limitations that lead to short-sighted, even dangerous outcomes. If you learn to do all three of these, you can (irrespective of income level) start to plan for a meaningful life, full of purpose.
Jack Beauregard, (my business partner), has written two books in this area, The Power of Balance (2001) and Finding Your New Owner (2011), in each he describes a specific process anyone can use to learn the transition from “working all the time, because that is all you can think of doing”, to a “life in balance”: work, faith, family, leisure, etc.. In fact, if we think of the many transitions we have already made in life: school, marriage, parenthood, career change, etc., we all have the skills to make successful transitions. Mostly, we need the courage to do so, and permission to think about it as well (we control our own courage and may grant ourselves permission).
Family Business Owner Driving the Kids Crazy – Someone Call Security – Tom Deans
Last month I was speaking at a convention in Vancouver and took a question from the audience that made me laugh, even though I’d heard versions of the question before: “How do I get my 85-year-old father to stop coming to the office and causing all sorts of disruption?”
Before I could answer someone in the crowd shouted, “Remove the wheelchair ramp to the office!” The place went crazy. Laughing uncontrollably myself, I tried to get the room back on track by sharing my own family business story.
Now we all know it’s the prerogative of business owners to work as long as they choose – it’s one of the great perks of owning a business: voting control = management control. The great casualty is most often the succeeding generation, who are forced to walk the fine line between respecting a parent’s right to work and maintaining responsibility for driving profits through innovation.
But sometimes those profits are elusive precisely because parents never, ever leave and change is discouraged.
Fortunately, there is a simple and often overlooked solution that can channel the abilities and desires of both generations while keeping the fundamental goal of making money in focus – it’s called the Honorary Chairman.
Honorary Chairman: Complete with Job Description
I still have a vivid memory of my grandfather’s last business card, carrying the title “Founder and Honorary Chairman.” I loved that title and looking back, I think he did too – the title and the role he carved out for himself was that of wise counsel. It was a job that in some peculiar way suited him, as the founder of a significant manufacturing business, perfectly – a job he was driving toward his entire career. He was a naturally inclined philosopher and contrarian who loved provoking debate – the “why” was always more interesting than the “how” for him. Most importantly, in the last chapter of his life this role was carved out, respected and resourced but was really limited to board meetings and special projects.
The idea of the Office of the Honorary Chairman – and the literal office – always remained a safe haven from the threat of a mundane retirement (code for being relegated to staying home with my grandmother). The title was not, however, a license to wade into the details of ongoing operational issues. Rather, it was a place and a space for the founder to think and offer historical context and principled counsel without all the background noise of everyday business issues that too often cloud judgment.
Interestingly enough, I watched my father do precisely the same thing when I assumed the position of president of his manufacturing business. Culturally, the notion of wise counsel has resided in all our family businesses.
Business owners should be encouraged to establish truly independent advisory boards. Your freshly minted Honorary Chairman ought to be charged with the task of creating that board and chairing the meetings. This is precisely where his or her energies can best be leveraged – for everyone’s personal and professional sanity.
Advisors who ask their business owner clients, “When do you see yourself disengaging from the operations of the business?” can bring much-needed relief to the succeeding generation. Advisors who can encourage the establishment of an advisory board can themselves participate on these boards and thereby gain a front row seat to help families with their transitions.
Are you a strategic advisor offering new ideas or one responding with technical solutions after the fact?
Top 10 Reasons You Should Never Write a Will by Tom Deans, Ph.D.
1. You have spent a lifetime working, saving and generally deferring consumption to fund your retirement. Now that your money has outlasted you, it will be awesome to see how the government divides your assets. Governments always make amazing decisions about other people’s money.
2. The idea that a Will simplifies matters for your family after you die is so overrated. Why deny your family that special moment when they gather at your funeral and one relative whispers, “I wonder how the jewelry will be divided” and another relative answers, “What jewelry?”
3. All lawyers are loaded – they make a fortune writing Wills. The rumor that they make more money representing families who battle in court when there’s no Will is simply hearsay.
4. When you write a Will and then share it with your intended beneficiaries, expectations may be set high. It’s much better to keep everyone in the dark, especially the one child who’s providing the bulk of your late-in-life care. Strong, dynastic families are built on secrets and pitting children against each other after you have died intestate. Fighting toughens children up and prepares them for the real world.
5. If you write a Will and share your dreams and aspirations with your intended beneficiaries, they will likely never work another day in their lives. People usually don’t work because they want to. Even billionaires who continue to work and start new businesses are usually faking it.
6. Some say a Will is important when you have young children because the issue of guardianship is addressed – you know, naming the person who will actually be entrusted with raising and caring for your children when you can’t. This is a tough decision – maybe the toughest decision of all, which is why you’ll want to avoid it at all costs. Let Lady Luck – and the courts – work their magic. Your kids will understand.
7. When you write a Will you appoint an executor who is responsible for carrying out your last wishes. But this denies your family the opportunity to debate the merits of burial versus cremation. This can be a lively debate, especially when everyone is grieving. Great families thrive on chaos, anger and regret; clearly communicated Wills and last wishes undermine this principle.
8. Wills often include Advanced Health-Care Directives and clearly outline the kinds of medical interventions you’d like when you can’t communicate. But here again a Will denies your family the opportunity to play one of the most satisfying guessing games ever invented. It’s called Resuscitate – Do Not Resuscitate. This game is best played at the hospital in front of the doctors, who will be fascinated to see who wins.
9. If you die (I say “if” because you may be the first to live forever) the grieving process is enriched when family hunts through your personal files and possessions in an attempt to figure out what you owned. This is like a scavenger hunt but with more zeros. After the hunt, some might say they’d like to bring you back from the dead and kill you themselves – but they’re just having fun. This is a game the whole family can play. In truth, it’s a game the whole family will play because everyone wants to make sure others get more.
10. Studies show that people are superstitious – and they should be. When you write your Will, you’ll almost certainly die shortly thereafter. The same applies to writing books on the subject of Wills. Having written Willing Wisdom I’m practically uninsurable. Just like eating fruit and vegetables and getting regular exercise, writing a Will is extremely bad for your health.
Dr. Tom Deans is the author of Every Family’s Business and Willing Wisdom. An author, a full-time professional speaker and the founder of the Will to Will Campaign, Deans starts conversations but rarely finishes them, leaving that to the trusted advisors and charities that bring him to their community to speak. To learn more about his live event presentations about transitioning a family business or transitioning family wealth, simply click here.
“Where will you be five years from today?” by Paul Cronin
That’s the question asked by Compendium in their little inspirational book Five. It reminds me of the ubiquitous answer to the transition question in the CEO peer groups I ran for nearly fifteen years. Regardless of age, years in business, or any other pertinent demographic if a CEO was asked when he or she might want to sell their business, the answer was almost always, “in five years”.
What do you make of that? In my speculation, it means that the question is relevant and close but the answer far enough away that the owner doesn’t have to do anything about it just now – a decision that can be delayed. The problem is that the five-year window keeps slipping and the planning doesn’t happen.
Deciding what’s next – start with what you value
A good place to start is with your values. What’s important to you? Be honest with yourself – it’s too easy to create the “God, family, country” list. Where do you spend your time and your money? That’s a good indicator of what’s important to you. When I looked at it that way, I saw that I spend a lot of time and money on training, books, exercise and home goods – so some of the things that are important to me are education, life-long learning, health & fitness and good design (I won’t get into “the hair expense” – something most women of a certain age know a lot about).
What did you discover? Did that exercise make you wince? If so, you might want to start down a path of self-examination and redefinition. In re-examining your values, start with the traits or qualities that describe the people you admire, the places you love, the programs you support – from this list you can choose your top five lifetime values. Write them down and keep them near so you can frequently reflect on them. How are you living those values? On a scale of 1 to 5, how consistently do you live what you value? What would you like to change? How would you like to be different in this? Identifying your top five values and answering these questions is a short-cut to naming the top goals for your “what’s next”.
Create a personal mission statement
I love this quote, “Your life is worth a noble motive”. Most leaders I know are good at making things happen, not just letting things happen. And yet, in this arena of business transition, I often see “the deer in the headlights” look.
Once you’ve clarified your values, consider creating a mission statement for your life. Just as your business has a mission or purpose, so can your life. When you dedicate your life to something greater than yourself life is a bigger adventure, something you can organize around. Ask yourself, what services or activities do my values call me toward? What is my legacy? What is the contribution I want to make? Can you start to sense a direction here?
Satisfaction and the wheel of life
Once you’ve defined what’s important to you and gotten clear on what your life is all about, you can take a look at each spoke on the Wheel of Life and measure your level of satisfaction in each domain. Many business owners speak to me about the lack of balance in their lives. Here’s the place where you can gauge what you’re attending to (or not) and what your goals and options are in each “spoke”.
When I coach owners through the Successful Transition Planning Institute’s LIVE™ program, I help you decide how you want to live your life going forward.
We look at ten “spokes” –
Income Producing Work
10. Volunteer Work
We look at six options for each spoke of the wheel and then further, within each option we look at both the upside and downside, so that both your thinking and your life is balanced. From this investigation, you can create a life plan.
Define your own success
In the end, you need to define success in your own terms. I think Viktor Frankl said it best, “success is the side-effect of your personal dedication to a course greater than yourself”. Enough said.
My Top 10 Tips to Shorten the Life of Your Family Business by Tom Deans, Ph.D.
I’ve certainly enjoyed more than my fair share of quality time on airplanes to contemplate some of the fascinating family business stories I’ve collected on the speaking circuit.
It’s pretty common for professional speakers to spend a little time with audience members who confess their stories and share details about their family firm fiascos after an event – typically during the book signing.
Sadly, most of these stories are stranger than fiction. Some people who share their tales are looking for a kind of absolution for their family business sins. But dispensing penitence is a task I’ve never done particularly well; it’s always my cue to send someone in the direction of the advisor who hired me so that they can receive the proper professional care they deserve and require.
Underlying these tales of family business woe is always personal tragedy on a scale that for me is unfathomable: estrangement between children and parents and between siblings, and physical violence that’s been known to include murder – and I’m not kidding.
On a lighter note, as I vacation in Spain recharging my battery before another busy fall speaking season, I’ve prepared a lighthearted list of the Top 10 Tips to Shorten the Life of Your Family Business. Read ’em and weep.
Top 10 Tips to Shorten the Life of a Family Business
Invite all your children into your business as soon as they’re able to walk so that you can enjoy as much of their free labor as possible. Remember to promise them that “one day all this will be yours” and look closely for the excitement in their eyes. Those are tears of joy.
Always give the most important jobs to your eldest child (but only a male) and pay him (if you must) vastly more than your other children – this is how great family dynasties are built. It may seem unfair, but it’ll toughen some of them up and really set the stage for great Thanksgiving dinners for years to come.
Talk about your family business history often with your children and remind them that “we have always been (fill in the blank – shoemakers, dry cleaners, widget makers…)” and that this is all they will ever be. This will instill great pride and confidence that life is about tradition and not about pursuing their own dreams and definitely not about reaching their full potential. Talk about how Henry Ford should have followed in his father’s footsteps as a farmer and Steve Jobs in his father’s footsteps as a restaurateur.
Tell your children that the only reason you work so hard is so they will have a guaranteed job waiting for them when they graduate from school. Definitely do not let them work outside the family firm, for that will only build their self-confidence and fill their heads with crazy ideas about how other firms succeed in a changing world.
Some children who have watched their parents struggle and work hard at their business express a desire to pursue a different path. Mothers can play an important role in dissuading them from doing this by encouraging their husbands to hire the children (especially sons) and over-pay them for jobs they do poorly. This way, you can keep your children close and your grandchildren even closer. When this plan is in place, sit back and watch that special bond between a mother and daughter-in-law blossom – it’s really indescribable, especially when a son and his wife have no options because they could never replace their current salary elsewhere, especially when their only work experience is in the family business.
Always tell your non-family employees that there are two sets of policies and procedures – one for family and one for everyone else. This way, when your children show up for work at 11:00 a.m. (when they show up at all) and leave at 2:00 p.m., everyone will know they are following the rules and earning their bonuses. This is a fantastic technique for attracting talented non-family employees and retaining them for up to six months. The idea that experienced, long-serving employees are valuable to a business is highly overrated.
If you happen to be lucky enough to have one of those children who actually works harder than you – I mean really works long and hard – make sure you never discuss selling the business to him (and definitely never sell to a daughter, especially if she has an MBA). It’s always much better to leave your son – and your entire family – assuming that he will inherit the business. Hint at this plan but never really commit. Think of the excitement when your other children learn only when you and your spouse have died (likely when you’re both in your nineties) that in the spirit of fairness, you have left an equal number of shares to all the children. There is nothing like brothers and sisters becoming business partners late in life and working shoulder-to-shoulder, especially when one is married to a lawyer. Remember to keep your real business succession plan a secret – surprises are what make families strong.
Instill in your children the idea that a business is not about making money but rather about staying in business at any cost – the older the business, the better. Old is good! You can make this point by talking about how bankers will always lend money to an old family business to support its growth. But steer clear of examples involving buggy whips, slide rules and BlackBerries – they are just anomalies.
It is important to concentrate all your wealth in your business, especially as you near retirement. When you make money, reinvest it in your business year after year and tell your children that this is the full extent of your retirement plan. Tell them that when you die their mother will inherit the business and that she will need all of their help running it. If all goes well, the business will fail and everyone will gather round and reminisce about what a magnificent businessman you were – after all, clearly only you could run it profitably. This is okay because remember: you are dead and no longer require money.
Definitely do not write a will. Some of the best family moments come when everyone testifies in court and offers his or her own version of what you really wanted. Why deny your children an authentic Darwinian moment? Why deny them the sheer joy of learning who you really were as they riffle through your personal papers and slug it out mano-a-mano in open court? This makes for great front-page reading in your local paper. If you insist on a will, definitely do not get professional help writing it – those $9 do-it-yourself will kits are awesome and take only 10 minutes to complete. But remember, that’s 10 minutes of your life you’ll never get back.
Do you have a Chief Legacy Officer? by Family Wealth Coach
No, that’s not a mistake in the title. But we wouldn’t blame you for thinking that, because Chief Legacy Officers are a relatively new idea.
We get lots of feedback about how much the “values and vision” concepts in our blogs resonate with readers. We can imagine though, that with everything else that’s going on in your life, it can be difficult to implement some of those ideas as effectively, efficiently and directly as you’d like. That’s where the Chief Legacy Officer comes in.
The idea behind the “Chief Legacy Officer” originated from the Family Office Exchange. It’s an idea that we’re enthusiastic about because a Chief Legacy Officer is to values and vision, what a CEO is to executive decisions, and a CFO is to financial decisions. We firmly believe that decisions about values, vision and mission play as crucial of a role in your business and family office as the executive and financial decision-making aspects. After all, there needs to be a driving reason behind making those executive and financial decisions.
A Chief Legacy Officer can help to define governance structures, and can be designated to implement some of the important concepts that we’ve discussed in past blogs such as engaging and educating the next generation.
This isn’t a fluffy role; it should be taken just as seriously as the selection of a CEO and CFO. However, one difference to consider between those roles and a Chief Legacy Officer is that experience isn’t always an asset. Leaving this role to the first generation can have risks. Incorporate the second and third generation’s views. The first generation’s take on all of this is great, but it will fade with them if the younger generation’s views are not also considered.
Incorporating a Chief Legacy Officer gives you the opportunity to focus attention and energy on all angles of your family business and estate—not just the obvious ones.