Avoiding Family Bust-Ups
Why a professional approach can make the difference between success or failure
Schwerzler ANZ INPERSPECTIVE - Don Schwerzler, founder of the Family Business Institute, was featured in this article published in Australia and New Zealand Bank's magazine INPERSPECTIVE.
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Robert Manifold died suddenly in 1973, leaving his two sons a grand inheritance. The family’s west Victorian estate, the result of land grants in 1838 to Robert’s father and uncles, occupies some of the richest pasture land in Australia.
The sons, both in their mid twenties, were left the estate to share equally, but for a year couldn’t agree how to divide the property. They ended up tossing a coin to decide. The winner, Ed, took the homestead Wiridgil while older brother Robert received a larger portion of land as compensation.
Their story unfolded in unexpected ways. Flagging wool prices and death duties saw Ed struggle to make a profit while his brother had better results with more acreage. The 30-room Wiridgil has become a struggle to maintain. Ed now leases the bulk of his land and takes tour groups through the house. “Our gift is also our curse,” said Ed’s son Harley recently. Harley will not continue the family’s business. Robert continues to farm his adjacent property and the brothers have little to do with one another.
Sooner or later every family business looks beyond the immediate what and why to how they do business. As the Manifolds discovered, questions like ownership and succession can determine success or failure. Only around 30 per cent of these businesses make it to the second generation, according to recent figures. About 12 per cent successfully transition to the third and just three per cent make it to the fourth.
Why do so many unravel?
Answers lie not just on the bottom line or in market conditions but in understanding the way families in business together interact. “Often they don’t know what they don’t know,” explains Philippa Taylor, Chief Executive Officer of Family Business Australia. “It’s not until problems arise they realise if they’d had a more professional structure their problems wouldn’t have occurred or they’d be less serious.”
Taylor points to Melbourne’s Dennis family as a textbook study in good governance. Begun in 1960, the Dennis Family Corporation (DFC) is now the largest residential development company in Victoria. Bert Dennis started the business by buying a parcel of land outside Melbourne and developing it for residential use. He then ventured into allied businesses.
A number of companies under the DFC umbrella were successful, but the more successful they became the more attention each needed. As founder and head of the business Bert struggled to maintain control of all of them. “They couldn’t draw a clear organisational chart,” says Taylor. Finally the family realised they needed to start professionalising the business. One of their first steps was to formalise a board of directors. Until that point family members had sat at a table and made strategic decisions – behaving much like a board but with no formal structures, which made decision-making fragmented and time-consuming. Another step was to identify gaps in the family’s skillsets and recruit externally to address them. The impact was apparent almost overnight. They saw double-digit growth in revenues over a short period.
Avoid emotional solutions
Don Schwerzler is an Atlanta, US, based pioneer in developing success strategies for family businesses. After forty years working in the area he sums up the challenge this way: “In non-family businesses you tend to have rational problems and rational solutions. In family businesses you tend to have rational problems and emotional solutions.”
A family business will have the usual support team of professionals advising it: their banker, lawyer and accountant. But those professionals are often frustrated because decisions are made not necessarily in terms of what’s best for the business but what might be the best for the family or a family member, says Schwerzler. “This frustrates the professionals who are trained to think logically.”
Family-first or business-first?
The first question worth asking, says Schwerzler is this: are we a family-first business or a business-first family? How this is defined will have a strong impact on the intricacies of formalisation, succession and other issues downstream.
A family council
To help decide, Philippa Taylor recommends forming a family council. A formal board should address strategic business issues but a family council is a means to review issues that impact the family, she says. Handling family investments, appointments and members’ development within the business are subjects that might be addressed by the council. They decide if, for example, a family member’s son is able to take a year’s sabbatical for study.
Uncertainty – around wills for instance – can quickly create conflict. Schwerzler recommends creating a family plan and mission statement that is separate from the business’s plan and mission statement as an effective way to manage conflict. “The family plan might say the elderly founder doesn’t draw a wage but wants to remain active in the family charitable foundation, or the sister doesn’t work in the business but wants a dividend.”
The whole family needs to be involved in creating this plan, not just one enthusiast, Schwerzler adds. After defining the family’s needs these then inform the business planning along with growth targets and the other, usual strategic aims.
Identify primary objectives
As part of the professionalising process, a family company should start with three primary objectives, Schwerzler suggests. These might be, say, to grow the business, to increase profits and maintain healthy family relationships. Efforts to professionalise the business then need to address each objective.
The right infrastructure
A common problem in family businesses can be an overly informal management style, which is not always appropriate as a business grows. Addressing this can be a straightforward matter of introducing appropriate infrastructure such as strategic planning, business plans, job descriptions, employee handbooks, manager handbooks, operation manuals and documentation of computer systems.
Another typical challenge is disconnected solutions. A family business may have good accountants, lawyers, bankers and consultants but never bring the advisers together. The risk: to end up with a series of solutions to problems which don’t work well in concert or are not cost effective. Implementing a number of unconnected pieces of advice can be costly – for example a financial system that doesn’t link to purchasing or forecasting.
“To help manage this issue hire a business consultant with family business experience,” advises Schwerzler. “They need to be smart about business and about family dynamics. An accountant is good at tax and but unlikely to know how to deal with two feuding brothers. A family therapist may be good at dealing with feuding brothers but have no notion of a balance sheet.”
Family Business Australia’s Philippa Taylor urges family businesses be sale-ready even if they don’t have immediate plans to sell. Professional structures like job descriptions and KPIs make the valuation process easier and increase the likelihood of the owners realising full value in future.
As part of this, she warns, it’s important for family members to undergo the same processes as non-family employees. In many family businesses it’s common for non-family employees to have job descriptions, KPIs, performance reviews, salary benchmarking and other professional structures but for family members to sit outside of those structures. This can impact morale and have other adverse effects.
Finally, says Don Schwerzler, family businesses should consider having an independent advisory function. This can be a single person who is not part of the formal board and who offers advice only. He or she can meet informally and infrequently with the owners, but must be objective. “It should be someone who’ll act as an ombudsman and a sounding mechanism for the owners on issues such as the competency of their children. Such honesty is truly valuable.”
Don Schwerzler’s ten tips for a more professional family business
1. Differentiate family issues from business issues. Ask: are you a family-first business or a business-first family?
2. Explain business functions and strategies to family members who are stakeholders in the business but who don’t work in it.
3. Facilitate the formalisation of business functions and controls – establishing better processes for the entire management team
4. Encourage personal growth and development.
5. Set up a formal recruiting process for your advisors and board of directors.
6. Develop agendas for family business retreats.
7. Gain a better understanding of the strengths and weaknesses of your organisation.
8. Set goals and action plans that will ensure the survivability of the business.
9. When preparing to do a business valuation, learn and seek advice about factors that would increase or enhance the value of your company.
10. When doing new employee orientations, explain how family values impact the decision-making process in the company.
**** Our thanks to Justine Burke, Senior Writer and Project Manager with Businesswriters & Design in Pymble NSW Australia, who did the interview and wrote the story!
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