Jeff Savlov's Family Business Minute
February 2012
One Step at a Time...
"Governance" can be a daunting term for enterprising families. It tends to conjure up images of a large group of grey-haired "suits" sitting around a long table, staring at an executive, expecting some fancy graphs with lines shooting up and to the right.
The fact is that governance is simply a process for having discussions about how things are done (which are often difficult when family is involved) and then making decisions everyone can stick to. Research shows clearly that healthy, effective communication is essential for the multi-generational success of family businesses.
For some of you, this may be relatively new. Maybe you've read about it, heard about it and thought about it, but haven't taken many (any?) steps yet. For others, you may have a number of governance structures in place. In either case, here is a list of simple ideas to get started or move further along. As with anything new, take one step at a time and add more as you feel comfortable.
- Have a meeting with all family members who work in the business and discuss:
- How well is conflict managed and can it be improved? (Remember, conflict is unavoidable; the trick is in how you manage it.)
- Is it clear how the decision is made for another family member to enter the business?
- Are compensation policies in place for family members and are they fair and transparent?
- For family members committed to the business, are there development plans with mentors assigned? If not, are you willing to put these in place?
- Gather all the family shareholders and go over the shareholders' agreement. Discuss the terms and clauses and, if necessary, compile a list of questions for your attorney to explain and discuss with you. Then list issues for discussion and have a follow-up meeting.
- No shareholders agreement? Agree on someone to do research and present a summary to the family. Start a discussion about topics such as when shares can be sold and to whom as well as how they will be priced.
- Family members by marriage (spouses, brothers-in-law, etc.) can feel left out when not included in business decisions that greatly affect their lives. They may have gems of insight into how the business can be improved (especially as it relates to family/business interplay). Gather them, along with family members in the business, and have a meeting to get feedback from them. Brainstorm ideas for making improvements. Make sure these "non-related" relatives are felt welcome in word and deed.
What is the lesson?
Enterprising Families: Just because you have a meeting to focus on decision-making, doesn't mean decisions need to be made at each meeting. Particularly with important decisions, take enough time so all stakeholders feel heard and understand the issues. If things feel too intense, reach out for an experienced professional to help you through it.
Advisors to Enterprising Families: Encourage your clients to become more formal with their communication and decision-making, one step at a time. These simple ideas can get them going and are very likely to avoid a great deal of misunderstanding and conflict. They will thank you for it.
January 2012
Strike While the Iron is Cold
Recently I was contacted by three cousins. They were successful being in business together, said they got along really well and wanted to know if I could help them. You might be thinking, "With what? This sounds great - an enterprising family with no major family conflict."
The cousins wanted to avoid the pitfalls that tore their fathers (two brothers) apart. The fathers' business was ruined and they barely speak to each other now. Fortunately, the cousins managed to stay close and start their own business in the same industry as their fathers'. Also positive is the fact that they were sophisticated enough to plan ahead and think through the interplay of family and enterprise before major issues arose. They were not sure what the pitfalls might be and wanted to develop a process for open discussion and planning for the various (and normal) conflicts that inevitably arise when the intensity of business is combined with the intensity of family relationships.
While forward-looking calls like these are more common than they were years ago, the reality is that the majority of calls I get are from families and their trusted advisors after things have been simmering for quite some time and often are at a rapid boil. The importance and value of being proactive can't be overstated. While I can be quite helpful to families in business even after conflicts are in full force, it is clear to me how much more time, energy and money is needed to address these issues later rather than sooner. This is true for many reasons, not least of which is that by the time emotions are running high and communications are blocked, it is markedly more difficult to start untangling the problems and move forward.
While conflicts are to be expected in family enterprise, they can best be handled by starting the important and necessary discussions early and having them often.
In other words, strike while the iron is cold!
What is the lesson?
Enterprising Families: If you are early in the life-cycle of your business and starting to think about involving family members (or are already working together) consider implementing family-specific governance structures (e.g. family councils or family meetings) or have an assessment by an experienced family business consultant. Even if you go no further than the assessment, you will have some valuable direction, a good baseline, and food for thought.
Advisors to Enterprising Families: Technical expertise, good financing, strong marketing, and all the other hallmarks of a thriving business just aren't enough to insure success over time. Williams and Preisser, in their excellent book on family enterprise, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, detail their research on 3,250 enterprising families. They find 70% of generational transitions fail even while 97% of technical professionals are performing well. Their research demonstrated that 85% of the failures were due to lack of communication, trust and preparing the next generation. Helping your family clients to begin thinking about and addressing issues at the intersection of family and enterprise is one of the best ways you can add value and help your clients achieve their true potential.
November 2011
Family Craziness = Family Harmony?
Thanksgiving is just around the corner, and that generally means time for families to gather. This makes me wonder if there is such a thing as a family without some level of family craziness? I say no. The question is whether or not you can get a good laugh from your family craziness, and maintain a sense of perspective. Let me use my own family to demonstrate.
I have an older sister and a younger sister. As kids, we competed for our parents' attention and it was ugly at times. Rarely physical, we preferred words that felt like a punch. The older we got, thankfully, the more we all matured. But the old dynamics are always lingering. For example, my parents have large framed photos of each of us with our spouse taken on our wedding day and they hang vertically on a wall in their home. That's right, vertically! Why the emphasis on vertical? Because one of the photos has to be on top of the others, a place of seemingly greater love and affection from mom and dad for sure!
We actually have a pretty good laugh when we are all visiting, and mom and dad play along by rotating the photos around over time, giving one of us a reason to crow from high above the other two. The same hilarity holds true for the infamous Savlov Family Twisted Soup Ladle Saga.
When we were kids something happened at the dinner table that triggered my dad into an angry state – quite possibly having something to do with me. He turned reddish-purple, the muscles in his face bulged, and he grabbed a soup ladle that happened to be within reach and twisted it into a pretzel. Things became silent; we untwisted the ladle and served the soup. Forty years later, we use that ladle every year when we all get together and hold it up for all to see. Then we launch into a recounting of the Top Ten Savlov Family Crazy Moments, laughing until we can hardly breathe. Dad laughs as hard as any of us when we display the infamous ladle.
We have found a way to appreciate our family "craziness," acknowledging the reality of less-than-ideal moments while moving on with a strong sense of family connection and a dose of humor that brings us closer.
What is the lesson?
Enterprising Families: Take some time out to rummage through the family history and have a good laugh as you all cherish the craziness you have been through together. The perspective will pay dividends in doses of family harmony. You'll be surprised how the passage of time softens the anger and actually gives everyone a chance to laugh together.
Advisors to Enterprising Families: If you are close enough with your clients so they tell these stories in front of you, you should feel honored and laugh along – though not too loudly or you may become the common enemy and find yourself in a story to be told several years in the future. Recognize that while you are being allowed into the family's "inner sanctum," that doesn't give you the right to bring up these stories on your own. It's great to be included, but you still are an outsider; tread lightly.
October 2011
The FFI Mindset: Collaboration is Key
Last week I attended the Family Firm Institute (FFI) 25th Annual Conference in Boston. FFI is the premier organization in the family enterprise field for consultants, educators and researchers around the world. FFI has a great history and my colleagues and I who belong to FFI are highly committed to helping enterprising families. From the small group of interdisciplinary founders 25 years ago, to the growing organization with 450 attendees at this annual conference, FFI's members strongly embody the values of sharing knowledge and working cooperatively across professions for the benefit of enterprising families.
The FFI mindset is valuable and stimulating to me. When I work cooperatively with an FFI colleague in another profession, on behalf of a family business client, I can be confident that we will both maintain a balanced understanding of family and enterprise and how they relate. Neither will be emphasized at the expense of the other. My FFI colleagues have a special sensitivity to and knowledge of the family business environment and how professionals can effectively collaborate within it. Families get so much more from their professional advisors when they have this mindset.
On November 10th, I will be presenting a family business case at a breakfast meeting (in Philadelphia) of the Mid-Atlantic Chapter of FFI. I'll present with my colleagues Bob Louis, an attorney at Saul Ewing, and Alan Scharfstein, an investment banker and President of The Dak Group. You'll find the case very interesting as it has elements of family and business (no surprise there) as well as positive collaboration between professionals and collaboration gone unfortunately awry.
If you are unfamiliar with FFI, this will be a great opportunity to learn more about the FFI mindset and us. Whether or not you are already a member or are familiar with us, please consider joining us.
FFI Mid-Atlantic Chapter Breakfast Meeting - November 10, 2011
September 2011
Equal or Fair Part II: How Do You Determine What's "Fair"?
Last issue I wrote about the difference between "equal" and "fair" and shared a current case situation (Family Business Minute - July 2011). A number of colleagues inquired about what guides me in determining what's fair; here are my thoughts on this interesting question.
In a nutshell, I use my knowledge of and insight into the family to help them discover their own fair. The tricky part is getting the Matriarch/Patriarch/Parents/Grandparents to open up a discussion within the family about all the feelings and factors. Historically, these decisions were made by patriarchs (yes, men specifically, although this is changing). They would sit with their attorney and "paper up" the will and nobody in the family knew much, if anything, about how things would be handled until the Patriarch died.
Today, enterprising families are becoming much more sophisticated about the emotions and family dynamics related to these transitions of wealth and control, and try to ensure that conflict among heirs will be minimal. Parents want to pass on what they have built without unintentionally, or intentionally, creating friction among the heirs that might create or worsen family relationships. My goal is to facilitate a safe environment for the family to open up discussion - not a debate over who gets what, but a discussion that begins with little reference to money or material wealth. In these initial discussions the emphasis is on discussing the family history, stories, and relationships and dreams. It is essential for the family members to express their values in this process, and there are a number of creative ways I accomplish this.
The main idea is to open communication and express family values FIRST and then deal with the nuts and bolts of who gets what and how and when they get it. I do not advocate family leaders give up their discretion and decision-making power but, rather, find out what in life is meaningful for all involved. Without these discussions there is risk of giving your vegetarian son the organic farmer the meat packing plant when your carnivorous daughter with an MBA and extensive experience in food production might be much more satisfied (and feel more understood and loved) by receiving the same gift. Equally important, the MBA daughter might be far better equipped to manage and sustain the business and carry on the founder's vision.
What is the Lesson?
Enterprising Families: Though it is possible for you to "reach beyond the grave" and impose your deep desires on your heirs, even when they run counter to what those heirs might want, think carefully about how doing so might affect their reactions to the legacy you have created.
Advisors to Enterprising Families: Recognize that you have allegiance to the business founders/owners to help them clarify their intentions and dreams, and put them into action in terms of how their business and estate will pass on to the next generations. Also, gently help them be mindful of the unintended consequences for family dynamics if an estate plan ends up creating or worsening family tensions. This is an ongoing process and not a one-time discussion.
July 2011
Equal or Fair: Which Is Better?
Splitting a pie into three pieces all the same size and giving a slice to each of your three kids is EQUAL treatment. Slicing the same pie the same way and giving two slices to your very hungry youngest child, one to your moderately hungry middle child, and none to your oldest child (who has told you he/she is not hungry and would be okay giving his/her slice to the youngest) is FAIR treatment.
An attorney friend called yesterday to enlist my help and introduce me to a client of his. The father is the founder, one son has worked diligently for 30 years to learn, develop and grow the business, and three additional siblings are not in the business at all. Dad has decided to sell the business and plans to give equal slices to each child. One child is very well off on his own and said he does not want a piece of the "pie" at all. The son in the business feels like he has spent most of a lifetime building something and that suddenly it is being taken away from him. He and his father are not speaking.
Equal is not always fair and fair is not always equal – and the distinction between the two often varies based on whose perspective is considered.
There are many ways this scenario can play out, but without some open conversation and planning at the intersection of family and enterprise, both entities may suffer.
What is the Lesson?
Enterprising Families: Give some thought to the distinction between equal and fair, and consider some discussion with all family stakeholders (in and out of the business) to begin to understand ramifications for family and enterprise alike.
Advisors to Enterprising Families: Introduce these concepts to your clients if they are not already considering them. Encourage them to have some basic high-level discussions with family stakeholders to get a broad understanding of the issues.
June 2011
"Family-Influenced, Trans-Generational Wealth Creation"
Today's Question: The Same or Different?
In their 2002 article*, Habbershon and Pistrui coin the term "family-influenced, trans-generational wealth creation." They distinguish their concept from the traditional notion of "family business" which usually connotes several generations of a family passing down a single business from generation to generation, within the family, sometimes building it along the way. They argue that for families with trans-generational wealth creation as a goal, an entrepreneurial sense is essential, and that being wedded to one business entity (and the founder's legacy) can be stifling for subsequent generations from a family investment growth perspective.
They suggest that founders who want their families to achieve trans-generational wealth creation allow the next generation to use the family resources to take risks and build an "entrepreneurial orientation." They also question whether many of the proactive, entrepreneurial strategies such as diversifying assets through a sale ("even at a premium") or strategic alliances leave "family businesses" unnecessarily defined as failures. In such situations, and with a goal of growing and developing family assets, the authors consider these absolute successes for enterprising families that can lead to further growth opportunities.
What is the lesson?
Enterprising Families:
If your goal is to grow your family's wealth and pass it on to subsequent generations for their stewardship, carefully consider if you are giving enough opportunity for the next generation to take risks and pursue new directions that are essential for multi-generational growth.
Advisors to Enterprising Families:
Do you have assumptions about defining family business success that might get in the way of the multi-generational success of your clients? Are you able to help clients understand the need for a proactive, entrepreneurial orientation to help them create the kind of growth that can sustain (and be sustained by) future generations?
In my view, it is not a question of abandoning the founder's legacy but rather redefining the concept of legacy. Enterprising families need a concept of legacy that promotes flexibility and entrepreneurial risk-taking so future generations can add their mark and achieve multi-generational growth. I believe this to be true regardless of whether the family stays committed to the original operating entity or branches out.
*Habbershon, T.G., & Pistrui, J. (2002). Enterprising Families Domain: Family-Influenced Ownership Groups in Pursuit of Transgenerational Wealth. Family Business Review, 15(3), 223-238.
May 2011
Paul Cézanne, Esquire???
Last year I went to a Paul Cézanne exhibit in Philadelphia and was surprised to learn that this famous artist struggled to pursue his passion against his father's wishes. His father, a successful banker, insisted that Paul attend law school rather than pursue painting. Paul did attend law school for a couple of years before abandoning that path and defiantly moving to Paris causing a rift between father and son. Eventually, Paul's father came to realize the importance of his son's desire for painting (not to menton his talent for it) - the two reconciled and Paul received a generous inheritance allowing him to purue his craft without financial worries.
In my work with enterprsing families I encounter various versions of this all the time. Often the founder will strongly "encourage" a child to choose a career in the business without an open discussion about the child's interests or aptitude. Altertnately, some parents assume none of the kids are interested or able and this is not always accurate. Both family and enterprise are at risk when there is a lack of communication about the next generation's involvement.
What is the lesson Learned?
Enterprising Families:
Take the time to learn about the next generation's desires and dreams for their lives whether or not they include the family business. If the founder's dream is not the child's, rarely can it be successfully forced on the next generation. When dreams do coincide, open, honest communication is necessary to manage expectations and develop the next generation.
Advisors to Enterprising Families:
As a trusted advisor, you are probably already having discussions about your clients' children. Ask about their thoughts on the involvement of children, e.g., have they had family discussions about working in or out of the business? Do they have a policy for how family members get hired, or how they attain management or ownership?
An entrepreneur's child may not be a budding Paul Cézanne, but he or she may have interests and aspirations that might surprise – and even excite – the parent if only the two of them make the time to talk about them.
March 2011
Snow, Sledding, Siblings - and the Family Business
Here in the Northeast, the snow has finally melted enough that I can bear to write about it and I no longer feel the shovel-induced aches in my back. During one of several days when our sons' school was closed due to snow, I took them sledding. While sitting at the top of the hill I noticed a mom pull up and four kids got out of her minivan. The oldest, a girl who seemed to be about 16, was clearly in charge. There were two sisters (perhaps ages 12 and 9) and the youngest, a boy, looked to be around five. (I empathized with him; I grew up with only sisters and know the joys and pains of that situation.)
All was well until the boy decided to go down the hill head-first on his belly. My boys and I were doing that all morning and having a great time without injury or decapitation. However, the sister-in-charge decided that was too dangerous and insisted her brother go down sitting up, feet first. His feet kept slipping off, digging into the snow ahead of him and sending him flying into the air only to crash down hard on the icy, packed snow. He would have been safer on his belly, head-first, dragging his little feet behind him - as he had suggested. Nonetheless, nothing changed; she insisted, he complied, and he continued to fly face first into the icy snow.
In my work with enterprising families I frequently encounter the "birth order conundrum." Often the oldest is automatically given the most authority and responsibility without regard for the relative aptitude, ability and leadership potential of the younger siblings. This can lead to missed growth opportunities for next-generation leadership and the business.
What's the Lesson Learned?
Enterprising Families:
Assess long-standing birth order roles within the family and how they are applied to business roles. Are they the best fit for the individuals and the business? Ask your most trusted advisors and non-family executives if they see pitfalls in this area. Develop a plan to ensure that all family members working in the business are in positions that fit best with their ability, education and experience.
Advisors to Enterprising Families:
You are in a key position to see birth order pitfalls in your clients' businesses. Start a general discussion about balancing family with business. Then, look for a comfortable opening to point out some of the mismatches you observe.