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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?
Dr. Phil: The Darkness of Riches: From Victims to Victors
Family vs. Business by Family Wealth Coach
As a business owner, you take on a unique challenge. Every day you are faced with both business and family decisions. And family business owners deal with this even more.
Sometimes people feel that those two aspects of their lives are really at odds with each other. They absolutely can be—but they don’t have to be if you manage both of them carefully.
Think about your family and business in terms of a pendulum, or a teeter-totter. Your family is on one side, and your business on the other. Every decision you make will have both business and family implications. For example, promoting one of your children as CEO, or even deciding when your children will engage with the business as either employees or shareholders, will have an effect at home and at work.
Sometimes you will have to prioritize business over family, or family over business. Again, think of the teeter-totter, when you make a decision for one side, the other side will also be impacted.
The key take away here is that Estate plans have to consider both – who gets voting control, who will manage the business, how will you look after your family? Balancing a teeter-totter (or a family and a business) is not easy when both sides are so intricately linked to each other.
The name “teeter-totter” may suggest otherwise, but finding the equilibrium is always possible with some careful planning and accurate adjustments. The same is true for your family and your business.
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?
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.
Beyond Empowerment – Are We Ready for the Self-Managed organization?: Doug Kirkpatrick
Doug is a Northern California-based executive coach, organizational consultant, speaker, author and educator. He is the author of Beyond Empowerment: The Age of the Self-Managed Organization. An economics graduate of Pacific Lutheran University, he also holds a law degree from Willamette University College of Law and a Senior Professional in Human Resources designation (SPHR). He enjoys traveling to rough parts of the world and appreciates the perspective that he gains from it.
John Mackey on Whole Foods, Conscious Capitalism, and Life Beyond the Profit Motive
“I think the critics of capitalism have got it in this very small box – that it’s all about money,” explains John Mackey, co-founder and co-CEO of Whole Foods. “And yet, I haven’t found it be that way. I’ve known hundreds of entrepreneurs and with very few exceptions most of them did not start their businesses primarily to make money.”
In “Conscious Capitalism: Liberating the Heroic Spirit of Business,” Mackey and his co-author, Raj Sisodia, make a case that businesses are at their best when reaching for a higher purpose that ranges far beyond any simplistic notions of the profit motive or self-interest.
Reason’s Nick Gillespie sat down with Mackey to discuss his new book, the success of Whole Foods, the growing burden of government on day-to-day life, and how the Austin-based entrepreneur came to appreciate what he calls “the heroic spirit of business.”
Succession Planning for a Family Business
Lessons In Leadership – Episode 2 – Family Businesses
When it comes to family-run businesses, there’s a common saying that the first generation creates a business, the second builds it and the third squanders it away.
Is there any truth to that? Bloomberg TV India’s Mini Menon discusses how best family run businesses survive generations as she speaks to Professor John Davis, Senior Lecturer of Business Administration, Harvard Business School on Lessons In Leadership.