The Key To Family Business Success
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Understanding Family Business
June 14, 2007 Issue #067
During one of our daily phone calls, Don and I were discussing a problem a client was having. They were busy adapting to changing conditions and developing new ways to deliver their services. They knew their business really well, but we were seeing that they hadn't kept up with keeping their clients and potential clients informed about all the changes.
After we mapped out a plan to help them bring their clients up-to-date, I paused for several seconds...
Don said, "David, are you still there?" I said, "Yes... but I've just had a horrible thought."
"What? What?", said Don, sounding a bit concerned.
"We're like the shoemaker's kids who go without shoes...", I said. "We're in the same boat as [X, our client]]...". "Our business has changed a lot, and our clients probably don't know a lot about the problems we face and help solve every day."
"Oh [mild expletive!}", he said, "You're absolutely right!"
"Tomorrow morning I'm going to call you to interview you for the newsletter and web site, Don, so be ready with some good insight for our readers."
"Uh, yeah, but you know we don't like to talk about ourselves and our business..."
Well, I did get him to talk! Turns out he wasn't so reticent and bashful at all! The result is a glimpse into the world of family business consulting as it has evolved for a 40-year veteran.
Family Business Consulting
An interview with Don Schwerzler
UFB How did you get started as a family business consultant?
After serving in the USAF and then graduating from the University of Wisconsin at Madison, I was recruited by a management consulting firm with offices in Chicago and New York. Our work was focused on developing and implementing productivity improvement strategies for our clients. Our work was based on industrial engineering concepts and we were very successful in helping our clients improve their performance.
However, with the family-owned business clients we were never sure as to which generation was the client – the senior generation running the business or the next generation of family who would be running the business in the future. As ideas and strategies were discussed, I could see that there was a wide gap between how the two generations saw the problems and the opportunities of the business.
UFB Were the differences minor or significant?
They could be both – but what caught my attention was how emotional the debate could become between generations and amongst members of each generation. Let’s say you have two brothers who had taken over a business started by their dad. The two brothers are equal owners of the business and each brother has adult children working in the business as key members of the management team. In this instance you are going to have issues between the brothers about who is making the bigger contribution to the business – and each of the brothers is likely to want their kids to take over the business. Amongst the cousins, similar debates will be taking place – in fact some times these differences can develop in family feuds that can Balkanize the management team of the business.
These differences helped me to understand how family businesses differ from other businesses. Most businesses follow the models that are taught in business schools at colleges and universities – that you have rational problems and rational solutions. However, Family businesses tend to have rational problems and EMOTIONAL solutions. This was a major conceptual breakthrough – as it allowed me to understand that decisions in family businesses are not necessarily made for what is best for the business, but what might be in the best interest of the family or of a particular member of the family.
UFB Interesting juxtaposition – rational versus emotional!
It gets even more complex. As part of our triage process we must ascertain if we are dealing with a “family first business" or a “business first family" Every problem or issue a family business will address will have dramatically different solutions – depending on which of those models best describes their family’s business. That is why our family business assessment process is so vital.
UFB What is the Family Business Assessment?
It is a two or three day meeting where we do confidential one-on-one interviews with the family members, key non-family executives and professional advisors to the business. It is where we gain an understanding of how to best develop and manage the succession process. We are also identifying the operational strengths and the weaknesses of the business. By gaining an understanding of all of the individual points of view – we can facilitate reasonable resolutions to different points of view. We position ourselves as the "Ombudsman" for the business – to make sure that in the succession process the family does not kill the goose that is laying the golden eggs. It is an interesting process and underscores the observation made by Zig Zigler, "You can have anything in life you want, if you will just help other people get what they want."
UFB "Family-owned business" sounds like an assortment of "mom and pop" businesses?
That is an unfair characterization. It is estimated that family-owned businesses represent more than 60% of the Gross Domestic Product and they produce most of the new jobs in our economy. Not all family businesses are small businesses – about a quarter of the Fortune 500 companies are family-owned or controlled businesses. Some of the most difficult problems impact the family business when one generation is getting ready to hand over the reins to the next generation – planning for the succession is crucial to the survivability of the family business.
UFB How important is succession planning?
Overall the statistics are not very good. Only about 30% of family businesses successfully transition to the second generation and only about 12 % to the third generation. The problem is two fold. Developing a formal succession plan is not easy and is time consuming. And implementation of the succession plan and management of the succession process is a real minefield of problems. In fact, our logo is three interconnected circles that represent the major problem areas that must be engaged during succession – the family issues, the business management issues and the ownership issues. Problems and issues in any one of these spheres of influence can derail the succession process.
UFB Why is succession planning so difficult for family businesses?
Family businesses tend to evolve from the founder generation where the business is run by entrepreneurial hard work and the management style is often more "intuitive" than "planful". As the business grows, the problems impacting the business become more complex and more sophisticated. It is essential for the management style of business to become more professional in planning and execution – moving away from where the boss is sticking his head out of the door of his office and hollering down the hall to get things done!
UFB So by doing a better job of professionalizing the management of the business, the family business will avoid the minefield of problems at succession time?
I wish it were that easy. In many cases, the time and effort family businesses put into planning is not worthwhile – the plans do not work. We coined a phrase to explain the main planning problem for family businesses – it is called the "Dualism Dynamic". What we are talking about is the relationship between the family and the businesses. If a family business is going to create a mission statement for the business, we suggest they FIRST develop a mission statement for the family. If they are going to develop a strategic plan for the business, FIRST develop a strategic plan for the family. In other words, the planning for the family should be driving the planning for the business – if you want the planning for the business to be effective.
UFB Business Week did a pod cast about your Family Business Innovation program – what is that all about?
For years, the mantra for many family businesses was simple: "If it ain’t broke, don't fix it." The first time I heard someone challenge that philosophy was the then - Chairman of Coca-Cola, Roberto Goizueta. Twenty-five years ago Goizueta opined that his core business philosophy was "If it ain’t broke, break it!" That should be the mantra for family business innovation – "if it ain’t broke, break it"!
Succession time is extremely important for family business innovation. The focus of the succession process should be more than “transgenerational" it should be “transformational". According to Dr. Kevin Fleming, who heads up our Family Business Innovation section, “Succession time is an opportune time to work on creative changes and new ideas for the family’s business. It helps to regenerate and reinvigorate the family business with a passion that is associated with positive and healthy change."
UFB What are the implications for the “family" of a family-owned business?
Just as important as it is for the professionalization of the business management process, it is crucial for the family’s communication system to become more formalized. We do that using family business meetings and retreats to sort out and resolve issues within the family. This is a time for the entire family to open up new channels of communication. This is especially important when some of the kids are involved in the business and some are not - yet both groups have “their" sense of the importance of the legacy of the family’s business.
UFB Giving/selling shares of the business to the kids can help keep peace in the family?
You have just put your finger on one of the most difficult issues a family business owner must confront – how to be fair and equal to all of your children. Based on 40 years of working with family businesses, I would recommend that shares in the business only go to the kids who are working full time in the business. There are other ways estate equalization can be reached than by giving stock to kids not involved in the business.
With the kids receiving stock in the company – a buy-sell agreement should be in place before any stock is exchanged. The buy-sell agreement will address the kinds of problems that can happen – early death, divorce, drug or alcohol abuse, etc,. and it can lay out a formula for a stock holder to leave the business and feel he/she had a fair settlement.
UFB How do you know what a family business is worth?
The smartest strategy is to have a formal valuation done by a professional valuation firm. Every industry has “thumbnail" formulas for suggesting the value of a business - and most are wrong, most of the time. We recommend a formal valuation be done every 2-3 years. That information is valuable not only for tax and estate planning – but for measuring the success of the strategic plan and even as a compensation guide or benchmark for key non-family executives.
UFB As a pioneer in the family business consulting profession – what are the biggest changes you have seen?
Clearly the changes in how birth order and gender are considered in the succession process. Over the past 25 years the old “prima genitor" (oldest son inherits the business) has changed to where successors are being selected because they have an education and are competent to run the business. Over the past 12 years, selection of the successor has become more gender neutral. Daughters and sons are seen as equal competitors for the top job.
UFB Your work certainly sounds interesting!
Having worked with hundreds of family businesses, one thing I know for sure – every family business client has their own set of unique and complex issues that confront and confuse the family. Succession management is tough work – but assisting a family business resolve and/or avoid the mistakes that can wreck the business and/or ruin the family relationships, makes all the work worthwhile. It is very gratifying work and I am pleased with all of my successes. I have made some very good friends along the way.
Family Business Consulting - Don Schwerzler
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