All posts by Norbert E. Schwarz

Establishing a family philanthropy

Norbert Schwarz
Norbert Schwarz

Several of my clients have wanted to begin or continue a philanthropic culture with their families but have been hampered by the costs of establishing their own foundation. The advice generally given to them by the experts is that it takes an initial investment of $250,000 to $500,000 to make the foundation cost effective. However, there are vehicles that can accomplish the objective for far less.

Our family was recently made aware of Vanguard Charitable. It is a public charity that was founded in 1997 by the Vanguard Group and provides investment management and administrative services for charitable purposes. A majority of Vanguard Charitable’s trustees are independent of the Vanguard Group.  The minimum contribution to establish a fund with them is $25,000 and you can make grants to acceptable charities of $500 or more. We were able to fund our initial tax-deductable contribution utilizing appreciated mutual funds.

The process to establish a charitable account was very easy and the company was extremely helpful in working us through the enrollment process. Making grants to your favorite charities is also simple. Vanguard Charitable does the due diligence, and you can choose the charities for your grants. Grants must support recognized public charities. You can also designate how you want your remaining fund balance to be invested at Vanguard Charitable. The annual fee based on our initial funding was .6%

If you are looking for a vehicle to establish family philanthropy at a conservative funding level, this type of vehicle might be well worth investigating.

Five principles of personal wealth management

Norbert Schwarz
Norbert Schwarz

Recently a business-owning family facing the sale of their business asked me how they might prepare the family to face the issues of sudden wealth. Their primary concern was for their children and how this major change might affect them.

Over the years of serving as a banker, investment advisor and family business consultant, five principles of personal wealth management came to mind. These principles apply to adults as well as children and have been confirmed by the test of time for families of wealth and those just managing to get by.

The first, and most important, is to learn to live below your means.

Number two is to maintain a budget. Whether it relates to an allowance or a paycheck, the old adage “you can’t manage what you can’t measure” is just as true in managing your finances as it is in managing your company.

The third principle involves establishing a regular saving discipline. Save regularly, and when possible, save on a tax-effective basis.

Number four is to exercise financial patience in investing. Don’t try to time the market.

Finally, from a life as well as an investment perspective, understand the benefits of balance. In investments, it means asset allocation and periodically balancing assets according to the targeted allocation. Seeking balance in everything you do in life can make life’s transitions more rewarding.

Managing the FUDG factor in a Hold or Fold decision

Norbert Schwarz
Norbert Schwarz

Fear, Uncertainty, Doubt and/or Greed (FUDG) often play a major role in a family’s decision to keep or sell the family business.  Managing these emotions in the decision can have a powerful impact on the success of the process.

Several steps can be taken to manage the first three elements of the FUDG factor to the extent needed to make an informed hold or fold decision. Educating family shareholders on the products, the competitive environment, and the challenges and opportunities of the business is a good starting point. Encouraging family members to be informed on business issues in general can also help those not in the business better understand the current and future business environment in which the company operates. If the company has embraced a comprehensive strategic planning process, management should be well aware of these subjects. The planning process should also clarify the company’s vision for the future and outline its plans to achieve that vision over time.

An outside board I worked with recently had a policy of asking shareholders to discuss and communicate to them their long-term vision for their ownership annually. This was done before the board reviewed and approved the annual revisions to the company’s strategic plan. Building value and growing the company were the focus for many years until the shareholders responded unanimously that they wanted to prepare the company for sale within a three to five year timeline.  A successful, fully priced sale was accomplished in less than three years.

The Greed factor is a bit more problematic. There is a difference between greed and rational self-interest.  The need for individual financial security may become a key driver in the decision process. The question that arises is “what is enough?” When that question cannot be answered rationally, an element of greed becomes suspect and may lead to conflict before, during and after a hold or fold decision is made.

Fear, Uncertainty, Doubt, and to some extent, Greed may always be present in one form or another in every hold or fold decision. The key to success, whether the decision is to hold or to fold, is to manage these factors effectively.

A Banker’s Dozen of Life Lessons Learned

Norbert Schwarz
Norbert Schwarz

In my 50 plus years in banking, business and consulting, I have been blessed to have had the opportunity to work with scores of families and mentors who have taught me a lot about getting along in the personal and business world. While I have not always practiced the sage advice given, it has served me well over the years. I would like to share some of those gems with you and ask that you share any that you have found particularly helpful in furthering your successes.

  1. Build your foundation on trust.
  2. Be able to shift gears.
  3. When considering the hold or fold strategy for your family business beware the FUDG Factor. (Fear, Uncertainty, Doubt and Greed)
  4. When you are up to your elbows in alligators, remember that your objective is to drain the swamp.
  5. Don’t try to push a string uphill.
  6. Don’t fight people who buy ink by the barrel.
  7. Fix the process and not the blame.
  8. How you say it often means more than what you say.
  9. Learn to love details. The devil will often appear in them.
  10. Know your bottom line before entering into a negotiation.
  11. Keep it simple.
  12. Never leave anything, always go to something better.

Thank you for indulging me in a bit of nostalgia. I look forward to hearing from you on your life’s lessons learned.

Accessing Next Generation Wisdom

Norbert Schwarz
Norbert Schwarz

The senior generation of a family business was in the process of developing an employment policy for family members wanting to apply for a position. They interviewed next generation family members for their input and found some very interesting suggestions. Many of the suggestions coming from the next generation were surprisingly similar to those suggested by the senior generation. There was one comment that was unique to the next generation. Many of them thought that any family member being considered for employment in the family business should have the trust of his/her cousins. This input led to some very interesting discussion among the generations. What constitutes trust? How do you know when it is there? If it is not present, how can it be gained? Some of the results of the subsequent conversation on this very important subject are worth sharing.

Trust is one of those fundamental notions that is claimed to be understood by everyone, yet it is hard to explain or precisely define.  Trust starts with the individual. Character captures a number of concepts inherent in the basic values of integrity, honesty, and credibility; being perceived as a “good” person. Trust is a level of comfort that someone is being genuine. It was also suggested that trust and vulnerability are partners; hence confidentiality might be an element of trust. Both generations agreed that it was of paramount importance that anyone employed in the business must have demonstrated the skills required for the position. Therefore competence is a critical element of trust. Competence includes skills, expertise, and performance as well as sound judgment and decision-making abilities. There was also agreement regarding the need for a family members’ commitment to the values, vision and mission of the family and the business in order to warrant trust. Such a commitment would also include a willingness to set individual wants aside for the benefit of the group. In a word, by caring for others. Trust is something you earn by giving.

This family is well on its way to understanding and practicing one of the very important foundations of any policy or relationship. Trust is the centerpiece of the family business system. Where it is present, the family and the business are well equipped to meet any challenge. Without it, conflict often overshadows opportunity.

Questions to Consider Before you Venture into ‘Family Venture Capital’…

Norbert Schwarz
Norbert Schwarz

Some families have thought about providing venture capital or “seed” money to family members who have an entrepreneurial dream. Families that have considered offering such capital often see it as a way to support family members and build on a legacy of entrepreneurship.

Like many good intentions, the challenge is usually in the details. When the family, or family office, begins to develop a plan for providing venture capital several questions must be answered. Perhaps first and foremost is the question of how to establish a policy that will be consistent and can provide equal opportunity within the family’s means.

Other questions that will need to be addressed include the following.

  • What are the criteria for approval or rejection of a venture request?
  • How should expectations be set for the investments? What are realistic expectations?
  • What about non-profit ventures? How should expectations differ for profit and for community based non-profit ventures?
  • What about accountability? What happens if the expectations are not met?
  • Should the investment be administered within the family or family office? Or should the function be managed outside the family with some family governance?
  • What role will the family investment vehicle play in the governance and/or management of the venture being financed?
  • In the event of a failed investment, what can (should) be done to make sure the unsuccessful entrepreneur remains a welcome contributor to the family?

Certainly determining fair and objective criteria for consideration is key.  Most will require the submission of an acceptable business plan accompanied by realistic financial projections, including cash flow “burn rate” and break-even to profitability projections. Normally, these would be on a worse case, best case, and most probable case basis. The plan should also address the repayment of venture financing and expected return on investment to the venture capital provider. Another consideration for approval might include the extent to which the prospective entrepreneur would be wiling to support his/her own venture from both a financial and time commitment perspective.

The review and approval process is paramount in maintaining fairness in a venture capital environment. Some families have considered engaging outside advisors such as investment or banking sources to assist in establishing approval criteria – though these should not be advisors who are currently active in managing family assets or providing services to the family. An outside independent venture capital board might provide a welcome resource for policy development as well as for the process of managing the family venture investments.

A source of venture capital within the family can be a most rewarding addition to an already rich tradition of participation in the free enterprise system. It can also be a major contributor to the family’s efforts in active philanthropy that may enable numerous family members to realize their dreams of active involvement in making a difference in their communities.  While all these intentions are good, make sure you take the time to think through the tough choices and set up clear processes before supporting the first ‘deal.’

The Roles and Responsibilities of Beneficiaries

Norbert Schwarz
Norbert Schwarz

Trusts are important tools when planning for the continuation of family ownership into future generations. While trusts are often effective in tax and transition planning, family and business issues can emerge when little is done to educate beneficiaries about their roles and responsibilities.

The following are suggestions for minimum education that should be provided to beneficiaries, they need to:

  1. Understand why the trusts were set up and the governance processes by which they are overseen.
  2. Have a basic understanding of businesses owned by the trusts, and the processes by which they are governed.
  3. Know how to manage personal finances responsibly.
  4. Be educated on how they can become productive and knowledgeable stewards of their heritage.  Help them to think of how, even as beneficiaries, they can add value.
  5. Develop the habit of thinking in terms of multiple generations, and appreciating the role of ‘steward’ of wealth.
  6. Get help and support to establish an effective decision making process at the family and beneficiary level.
  7. Understand the basics of business finance.
  8. Develop a real appreciation for the importance of confidentiality.
  9. Support those who have been entrusted with governing the family business and the business of the family.

 

 

Adding owners to the family business

Norbert Schwarz
Norbert Schwarz

At some point in their lives, many family businesses face a decision regarding whether to authorize and issue non-voting stock or not. This common strategy can be very helpful in accomplishing tax and estate planning objectives as well as adding family members to the ownership structure without necessarily giving up voting control by the senior generation. However, unlike marketable securities held as financial investments, ownership in closely held businesses, whether voting or non-voting, carries with it important considerations not usually apparent in open market investments.

Some of the factors to be considered when expanding ownership in the family business are whether the prospective owners are perceived to have the following:

  • Shared ownership values
  • A strong sense of stewardship toward ownership in the business
  • Willingness to support board, management, employees and the shareholder majority
  • High level of Trust with other owners
  • Constructive participation in family meetings
  • Commitment to teamwork and collaboration
  • Strong personal bonds and relationships with other owners

When these qualities are present, the chances of future conflict within the ownership ranks is generally minimized.

The importance of Values and Mission in a family business

Norbert Schwarz
Norbert Schwarz

One of the most enlightening discussions I was privileged to facilitate with a client was one involving the family’s Mission as it related to the business. The question posed was  “why do we own this business?” The question was rephrased as “to what end?” The discussion that followed was most enlightening.

An investor owner focused on the business as a financial wealth creator for the family. Another owner looked at the Mission of the business as being a vehicle for family bonding around a business venture that would require the family to communicate, collaborate and compromise. Some in the younger generation focused their attention on the capacity of the business to contribute to the community and for the shareholders to become more involved in the philanthropic opportunities offered by a growing and profitable family business venture.

In spite of the diverse Missions or business purposes by this family of shareholders, they were able to communicate, collaborate and compromise to establish a unified Mission and Vision statement that provided their professional board with guidelines that would allow the board to direct management effectively in the years to come. The foundation for this very rewarding process was laid by the parents and grandparents who practiced and communicate a set of values that allowed the family to bring generations together toward a common goal.

To what end? The value of getting clarity on mission

Norb Schwarz

One of the most enlightening discussions I was privileged to facilitate with a client was one involving the family’s Mission as it related to the business. The question posed was  “why do we own this business?” The question was rephrased as “to what end?” The discussion that followed was most enlightening.

An investor owner focused on the business as a financial wealth creator for the family. Another owner believed the Mission of the company was to be a vehicle for family bonding around a business venture that would require the family communicate, collaborate and compromise. Some in the younger generation focused their attention on the capacity of the business to contribute to the community and to permit shareholders to become more involved in the philanthropic opportunities offered by a growing and profitable family business venture.

In spite of the diverse Missions discussed by this family of shareholders, they were able to communicate, collaborate and compromise to establish a unified Mission and Vision statement that provided their professional board with guidelines that would enable the board to direct management effectively in the years to come. The foundation for this very rewarding process was laid by parents and grandparents who practiced and communicated a set of values that allowed the family to bring generations together toward a common goal.