Tag Archives: baskin

Who Should be Members of Your Board?

Otis Baskin
Otis Baskin

Often when working with clients to help them form or revamp a board we are faced with a list of qualifications that are strikingly similar to those of the current CEO:  “a current president/CEO of a business in our industry with size similar to ours”.  Of course the challenge is to find people meeting this description who are not direct competitors.  It is easy to understand why an executive would want to have similar experience on her/his board.  If the board understands the challenges and opportunities of a business it takes less time to inform them before a meaningful discussion. 

However, when any group is composed of individuals who are too much alike Group Think can set in and diminish innovation.  Group Think occurs when people are too comfortable with each other or too respectful of each other to challenge ideas.  A “rubber stamp” board cannot test ideas in the crucible of critical analysis.  Sometimes the very differences that cause us to spend extra time explaining an issue before we get to the solutions stage of a discussion can produce the most creative outcomes.  Having intelligent, committed board members from different backgrounds can provide new ways of thinking about old problems.  For example, the president of a company from a different industry whose customers, suppliers, or distribution channels are similar to yours may help you find alternatives your competitors don’t see.  Different points of view help us to look at problems from a fresh perspective and can break the logjam of “we tried that before”.


Is Good Governance a Waste of Time?

Otis Baskin
Otis Baskin

OK, let’s just admit that productive people almost universally hate meetings – “what we do instead of doing something” is the frequent sentiment expressed to me.  So, too often, the required meetings of corporate boards are simply “formalities” or sometimes an attorney’s creative writing exercise.  I have had business owners tell me the primary reason they decided to organize as an LLC was to avoid the need for a board of directors. If board meetings are just a waste of time, why are they the center piece of any discussion of good governance in business?  As with most things meetings are only as productive as the people who manage them.  If the board chair manages the agenda, the discussion, and the action items well board meetings can be extremely productive. 

If the board chair is thinking ahead to the next meeting well in advance the agenda and pre-meeting information can be distributed with enough lead time to allow everyone to come prepared.  If the chair manages the discussion in a way that makes sure all opinions are expressed and understood but does not allow anyone to “hi-jack” the meeting for their own purpose both the quality of decisions and the satisfaction of members will improve.  Rather than a time waster, good governance can be a time saver by testing ideas before they are implemented and avoiding costly mistakes.


No one can ever be dad or mom

Leaders must be able to communicate with those they need to influence and often next generation leaders in a family business need to adjust their communication for effective leadership.  While founders often have a charismatic and legitimate “right” to leadership, next generation leaders must earn their right to leadership independently.  First, acknowledge that no one can ever be dad or mom again and you shouldn’t try.  Second, work on your listening skills to make sure others understand that you understand their point of view.  Finally, you can work on developing your own “charisma” in your communication to others.  Professor John Antanakis and his colleagues at the University of Lausanne in Switzerland have identified several communication habits that make a speaker appear more like a leader.  These discoveries are actually rooted in classical rhetoric as defined by Aristotle:  1. Establish your credentials and build rapport with those you are speaking to; 2. Use logic to present your arguments; 3. Use emotional appeals to persuade your listeners.  While people generally need a logical framework in which to “understand”, use emotional appeals to persuade your listeners.  While people generally need a logical framework in which to “understand” your appeal, they actually respond emotionally to the “goodness” of a proposal. Make sure you understand the emotional connection that will need to be made with those you want to lead.


The Power of Persuasion

Otis Baskin

Leadership could be defined as the ability to exercise influence over others.  The success of a leadership transition in a family business is therefore dependent on much more than someone assuming the position of CEO or obtaining voting control in a shareholders meeting.  Leadership is really about how to avoid a power confrontation and still get things done – the power of persuasion.  One old definition of persuasion tells us that influence over others is purchased at the price of allowing one’s self to be influenced by others.  While this may seem counter-intuitive, the logic is obvious:  We are all more likely to follow someone whom we believe has listened to us and has truly understood our point of view (been influenced by us).  If others believe you have heard them and have incorporated their interests into your leadership they are more likely to follow.


Do you have leadership ability?

Otis Baskin

One of the most daunting challenges of a new leader can be whether or not others perceive her/him as a leader.  This can be particularly true in a family business transition when other family members and company key executives see the next generation leader as “the boss’ son/daughter” or “our sibling/cousin that we used to play with in the sand box”.  The problem of perception is often more difficult for next generation leaders who have been excellent “second-in-command” executives.  The challenge of changing the perceptions of those you seek to lead can be daunting but one thing is certain – simply remaining the same is not likely to do the job.  When your role changes you probably need to change – but how? The first and most important change may surprise you – Listen More!  In a recent blog Rosabeth Moss Kanter, a well recognized expert in the field, argued that it is how well you listen rather than how well you talk that persuades people to do things.  Therefore, taking more time to listen to employees, executives and other family members may be the key to transforming the perceptions of others about your leadership ability.


Stewardship and Management Expectations

Otis Baskin

The concept of stewardship in family business has its roots in the long-term view that family businesses take.  Building strength for the next generation not just the next quarter is the strategic advantage of family business.  Because family companies have different expectations than public companies regarding long-term planning they have the opportunity to create a culture of stewardship that pervades the organization.

This culture should begin with the family’s commitment to building value for future generations and be described in a family values statement.  These values then become the foundation for company values, vision, and mission that can guide management decisions and actions.  But these statements must not be just “window dressing”.  The guiding principles of the family should be translated to guiding principles of the business that can be lived every day.

Just having family members leading the business and working in the business will not be sufficient to accomplish the kind of culture discussed here.  It is too easy for even family members to compartmentalize family and business and in so doing fail to let family values consciously guide their actions.  If family and non-family executives are going to manage as stewards rather than agents they need the support of ownership.  Active owners who take the time to understand the goals, opportunities, and strengths of their business can give management the conviction to stand firm when peers in other companies are looking out only for their individual interests.

One of my clients, a fifth generation building products supplier, was hit very hard by the economic contraction of 2008.  While it was necessary to cut costs in the business, the owners did not expect the employees to bear that burden alone.  They worked with management to cut the distributions to owners significantly in order to preserve the strength of their business to take advantage of an upturn in the market that would surely come.  This was a lesson they had learned from previous generations and their commitment to preserving value for  future generations gave business leaders support and confidence in doing what was needed to respond to the challenges of the market.


Parallel Planning for Family Business

Otis Baskin

Planning for the business and family in an interrelated and systematic way can seem artificial and uncaring from a family perspective.  Planning structures, decision processes, policies and procedures for family relationships in the way you would design business relationships may seem unnecessary and uncaring at first glance.  However, when a family owns valuable assets together that benefit from a synergistic relationship, like a functioning enterprise, it is important to plan both family and business relationships. 

The relationships within the family can have a powerful impact, positively or negatively, on the success of the business.  Divisions within the family can lead to divided and even competing interests within the business.  Likewise, differences that arise from business relationships can destroy family harmony.  When families attempt to avoid these problems by disassociating their business and family they only make things worse.  The business and the family that owns it are unavoidably linked.

For example, many business owning families pass ownership down through generations based upon family branches.  This is a reasonable and logical way for parents to distribute their wealth among their children.  However, if this is done without parallel planning on the family side it can have the unintended consequence of dividing the family.  If family branches develop into voting blocks that elect “champions” to positions on the board of directors they may not feel a fiduciary responsibility to all shareholders.  Similarly, family branches that are larger tend to have individual owners with smaller percentages of the voting or beneficial shares.  This can create an atmosphere where members of a large family branch become disinterested because they do not have the same influence and benefit as members of smaller branches.

Good structures, policies and decision making processes for both the family and business can serve to strengthen family ties, support good business governance, and allow estate planning to benefit the family branches as businesses are passed successfully from generation to generation.


Succession Webinar Questions Answered

Tools of the Trade: Two Experts Talk About Family Business Succession

Q. How important are buy-sell agreements and clearly established valuation methods for family shareholders? What are typical valuation methods?

A. A buy sell agreement is a succession planning tool that; (i) protects existing shareholders against transfers of ownership to nonfamily members or parties they do not want as “partners;” (ii) provides for a well thought out method of transferring management and ownership of the business to the next generation; (iii) addresses when and how an existing owner may be able to sell their ownership interest; (iv) provides a means of valuing the business in the event of an ownership transfer; and (v) determines how payments will be made to a transferring owner in order to protect the ongoing viability of the business.

Common valuation methods are; (i) annual determination of value by the owners; (ii) a formula approach; or (iii) determination of fair market value by independent appraisal.  Additional information on business valuations can be found at www.MandAlawyer.com by clicking on the tab on the left side of the home page titled “Business Valuations.”

Q. What are your recommendations for pre/post nuptial agreements for family members working in the business who do not have ownership but may be having ownership in the future?

A. Many families use pre and/or post nuptial agreements to protect assets that were acquired before marriage and to keep shares within the family.  The effectiveness of such agreements is dependent upon state laws so discuss this with an attorney before making such a requirement.  If you do want to require agreements of this type before someone is allowed to become an owner make it should be discussed and planned well in advance of engagements.

Q. Do you advise to sell to a family at a discount price?

A. Generally, minority owners are the ones that face a possible discount on the sale of their stock.  Whether or not there is a discount applied may depend on whether the event triggering the sale is voluntary or mandatory.  If the minority owner just “wants” to get out versus a buyout due to death or disability, it is more likely that there would be a discount.  Discounts tend to give majority owners an unfair valuation advantage and are generally avoided in buy sell agreements.

Q. What range of discounts do you typically see for minority interest and lack of control? 

A. Discounts are generally due to lack of marketability and lack of control.  These discounts also overlap.  Lack of marketability discounts range from 20% to 45% for privately held ownership interests and minority ownership discounts also range from 20% to 45%.  Different appraisers apply these discounts in different ways and in different combinations, but rarely would the total discount exceed 40%.

Q. Where are good places to find advisers to help with providing ideas for liquidity for the outgoing generations? We have found that local banks don’t provide the level of experience or expertise required.

A. For information on selecting advisors see www.MandAlawyer.com and click on “M and A Professionals” on the left side of the home page.  The right professional “team” is the key with the right leadership.

Q. What’s your experience with what family members are involved? Spouses and partners are the people I struggle with – how involved should they be?   

A. It is important to clearly define family for the purposes of ownership.  If spouses are allowed to own some provision may need to be made for the business to purchase their shares in the event of a divorce.  Life-partners are treated much the same as spouses in most states and therefore, would need to be considered the same as spouses.  There is no simple answer but there needs to be open discussion within the family and good documentation of decisions for future reference.  Since spouses and in some cases life-partners are influential in raising children who will be the next generation their cooperation and participation in the family business continuity plan is often critical.

Q. Can you review the valuation process you described with the two owners and two envelopes bids?

A. The simplest form of the “shoot out” is when two partners (A and B)  provide bids for the company in sealed envelopes. The envelopes are opened at a meeting of the parties and the highest bidder has the right to buy out the other owner.  If the A is the highest bidder and does not buy out B’s interest, then the B, the lower bidder, has the right to purchase A’s ownership interest at the price bid by B.  In a multiparty shoot out the rights would go from the highest bidder, in order, down to the lowest bidder.

Q. How is stock valuation different than an appraisal?

A. They are the same.  Stock values should be set based upon an appraised value.  Share prices increase when valuations increase.

Q. What are the unique concerns for succession of a C corp? My retirement fund is currently 90% company stock.

 A. The fact that a “C” corporation is not a pass through tax entity (C corporations are taxed at the corporate level and the shareholders are also taxed on dividends from the C corporation) requires additional tax planning to make sure the buy sell agreement, current ownership structure and future business operations are all structured in a manner that minimizes the double tax.

Q.  Is there any published stuff out there on typical valuation methods for private companies for those with minority interest?

A. Google “discounts on minority interests” and you will find volumes of material.  One of the leading writers on this issue is Lance Hall with FMV Opinions.  Applicable information can be referenced through FMV’s web site at www.fmv.com.

Q. What are the steps to help a family transition to a family business office if they have not considered it before?

A. Generally, a family office is useful when a family reaches a size and net worth that can support central functions such as investment planning, tax planning, philanthropy and even clerical services.  If the separate needs of the family are placing an inappropriate burden upon the staff of the business it might be wise to consider a family office.

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