All posts by Bernard Kliska, Ph.D.

What Defines a Family Member?

Bernie Kliska

How does one determine who is a member of the family?

Last May, the U.S. Census Bureau reported that in 2010 married couples represent 48% of U.S. households.  The remaining households were comprised of single parents, live-in partners (same or opposite sex), divorced, separated or unattached individuals.  Further confusing the picture are blended families that are a hybrid of more than one family of origin.

The U.S. Securities and Exchange Commission issued a guide defining who is considered a family member (Dodd-Frank Act), which stated in-laws were not considered family.  Under this act, unmarried and same sex couples living together could be considered as family members. 

With so many variables, how do we decide who is a family member?  The answer can only come from the families themselves.  There needs to be a willingness to discuss the issues around this question without insult and recrimination. 

While this conversation may not lead to a consensus, it can generate an honest, powerful discussion on deciding who should be included in establishing policies for the business, as well as family and estate planning.  Having this discussion also helps emphasize to the family the importance of working together on complex matters.

Shifting notions of what constitutes ‘family’ is yet another variable that can challenge the senior generation’s dream that the family will all work together and stay together.  In our experience, if the senior family members are open to considering a sometimes broader definition of family, then the most important part of his/her dream… a supportive family and a successful family business…can be more likely to still come true.

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Why Independent Board of Directors?

Bernie Kliska

Once a crisis hits a family business, there is usually a quick scramble to put the pieces back together.  Perhaps the family CEO is ill and unable to work.  Maybe the company faces a cash-flow problem or unusually high turnover.  Who can the owners turn to for objective help?  In tough times and good times independent board members can be invaluable.

It is not the task of an independent board to run the company.  They are not an operational arm.  They will not decide which products the business should manufacture or sell and they won’t tell you how many shifts to run. 

Instead, the independent board members typically deal with broader issues that affect the company’s success and growth, such as successor selections, strategic planning, liquidity and crisis management.  In addition, an independent board can be extremely helpful in overseeing the executive management.

Note that independent directors serve more effectively if the owning family has done the hard work of articulation their own goals and values.  It would be beneficial if the family would communicate to the independent directors what their function would be before they are asked to join the board.

Independent directors of different backgrounds and views are a precious resource to the business owning family.  Bringing that strength and difference of perspective into the boardroom requires excellent listening, mutual respect and thick skin.

Developing an independent board is a significant step in the life of a family business – while it takes some effort to get established, done well, the value to the business is immeasurable.

We’d love to hear about your experiences in setting up or serving on boards for family owned businesses – please join the discussion…

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THE ROLE OF FAMILY VALUES IN UNITING FAMILY AND BUSINESS

Bernie Kliska

According to John Ward, Professor of Family Enterprises at Northwestern University”The best tool in the family business kit is, without a doubt, its values, which shape the culture of the family and their business”. What distinguishes one family business from another are size, location, success in it’s niche, service and products. But there is a secret ingredient that acts as the glue to keep a company’s survival and the ability to pass the business proudly from generation to generation. The values and beliefs  of the family are clearly articulated to employees, suppliers and customers.

The family and business values can be a powerful marketing tool. SCJohnson Company, a five billion dollar family company always ends it’s media message with, “We are a Family Company”. Fisk Johnson, SCJohnson president stated:

“We call our values family values. They are not radically different from the values you  hear from major Fortune 500 companies, but I think we are better able to practice those values as family-owned company. People care about making quality products, really care about the family, each other and the success of the company, I believe our family caring values translate into the success of the company”.

Values play a special role in uniting family and business. When the goals of the family and the business diverge, as they invariably do at some point, shared values can LEND a sense of mission and purpose that transcends those conflicts. When values in the business and family reinforce each other, powerful synergies can arise that strengthen peoples’ performance in both realms. An excellent resource for this subject is a book by Craig Aronoff and John Ward, Values: How to Assure a Legacy of Continuity and Success.  

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LETTING GO IS HARD BUT NECESSARY

Bernie Kliska

For most family business senior CEOs, the prospect of relinquishing control is a troubling one. It presents many fears—the fear of mortality, the fear of not having sufficient funds and the fear that one’s adult children won’t get along. These business leaders have put their hearts and souls into the business for all their adult lives; yet, as most seniors recognize, they must let go if the business is to make a successful transition to the next generation. In fact, they need to be thinking about giving up both the CEO role and voting control.

The process of letting go should begin long before the CEO’s retirement takes place, even before actual succession plans are drawn up. Ideally it should be the function of the board of directors to determine the appropriate time for the CEO to retire.  While clearly the CEO needs to have a voice in this process, if they are the sole decision-maker on when they should let go, they may well be tempted to stay on longer than they should —past the time when they still are an effective leader.

In order to prepare for the challenging transition away from the leadership role, CEOs need to develop security and confidence in a number of realms.  First, they need to ensure the company is sound enough to sustain itself without the senior CEO at the helm.  In addition, they need to take steps to achieve personal financial security – so they are not financially reliant on the business going forward.  Third, ensure the children really grow up by giving them the opportunity to succeed or fail without their parents’ protection.  And finally, often overlooked is the importance of developing meaningful other interests that you believe will keep you engaged and excited to face every new day.  The CEOs who are able to let go are those who know that even without the business, they still have value as human beings.

Entrepreneurs who truly retire and turn over authority can find joy in knowing that they have built a business that not only will outlast themselves but that also have been preserved for the next generation of their families. If you are interested in learning more about this subject matter I would like to suggest you read ” Letting Go; Preparing Yourself to Relinquish Control of the Family Business” by Dr. Craig E. Aronoff.

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SHOULD YOU HAVE A SHAREHOLDER (BUY-SELL) AGREEMENT ?

Bernie Kliska

Going into business with a parent, child, sibling, in-law, or cousin both demands and assumes a certain level of trust. But, you need more than good faith and a firm handshake. Future disagreements and unexpected events can occur and tear apart businesses, and relationships as well.  A shareholder’s agreement is almost a must in any business when more than one person is an owner.  Just because your fellow shareholders are family is not a reason to assume this ‘good practice’ does not apply to you.

How do you avoid splitting up a company and deciding who gets what in the heat of battle?  You may not be able to think in a level-headed manner when screaming is at the highest decibel and doors are being slammed. What is better is to plan for the worst cases, hoping they never happen.  The wording and terms of shareholder agreements can vary greatly, but they most commonly address the following issues:

1) Who may or may not own shares and what happens if shares intentionally or unintentionally fall into the “wrong” hands due to divorce, death, credit problems, lifetime transfer or otherwise.

2) Events permitting or requiring a sale, such as leaving the company to pursue another profession, retiring, being disabled, funding estate taxes or getting divorced from a family member.

3) The price for which shares can be bought or sold and how that price is determined (fair market value given minority shareholder discounts, etc.) and how that price could be modified over time.

4) The payment terms, including down payment, length of note and interest rate.

Many shareholder agreements give the company or existing shareholders the right of first refusal to purchase the shares. A shareholder agreement legally determines how to handle a host of what-ifs.

While it may be uncomfortable to go through drafting legal documents between family members – remember the adage, better safe than sorry!

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LETTING GO

Bernie Kliska

By “letting go” we mean relinquishing control and leadership of a family business, and it can be one of the most emotional difficult experiences of a individual’s life. He or she has the power to handle the shift roughly or smoothly,reluctantly or reassuringly. They set the tone for the rest of the company. Yet more often than not CEO’s find this difficult to do well. It is so difficult in fact, that many can’t bring themselves to do it at all. Research shows that about 11 percent of incumbent family business leaders say they will never retire and about 23 percent say they will “semi-retire.” That means that a third of all family business leaders aren’t going anywhere and therein lies the trouble with many attempted succession plans. Craig Aronoff, in his book Letting Go: Preparing Yourself to Relinquish Control of the Family Business stated “if leaders truly want their company to last into the next generation and beyond, the out going generation must remember that their main job is to relinquish the company—and support successors in their new positions.” Business leaders who actually look forward to retirement handle successions much better than who don’t. Key to this attitude is enthusiasm for some new activity. This may be real estate development, writing a book,starting a new business venture or just going fishing. Whatever the new activity is, it needs to be planned for in advance of leaving the company. John Ward has suggested “that a good transition plan may take five to seven years.” The outgoing leader should be willing to set a final date and stick to it. There should also be a date set for the transfer of voting stock. When it is over, it should be over. The wisest senior generation  leaders embrace the necessity of letting go and the responsibility and preparation that it requires.They find joy in knowing that they have built businesses that not only will outlast themselves but that also have been preserved for the next generation of their families.

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FAMILY BUSINESSES IN THE AGE OF ‘NEW NORMAL’

Bernie Kliska

Family businesses have much to be anxious about these days because of tight credit and the situation in Japan and the Middle East. But the truth is, during uncertain times, family businesses, are better situated than most other businesses not only to survive, but to grow and prosper. Acknowledging today’s unique business environment is important. It helps people see their anxiety as something normal. Family businesses cope best by replacing their anxiety with a renewed sense of mission. They are in better position to make the necessary changes in this challenging environment. Stockbrokers and Wall Street analysts are not second-guessing them, they are ultimately answerable to their own internal support system. During demanding times families usually find ways of supporting one another and sticking together. When working with families  that are apprehensive, I usually ask them how they supported each other in the past when things were uncertain. What are their reassuring strengths, who has them, and can they be utilized now?  Family businesses have many qualities that not only help them stay afloat but move ahead through uncertain times. By their nature they are more entrepreneurial and more flexible. They also have a deeper reservoir of loyalty to draw upon, not just from each other but also from their employees. They are less prone to lay people off and therefore tend to have a more motivated workforce. Family businesses are more than ever the backbone of our economy.

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ARE YOU RUNNING A ‘BUSINESS-FIRST’ OR A ‘FAMILY-FIRST’ FAMILY BUSINESS?

Bernie Kliska

A question often posed is, “Which comes first, the family or the business?” If yours is a ” family-first” business decisions are often made that primarily benefit the family. For example, you pay family members more than their job pays on the open market. Also family members are guaranteed a job. If you are a “business-first”, you run the business strictly as a business; you require family members to get the education, experience, and other credentials to qualify for a job. And compensation is based on what the job merits. Whichever approach you take has long term implications. While there is no right or wrong system you may realize you may not be where you want to be. If you own a strictly “business-first” business you may want to ease some of the rigid rules that do not meet the needs of a growing family. For example if you have both a son and a daughter who are highly qualified and eager to join the family business, but you have only one position, you might consider changing the structure to allow both children to contribute. On the other hand, some “family-first” decisions that are meant to keep peace in the family may instead breed dissension among the next generation and threaten the business’s and family’s long term interest. Schuman, Stutz and Ward in their recently published book, Family Business as a Paradox, developed an excellent assessment to help families determine if they are a “family-first” or “business-first”. They also suggest, “One of the most powerful challenges in family businesses is managing the natural occurring tensions between the family and the business. Wise families know that the answer to this dilemma is to not choose one over the other, but be aware of the primacy of both”. Every family must decide what is best for them. Balancing both the family and the business goals require compromise, extra effort, extra planning and extra communication. The goal is to preserve the integrity of the business, while serving the needs of the family.

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FIRING A FAMILY MEMBER

Bernie Kliska

If you think firing a long time employee is difficult, try firing a family member. As daunting the task, sometimes it’s necessary. Any major firing threatens  to disrupt a business, creating fear and anxiety. But the ripples from firing a family member may spread throughout the family as well as the business. Handling this difficult matter the right way can limit emotional damage to the family and business and, with good communication and a few procedural tips, it can also ultimately strengthen them.

Prevention is always the best strategy. Because most terminations have long roots, it’s advisable to know as early as possible whether a family member is developing into a healthy plant or troublesome weed. Regular and honest performance reviews are essential. Although some people disagree about their automatic use, 360-degree reviews–reviews that solicit input from both subordinates and superiors–are an excellent tool for family business me mbers. Not only do 360-degree reviews help ensure the objectivity that is so difficult in reviewing family members, but if termination eventually becomes necessary, they provide important backup that can help defuse emotional reactions.

Keep the separation between business and family clear. It’s difficult to profess the family values of love, loyalty and all -for-one -and-one-for-all while delivering a termination notice. The person receiving the notice may understandably have difficulty hearing and believing that those family values still include him, but those values should still be clearly stated. Although for the ultimate good of all family members, including the terminated person, the business must come first; firing a family member from the business does not mean firing from the family. An uncomfortable fit for the business does not mean an uncomfortable fit for the family. Ask if there is  anything you or others can do to make him more comfortable.

Offer an honorable out. Consider offering the person a face saving resignation.

Use your board of directors wisely.  Make it clear that while the board has recommended termination, you have decided it. Remember, you want to enhance communication and the family relationship. This requires honesty.

Have an impartial third person present during termination. A third person is a valuable role for a family business consultant, who can navigate effective, clear, honest communication through the white-waters of anger, shame, denial and sadness swirling around the room. In an emotionally charged atmosphere, it takes more than good intent to make sure that the important things are said,heard and remembered. Firing a family member may feel like the ultimate paradox in a family business, but by handing it clearly, honestly and with consideration and compassion, it is possible for both family and business to emerge from the ordeal even stronger.

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CONFLICT ABOUT KEEPING OR SELLING FAMILY BUSINESS

Bernie Kliska

When family members debate whether to keep or sell their business, anger and tears often are part of the process. Differing interpretation of family’s legacy or level of wealth causes relatives to take sides against each other. Often these battles include arguments over a deceased patriarch’s or matriarch’s true intentions.

Inactive family shareholders may demand a sale for diversification, to create liquidity, to reduce risks or to have a better financial ‘return” on their capital. Those who want to keep the business may see growth opportunities which need family capital, or sometimes they may just want to preserve their own job and  lifestyles. Nothing accelerates tension in a family system more than telling someone his “inheritance” is locked up in the family business. Sometimes the insiders view the outsiders’ family capital as “theirs” and resent what they see as meddling when the outsiders begin asking questions about “our investment

Fireworks will often result when the family conflict includes,poor communication and listening skills, inability to accept change or differences, unwillingness to compromise and lack of respect for others. The family needs to develop a process that focuses on the best decisions in realizing mutual objectives. This is easier said than done, since solutions require trust and commitment from both sides. A cautious and respectful process may take time but can result in favorable agreements and potential transactions that both sides view as”fair”. For most business families what’s “fair” is not the highest price but a price and terms that lead to a graceful exit. Even if you get to deposit a big check if the business is sold, some family members are likely to experience some loss of power, authority and involvement. They may need to find another challenge fast to fill the void.

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