Category Archives: Financial Management

Profit: Counterpoint

Chris Eckrich
Chris Eckrich

The word profit invokes thoughts of selfishness amongst some, benefit amongst others, and a necessity in family business. While the love of money may be the root of all evil, the pursuit of profit is necessary in order to sustain any ownership group’s goals. But what role should profit play in driving behaviors of business owners?

Recently, I was confronted with a discussion in which a person shared that the only goal of business should be the pursuit of profit. When this view is taken to its extreme, employees in a company end up being viewed as replaceable automatons and leadership drives towards ever increasing levels of accountability to the point that a business starts to represent a slave enterprise.

One of the most rewarding experiences of my consulting career has been to experience the many ways that families approach earning business profit as an essential goal, but not to the exclusion of other goals they may have as an ownership group. One family ownership group may choose to organize their enterprise in a way where work life balance is of primary importance, believing that the essence of humanity is not either work or play, but a balance between work and the enjoyment of life in its many forms.

Another family may view their enterprise as an entity whose financial performance is critical to achieve their philanthropic goals outside of the business. A return therefore becomes imperative not just to provide a comfortable living for owners, but to further support their efforts to impact the world in positive ways – sometimes to the benefit of the business, but often times without any spotlight to gain publicity or benefit.

One other reason many owners are concerned about profit is to sustain their ability to keep their workers employed. One of our clients shared with great pride about a long-term employee who has sent two children through medical school while working for her family business.

In all of the situations above, the owning families could choose to focus on profit to the exclusion of all other ownership goals. Instead they see profit merely as a tool to achieving something greater than themselves.

When it comes to leaving a legacy, if the legacy consists of dollars alone it is likely to be an empty legacy void of any real purpose. The lasting legacy runs far deeper than money.  In fact, the families who pass on the strongest legacies rarely focus on wealth as their primary purpose, even though they may possess great wealth.  Instead, they seek to create an impact on the world through their core beliefs, business practices and philanthropic efforts.

Profit is just a tool to help them complete their noble journeys.

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.

Using the paradox model to unstick a stuck situation

Amy Schuman
Amy Schuman

Recently, I presented to a very engaged, thoughtful and curious group of family businesses and their advisors at the High Center for Family Business at Elizabethtown College in Pennsylvania.  They quickly grasped the importance of managing paradoxes for both/and outcomes. But they kept pushing me to explain more specifically how they might apply these concepts, so I told them I’d use this week’s blog to explore some practical applications of the paradox insight.  (Additional examples can be found in Part 1, Part 2 and Part 3 of the series “Managing unsolvable problems: Understanding paradox.” )

Let’s take a very common paradox in family business: Harvest and invest.

Many business owners — especially founders — believe that every earned dollar should be invested back in the business.  Funds deployed within the enterprise outperform every other possible investment. Investing dollars in any other way appears foolish, almost crazy.  Keeping all the eggs in one, closely controlled basket is the only approach that makes sense. Besides, it is often argued, individual family members have plenty of funds and rarely have a real need for more money.

However many folks — especially in G2 or G3 — disagree. They believe that a harvest event, i.e. a dividend or distribution, is essential to give them some measure of independence and self-determination. They recognize that their financial return on investment may be smaller outside the family enterprise, but they value other, non-financial returns. For example, the opportunity to move some eggs into a variety of baskets and diversify their assets, or to engage in a project all their own.

Why is it so hard for the investors to see the advantages of an appropriate harvest? Can an appreciation of paradox help them see that harvesting is not a threat to investment, in fact it generates support for investment? Paradoxically, a modest harvest to owners is probably the most powerful force for building support for future investment which will be necessary for creating future harvests.

And what about the harvesters? They must appreciate the importance of expressing support for investment as the source of their past, present and future distributions. The classic need to “protect the goose that lays the golden egg” must be made crystal clear to those who are tempted to overemphasize the benefits of harvests.

How do you unstick a situation where folks are tussling over two desirable approaches? Paradoxically, start by helping each side embrace, support and even advocate the position of the other side.  It is part of how the paradox works: Expressing staunch support for your “complementary opposite” actually creates stronger conditions for the implementation of your preferred approach. In the same way, any action you take in support of your less preferred option will help create more stability and trust in the larger system.

Many family businesses do this instinctively with great success. Now that you’ve heard these ideas, give them a try — they work! Let us know what happens.


My deep thanks to Dr. Barry Johnson for his pioneering work and inspiration in this field. Please see www.polaritypartnerships.com for more on polarities and paradox. 

Capital Market Theory and the Family Business

John Ward
John Ward

The most recent HBR has the theme, “Are Investors Bad for Business?” (excerpt). Extraordinarily respected Clayton Christensen of HBS talks of how bad capital market theory is for innovation and job creation. Finance rations capital to a short term bias presuming capital is scarce. But it isn’t, Christensen asserts.

Family business capitalism sees the world differently. Families see capital as limited, but also embrace the long-term view. Families don’t decide as much by IRRs as by future scenarios. Limited capital sharpens the commitment, persistence, and agility necessary for sustainable success.

For years I’ve thought that shareholder capitalism couldn’t escape its fundamental assumptions and elegant, even if wrong, orthodoxy. With Professor Christensen leading a different thesis I’m heartened we maybe see things differently. While that’s good for society, it also lessens the competitive advantage of business families. Or, maybe, business families are so innately good at this thinking that they are protected by years of experience.

It’s ironic. Just as the share value capitalism theory is facing critique by advocates, business families are losing confidence in their inherent advantages. They are increasingly being told by family business researchers that they compromise shareholder value too much for family continuity and comfort.

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.

Patience, Planning & Perseverance: A Client Success Story

Mike Fassler
Mike Fassler

During the first quarter of this year I had the great privilege of witnessing a significant accomplishment by a long time client.  I started working with this family in the late 1980’s as they were contemplating exiting their business due to some feedback from their lender and general frustrations with short cash flow.  They asked me to take a look at their situation and share my assessment and recommendations.

Their lender had indicated that since they were not able to “zero out” their operating loan once a year from the operating cash flow of their business, this suggested they were not making money.  The lender further argued that if they were not making money they should consider exiting their business.  My client was alarmed and considering an exit.  I dug into the numbers and had extensive discussions with the client.  My analysis indicated that in fact they were very profitable but the combination of their growth rate and the structure of their balance sheet was creating their liquidity challenges.  I shared with them that they were bankable and they could likely have their choice of lenders.  They shopped their financing package and were presented with financing offers from 3 different lenders.  The flood of emotional relief this family experienced upon refinancing was moving.

Fast forward to the first quarter of this year, 25+ years later, to the incredible experience for me.  At our annual planning meeting where we were reviewing their financial statements, this client proudly shared that as of this past December they had completely paid off all of their debt.  Their personal equity position is now over “8 figures”, they have plenty of liquid assets, and their business continues to churn out positive earnings and cash flow.  We spent the meeting discussing the future for them personally, for their family and for the business.  The pressures they now face are around stewardship of their sizable equity position, and making choices between options – enjoyable challenges to consider.  It has been my privilege to serve this family along their remarkable journey of success.

The Prenuptial Agreement – Handle with Care

Dana Telford
Dana Telford

Greg was engaged to Rachel, the only daughter of John, a wealthy business owner.  A few days before the wedding, Rachel’s family lawyer called.  He wanted to meet, as soon as possible, about a “pressing financial matter”.

In the attorney’s office, a thick prenuptial agreement was put in front of Greg.  He was instructed to “sign it or the wedding checkbook will close forever”.  After reading through the first pages, and getting terse responses to his questions, Greg refused and walked out.

Rachel phoned minutes later in tears. “Is it true what daddy said?, she asked. “That you are after my money and have called off the wedding?”

Ah the prenuptial agreement.  A topic that generates significant stress in wealthy families everywhere.

A pre-nup makes sense.  Most people agree that pre-wedding assets should remain separate after marriage.  Statistics show that half of marriages end in divorce. So it’s a predictable issue that arises as children of wealthy parents develop serious relationships, yet it is still difficult to navigate.  Why? It is an energy-rich combination of youth, romance, family money and intergenerational relationships, all intensified by a ticking “days ‘til the wedding” clock.  Add them together and you have the perfect environment for off the charts whacked out emotion.  Not the best scenario for sound decision making when great decisions are paramount.

So what’s a parent to do?  My goal here is to provide four ideas for putting the pre-nup in place without putting relationships in peril.

Lesson One: Put yourself in the couple’s shoes.

Remember those days?  You were young but increasingly independent and self-sustaining.  You wanted to be treated as an adult and huffed and puffed when it didn’t happen.  You were in love.  And the last thing you wanted was someone to throw cold water on your flames and get you to look closely at reality.  This is how a pre-nup can feel to the Next Generation.  Also, remember, your “child” is legally defined as an adult and deserves to be treated with respect.

Lesson Two: Get it done early.

Start giving your children more information about family assets each year, carefully and with judgment, starting in their teens.  To begin, tell them the stories of how the business began or how family holdings were accumulated.  Underscore the principles that have been a foundation for success.  Remind them of the benefits the family has received (e.g. education, travel, comfort) in order to help them respect family assets as something to protect. I firmly believe that children can handle more truth at a younger age than we give them credit for.

As they get older, teach them the logic behind a pre-nup. Pass along to them articles about family lawsuits and best and worst case scenarios.  Help them to understand that no relationship is guaranteed to last forever.  Confirm your belief in their ability to choose a spouse wisely and to work through any difficulties, but make it clear that pre-nuptial agreements are 1) a part of the family principles and 2) a benefit to everyone, including the future in-law.

The worst possible pre-nup scenarios happen in the 11th hour.  Nobody wants to have the discussion, so it is avoided and procrastinated and pretty soon the wedding is tomorrow.  As a rule, a pre-nup should be signed at least 30 days prior to the wedding.

Lesson Three: Send a messenger and blame him/her for everything.

If you represent the wealthiest side of the couple, you have the highest interest in assuring that a pre-nup is in place well in advance of the ceremony.  So drive the process, but send someone else to complete the task.  Your primary goal is to make the new family member feel welcome, cherished, appreciated and respected.

In my experience, there is no better time to use a trusted attorney.  And make certain that she politely advises the fiancé to seek qualified independent legal counsel so as to make the process fair, professional and reasonable.

If the fiancé calls to question the process or document, acknowledge the awkwardness of the situation, blame the attorney and kindly suggest that he/she give her a call.  Underscore that the intent is not to hide or avoid any details, but to make a sensitive issue less emotional.

Lesson Four: Be transparent.

Remember, there is a fifty percent chance that you will be spending holidays and vacations with this person for the next 20 or 30 years.  It is vital to ensure that the wedding goes off as a true celebration.

Don’t hide family assets in the pre-nup process.  Don’t “mis-remember” things that can hurt you in the future should the pre-nup become a guiding document for a divorce settlement.

The purpose of a pre-nuptial agreement is to clarify expectations and protect family wealth in a reasonable, less emotionally driven manner. Too much emotion hijacks our brain, literally, and makes us respond to reasonable things in unreasonable ways. Perhaps the greatest benefit of a pre-nup done well is that it minimizes the emotions that surround love, family and money and paves the way for a wedding that celebrates the beginning of a new family.

Innovation and Risk Taking – Everything in Moderation

Joe Schmieder
Joe Schmieder

Family businesses tend to pursue incremental opportunities rather than radical new innovations.  Growing by incremental innovation steps has proven to be more sustainable than giant leaps of change.  This incremental approach is prevalent partly because family businesses are less prone (not adverse) to taking high risks and leveraging large amounts of debt.

One finding that stands out when reviewing Family Business research is that successful, long-lasting family firms exercise moderation.  Typically, family firms do not over leverage, over risk, over plan, or over innovate.  Seldom do we read about a family firm that has discovered or developed a groundbreaking new product, like the iPod or Viagra!  These developments emerge from the heavily funded research and development departments of large public companies like Apple or Pfizer.

Whereas venture capital firms talk about burn-rate, the amount of cash a start-up venture plows through in the early stages, family businesses talk about less exciting things like self-funded developments or modifications to existing products.  This moderate approach to business, while less exciting, has for the most part served family businesses well.  The steady, moderate approach creates a more stable firm. 

Unfortunately, at times this status quo climate can be the underpinning cause of the decline of a family business.  When factors change and a family business does not adapt quick enough, there can be a noticeable drop in the value of the family business.  The print media industry is one of those very visible industries, populated by many family-owned firms, that has faced rapid transformation mainly because of the delivery of content through channels very different from traditional printed formats.  The digital age, specifically the internet, has changed this industry dramatically.  Some have adapted.  Some have not, and suffered for it. 

While moderation in a family business may be admirable, is your family business adapting to new trends in today’s accelerating pace of change?

Risk Taking in a Family Business

Joe Schmieder
Joe Schmieder

Research indicates that family firms take fewer risks compared to non-family firms. This lower risk-taking viewpoint has led to the myth that family firms are risk adverse.   Another conclusion is that family businesses take “safer” risks that are closely associated with their core business.   Since other studies indicate family firms show higher performance over the long run, it could be argued that family firms actually take more “high-probability” risks than non-family firms.  While these risk are not as exciting as what venture firms and some publicly owned firms may take, the family firms’ conservative, calculated approach to risk-taking appears to deliver stronger value over the long term.

As the New Year gets under way, what are some risks that your family business is considering for 2014?  Are you looking to expand your business?  Add more employees? Develop new products?  Acquire a business?  Open a facility in another country?  There are risks associated with each of these initiatives.  The competition could introduce an advanced product just before you go to market with your new product or the country you plan to enter could fall into an economic slump.  Regardless of these possible occurrences, family firms have a history of carefully selecting investment risk levels so they can endure these possible setbacks.  Families do take risks.  They are not adverse to risks.  They simply take measured risks that have a high probability of providing a long-term return.