Ten Qualities of Successful Family Businesses

Drew Mendoza
Drew Mendoza

This week’s blog is an easy-to-grasp list of 10 qualities I’ve noticed about the underpinnings of high-functioning family businesses over the last 25 years. These are not things I made up. They are philosophies and guiding principles of families I’ve been honored to serve and speak with.

  1. Estate planning is NOT continuity planning. Confuse them at your peril. Estate planning is necessary but usually not sufficient. Continuity planning will include these critical matters: leadership transitions of the company, the board and the family; the rules that govern the board, compensation and performance measures; company strategy; shareholder education; and your vision and purpose for being in business together.
  2. Family meetings should help plan for future generations of ownership and encourage leadership, fun, shareholder development and meaning. If the meeting does not work out as well as hoped the first time, give in and go hire an expert to facilitate the conversations that are required. And, while we’re on this subject, another reason to use an outside facilitator is because it is hard to come across as neutral and objective when you’ve got a large stake in the outcome of the conversation. Being a member of the family, an employee of the business or a member of the board may skew your thinking and ability to seem unbiased to everyone else in the room.
  3. The family will need expectations aligned around many areas including their expectations for growth, risk, profitability, liquidity, purpose and policies like how we select leaders and who can be on the board.
  4. Salary, bonus and distributions/dividends are different. I’ve seen many a family co-mingle them in order to minimize or avoid tax liabilities. For families that intend to continue the business to the next generation, this is frequently the source of big problems later on.
  5. Have an appropriate, functioning corporate governance structure.
  6. Run the business and the board as a meritocracy.
  7. Beware of conflicted advisors.
  8. A leadership change will likely take five to 10 years of preparation and execution and another three to five years for the new leader to get their sea legs. All concerned must commit to hang on and work through the difficult times that sometimes arise. Remember that although we’re related, we usually view aspects of our realities differently from one another.
  9. The transition of the company’s ownership and leadership is a dynamic strategic imperative that will benefit from having the right foundational building blocks in place. Know your values and divine a strategy that reflects those values. Be honest with yourself and each other. Have thoughtful policies about compensation, the purpose of profits (in all their forms), the responsibilities and purpose of ownership, and be open to accountability.
  10. Be patient with one another and the process of transitioning leadership and ownership of an enterprise.

If one or more of these strike you as something you’d like to read more about, let me know.  I’ll be happy to introduce you to articles and books specific to each of these 10 points.  And, by the way, each of these points can be a discussion item for shareholder, family or governance meetings.

To contact Drew Mendoza, Managing Principal, please call (773) 604-5005 or email mendoza@thefbcg.com.

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The Power of Questions

Barbara Dartt
Barbara Dartt

There will come a time during your family business succession journey when progress requires you to give up what you love to do and what you are very good at to make room for successors to learn, grow and flourish. This is some of the hardest work of succession.

Part of the trauma in this process is watching your bright, passionate and energetic successor – someone you have great confidence in – make decisions that you’ve made for 20 or 30 years. As you would expect, they make some missteps. They collect the wrong information. They take too much time. They move slowly on small decisions and too quickly on big, complex ones. They don’t treat people right. They screw up.

As the senior team member (some prefer “seasoned” team member), it’s often hard to know when to step in. How do you ensure they make some mistakes but none that are too big? How long do you let them bark up the wrong tree?

Today, I had the honor of watching Scott, one senior generation member (who would NOT appreciate that title), hit the ball out of the park while guiding a successor.

Scott is the CEO and the oldest of a four-sibling ownership team. He is fast paced, smart and loves to engage in stimulating conversation. Scott, while effective at his job, does like folks to know how smart he is and does not suffer fools lightly. He can easily dominate a conversation. And over the 18 years he and his brothers have worked together, his brothers have taught themselves to defer to him. And why not? Scott is almost always right. His guidance has brought the business a lot of success.

However, Scott (and his brothers) have recognized that his natural style – which has been a strength of the business for a long time – will not position it for long-term success.

The successor in the business is Derek, Scott’s youngest brother by 15 years. Derek presented a feasibility study today to the Board that he and Scott developed about an acquisition target. Scott has traditionally done the majority of this kind of work and been the one to present and lead discussions.

Derek had worked very hard to be ready for the presentation. He’d done his homework, gotten Scott’s input and worked with an outside consultant on both the content of his report and his presentation style.

I have watched Scott in similar situations before. When he already understands the content of a report, Scott has a hard time staying patient. He fidgets. He sometimes adds a point but then takes the conversation off topic. Scott’s become aware of these tendencies and their effect on other’s confidence.

Today, Scott was a superstar – just like Derek was. He was relaxed. He listened well. When he thought Derek missed something, he asked a great question. The tone was truly curious. He deferred to Derek’s knowledge and really asked his opinion on the topic – it wasn’t a rhetorical question that he already knew the answer to. (Well, it didn’t sound rhetorical.)

Questions can be transformative and sometimes very hard for experts to ask effectively. Questions can make the asker vulnerable – someone might think you don’t know something when you ask a question. For the CEO who’s been charged to know everything for a very long time, vulnerability can be an extremely hard place to put yourself.

The next time you’re tempted to add your perspective, hold off until you can do it in the form of a question. A real question – not one designed to point out what you know. And get the tone right. Tone probably contributes 90% of the effectiveness of a question.

When you get it right, watch the successor bloom with confidence and initiative. What an honor to watch Scott and Derek become a case study in how the hardest work of succession can pay off.

When the Dead Pick Your Business Partner

Dartt 100x150
Barbara Dartt, DVM, MS

“I had always wanted to be a nurse,” explained Rachel. “After 15 years as a stay-at-home mom, I went back to school, earned my degree and then got a great job. I worked just one town over from where we live and where my husband Tom’s family business is located. Tom was at work all the time, managing the business and I was close by with a flexible work schedule. After 20 years of patience and work, our ideal plan had come together. And then Tom died.”

When Tom died, Rachel became a 50% partner with her mother-in-law, Rita. Rachel’s father-in-law had passed away many years ago and Rita had been an active business manager and owner for years. She’d recently begun to step away from day-to-day decision making. But now that Tom was gone, she moved back into her active role.

Tom has three siblings, two of whom had worked in the family business, on and off. Rachel had never worked in the business and was concerned with Rita’s intentions. Rachel and Tom’s dream had been for their (young adult) children to have an opportunity to work in and own the business. What did Rita want? “Rita won’t say what she wants right now. I think she’s afraid that whatever she says, it will make someone unhappy. It will be hard to get her to decide.”

Rachel chose to quit her job and come to work in the family business. She saw no other way to ensure that her voice was heard. And no other way to protect the future she and Tom had discussed for their children.

Tom passed away with life insurance and strong operating agreements for his entities – ones that protected owners and the businesses from liability. However, there was no buy-sell agreement. No future plan for business ownership. Today, the business is saddled with two reluctant owners.

Rachel is an owner by default. She’s chosen to exercise her owner’s voice by trying to manage the business, with no experience and very little knowledge about financials or operations. Rita is an owner by legacy. She had hoped to back away from management but also felt the only way to exercise control and “protect” the business was to be an active manager. And that’s about all they have in common.

A team functions best when they have common ground — a shared purpose. Logically, Rachel and Rita could work on that shared purpose by jointly answering the question, “Why do we want to be in business together?” Practically, they don’t have the depth of relationship, the understanding of their roles (as both owners and managers) or the trust to answer that question today.

So they are 50/50 owners, yoked together by fate. They are both working to overcome grief of Tom’s loss that came suddenly and too early. Owners, thrown together by the death of a key business figure, rather than owners who affirmatively chose to be in partnership together.

The obstacles are huge. And preventable.

This is obviously an extreme example. However, every family member who owns or manages a business can ask themselves two key questions:

  1. First, do you have “affirmative” and engaged owners? Affirmative owners are those who have chosen to be owners. Engaged owners are ones who are clear on the rights and responsibilities of ownership and have the knowledge and maturity to effectively make ownership decisions.
  2. Second, are the owners aligned around why they are in business together? This trait is fundamental to effective owner teams.

Talking about what ownership might look like after you are gone is not usually fun or easy. But it’s one of the best gifts you can give your family. And one of the best investments you can make in the future of your business.

Banking on a Strong Corporate Governance Process

Otis Baskin
Otis Baskin

Why are banks so fond of boards with independent directors?  What is the big deal?

Actually, banks are interested for the same reason as minority and non-executive owners in a successful multi-generational family business.  Independent directors with real fiduciary responsibility have an obligation to work in the interests of all owners; not just those running the business, not one branch of the family, but everyone whose capital is at risk – including banks.

In business school, it is called Agency Theory:  the potential that managers of a business will make decisions that are better for themselves than for owners who don’t manage the business.  Things like executive compensation and perquisites are often a concern for owners who don’t share in them.  How can all owners be sure they aren’t paying too much to run their business?  Would dividends and other distributions be greater if management didn’t spend so much on their “pet projects?”

These are the same issues that banks worry about. The Warwick Business School study I cited previously concludes that when businesses don’t have a strong corporate governance process with independent directors, banks react by imposing their own controls through more restrictive lending terms.  Family owners who are not convinced their capital is being managed properly may attempt to impose their own controls by second guessing management and raising doubts with other shareholders.  Sometimes their behavior becomes a strain on the cash position of the business if dissident owners want to be bought out.

At the very least, dissenting voices can disrupt family harmony.

Can Independent Board Members Add Real Value to My Business?

Otis Baskin
Otis Baskin

“What real value can independent board members add to my business?”

This is a question often asked by our clients when we discuss corporate governance.  It is a fair question when the owners of a successful family business are contemplating the creation of a fiduciary board of directors – why should they include non-family, non-owning, non-management, members with full voting rights?  Of course, the right independent directors bring valuable, relevant business experience to your business.  But, it can be argued that consultants and/or advisory board members bring that value without having to give them a vote.  In other words, can we get their advice without being bound to use it in our decision-making process?

Good advice is always valuable but independent directors on a board designed to represent the interests of all the owners of a business have been shown to add much more tangible value.  A study of 1,300 U.S. firms recently released by the Warwick Business School in England shows that banks loan on more favorable terms to businesses with independent directors on their boards.  This study, done over a period of 13 years, shows repeatedly that as the number of independent directors on boards in these companies increased, the terms of their loan agreements with banks improved in the company’s favor.

The issue comes down to this:  When there is an effective system of corporate governance in place, indicated by the presence of independent directors, banks have greater confidence in a firm’s internal controls and don’t feel they need to impose as much external control through their loan covenants.

How’s this for real value?  A better relationship with your bank can yield a lower cost of capital in your business.

Keeping Promises

JoAnne Norton
JoAnne Norton

On a long cross-country flight, I sat next to a woman who was involved in her family’s business and she shared her family’s fascinating story. Working with a consultant, her family had put a lot of time and effort into creating a family constitution as well as policies, procedures, and protocols. She and her husband, his sister and her husband, as well as the eight cousins—who would all one day be owners—got along famously and had great fun designing the documents.

Then sadness crossed her face as she confided, “As wonderful as our agreements were, and you should have seen the celebration we had when they were ratified, the documents were never taken seriously by the senior generation. The new policies were ignored, and the rest of us felt betrayed. We had spent so much time and money on the process, and now my husband doesn’t speak to his sister, and my children no longer get along with their cousins.”

As the plane descended through the clouds the woman said, “When you work with families like mine, please tell them how important it is to honor the agreements they create. It just takes one little snag to unravel the whole thing.” I assured her it wasn’t too late to fix the situation, and I urged her to reconnect with her family business consultant.  I told her she might want to suggest a meeting with the senior generation to discuss how best to handle the breach of trust that had taken place. Her family could also take a second look at the documents to be certain they weren’t too constricting, but most importantly, they needed to start communicating again.

As we walked toward the terminal together, she said she would take my advice if I would take hers: she would call her consultant if I would remind families to keep their promises to each other.  When we write family agreements, we have to be sure they are promises we can keep, so if promises have been broken, we need to keep the channels of communication open.

Handling Inevitable Conflict in Family Business

JoAnne Norton
JoAnne Norton

Even though conflict is 100% predictable, completely unavoidable, and decidedly uncomfortable, many family owners avoid having disagreements at all costs. They don’t realize that smiling sweetly and yet again swallowing bitter bile only causes resentments to grow and unresolved issues to fester. Putting issues on the back burner causes emotion to boil over—probably at the most inopportune time.

An old axiom to remember is: “Choose your battles wisely.” Ask yourself if the conflict is a big deal in the first place and really needs to be addressed. It helps to remember Thomas Jefferson’s advice: “When angry, count to ten before you speak. If very angry, a hundred.” Screaming and yelling when you have a conflict with a family member is guaranteed to make a bad situation worse. Wait until you have calmed down or maybe even slept on it before broaching a sticky subject in your family business.

If the shoe is on the other foot, and your sibling is screaming at you, heed the advice of famed psychologist, Murray Bowen, who recommends in Family Systems Theory: “Don’t attack; don’t defend; don’t go silent; just remain neutral.” Bowen taught that screaming only escalates the fighting, but not saying anything at all could worsen the situation too.

If your cousin begins to lose her cool, agree to talk about the issue later when both of you are not in the heat of the moment. You will have a much better opportunity for successful resolution when you have two calm, composed people who are honestly and openly sharing their concerns. Carefully listening and paraphrasing back to each other what has been heard can be most productive.

In my family, we have a wonderful expression: “No matter how thin the pancake, there are always two sides.” Sometimes the solution is serendipitously obvious when each person is heard and feels understood. Family relationships are some of the most precious sources of happiness in our lives, so learning to deal with conflict constructively and confidently is worth the time and effort.

LGBT People and the Evolving Family

 Joe Schmieder
Joe Schmieder

The definition of “family” and its members continues to evolve.  Bruce Jenner’s transition to Caitlyn has created quite a buzz. It is estimated that 700,000 Americans, 0.2% of the population, are transgender. On June 26, 2015, the U.S. Supreme Court ruled that the U.S. Constitution guarantees the right for same-sex couples to marry in all 50 states.

Lesbian, gay, bisexual and transgender (LGBT) people are and will continue seeking committed, lifelong adult partnerships and many will raise children.  These societal changes, whether you are in favor of them or against them, are a fact.  It is also a fact that many multi-generational family businesses are composed of family members who live outside the traditional “Ozzie and Harriet” family world.

Some families try to hide these facts. However, more and more are displaying open acceptance of those living differently from themselves and welcoming family members into the business. Tim Cook, CEO of Apple, is showing the business community that a gay person can lead and grow what many consider the most innovative, highest-valued enterprise on the planet.

We serve family firms with LGBT family members who are contributing to the well-being of business. We also observe family members who have not felt welcomed and therefore have chosen other career options outside the family business. While family firms tend to be more conservative and slower to accept these societal changes, those that have been more welcoming have helped their own culture evolve while developing a more tolerant and understanding value in the workplace.

How Diverse is Your Family?

 Joe Schmieder
Joe Schmieder

Every family contains some level of common background, political and religious persuasions, and perspectives on business and family life. One fourth-generation family business in the Midwest is identified with many shared interests, including Catholicism, Polish heritage, Loyola Family Business Institute, Democratic Party, Chicago White Sox and Pulaski Days!

However, there are some family members who have opted to diversify their views, lifestyles and career pursuits. The more common are family members’ interests, the more homogeneous is the group. The more diverse, the more heterogeneous is the group.

There is no right or wrong answer.

It is only natural that the larger the family grows, the more diverse it becomes.  Spouses (in-laws) help to introduce diversity since they have often lived in different locations and been brought up in different family situations. While we find many family members still living in a rather homogeneous family group, many families are moving towards greater heterogeneity. This can be a healthy factor, but can also create tension that requires greater sensitivity, acceptance and creativity to take advantage of the greater diversity.

Acceptance and understanding of those who choose to pursue other paths can determine whether or not a family business continues for multiple generations. Celebrating diversity and learning how to take advantage of the different skills and perspectives is more likely to produce a harmonious family.

Splitting Roles

Chris Eckrich

We often talk about the many hats each person wears in a family business.  On the business side, one individual may hold the titles of Chairman and CEO, or CEO and COO.  On the family side, one person can serve as both the Family Council Chair and Education Committee Chair.  Individuals that take on leadership in multiple roles in this way are to be greatly appreciated, as with multiple leadership roles come multiple responsibilities.

A challenge develops over time when the “multiple hat”-wearer begins fusing the roles and sees all of the accepted responsibility as “just my job.”  His or her ability to differentiate between the two–or more–roles may become lost over time due to task familiarity.

As succession approaches and it’s time to transition these responsibilities to others, it can be a bit perplexing as to how the various roles should be split.  Without clarity around this question, when a shift is made to allow different individuals to take on the newly split roles, role confusion and frustration are likely to occur.

A quick example:  Arnold had occupied the position of CEO and Chairman.  As Arnold neared the age of transition (in his mid sixties), he determined that the business would be best served by keeping his role as Chairman, while his daughter Alyssa – who had demonstrated much competency over time and earned the position – assumed the role of CEO.  Over the many years of holding both the Chairman and CEO roles, Arnold became quite used to behaving in a certain way. With the new split in roles, he found himself stepping on Alyssa’s toes inadvertently which caused both confusion and conflict.  This caught Arnold by surprise – not a lot of planning went into the role division as they just figured they could work it out over time due to their close relationship.

New approach:  Arnold is suddenly struck by the lack of formality he has given to this situation.  He initiates an exercise whereby each role would be defined clearly in terms of its expectations, responsibilities and reporting relationships.  He includes Alyssa in this process and they work through areas of confusion by asking their Board members for input in the job descriptions they are working on.  Once they have agreed on their positions and reporting relationships, and how they will communicate about the business (frequency, content), the tensions seem to melt away.  This allows each of them to function independently and motivates Arnold to give Alyssa space to be the CEO while he focuses on being the Chairman.

Arnold’s lesson: Just because you are family does not mean you always have to act like it.  Splitting roles, whether they are family or business roles, requires forethought and advance planning.  By approaching the splitting of long standing roles as a professional exercise, Alyssa and Arnold enjoyed a much improved working relationship, which made life easier both at work and at home.