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Family Business in the Age of Uncertainty

Bernie Kliska
Bernie Kliska

In today’s business environment, there appears to be many issues for family businesses to be concerned about.  The demands and tensions during these uncertain times highlight even more clearly the need for trust and open communication between family members.  It also emphasizes the need for economic discipline, clear policies, and well-established systems of family and business governance.

A major concern today is the uncertainty of what Congress will or will not do in the future.  Acknowledging the current bewildering political environment is important.  It helps people understand that it is natural to feel uncertain and anxious during these times.

Family businesses seem to be more resilient during uncertain times because they tend to focus on long-term goals.  They work not only for the current generation of the family, but also for future generations as well.  They naturally tend to be more entrepreneurial and adaptable.  They also usually 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 more willing to hold onto employees longer.  For that reason, they often have a more dedicated and motivated work force.

What differentiates lasting family businesses from non-family businesses is an acknowledgment that they have challenges and they embrace those challenges.  There is a willingness to work towards resolving them.

We may not be able to destroy the beast of uncertainty, but we can definitely put it in its cage, where all it can do is occasionally rattle the bars and put on a distracting show.

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“Someday This Will Be Yours”

Bernie Kliska
Bernie Kliska

The ability to carry on a successful intergenerational transfer of ownership and leadership is one of the most important and difficult issues facing a family business. One metaphor for succession is the firefly. They flicker brightly for a period of time, then fade away. Consultants call this the rule of thirds: only about a third of family businesses make it to the second generation. A third of those survive to see a third generation and only three percent of those manage to see the fourth generation. Research indicates that failing to transfer the family business can be traced to one major factor: lack of planning. A recent survey (1,952 families) indicated that 66% had no succession plan or had a ” loose plan” that was rarely executed.

Succession planning can be especially complicated because of the relationships and intense emotions usually involved. Most people are not comfortable discussing issues such as aging, death, and their financial affairs,all of which are involved in the discussion of succession. Realistically, it takes years to plan and implement a proper succession plan. A good plan typically covers three main topics: management, ownership, and financial matters. It is important to recognize the distinction between management and ownership. They are not necessarily the same thing.

Often, the most challenging part of the succession process is getting started. First, you should thoughtfully and realistically assess the situation, and determine your objectives. Then, methodically address each issue that may stand in the way of those objectives. Seek input and help from advisers, independent directors and family members.

Succession of a family business is inevitable and the earlier you start planning, the more effective your transition will be.

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Family Business: A Valuable Marketing Tool

Bernie Kliska
Bernie Kliska

Businesses that are family owned are increasingly marketing themselves as a “Family Business.”

Surveys indicate that people generally have a positive view of family businesses because of the principles associated with it. They tend to focus on resilience and legacy. The owners of a family business usually have a long-term incentive to protect the reputation of both the business and the family, particularly, though not exclusively, if the family name is “on the door.” This can translate into better service and integrity, which in due course could lead to higher trust and loyalty among customers.

Some of the businesses that identify themselves as a family business are: Walmart, Mars, Becktel, Cargill and Koch Industries. Koch Industries is named for its founder Fred C. Koch who formed the foundation of what eventually became the largest privately held company in the United States. Perdue Chicken always uses a family member for their television commercials. S.C. Johnson ends all of their marketing materials by stating “We are a Family Business.”

If you have a family owned business, it is something you should be proud of. This is who we are. Keep getting the word out and take advantage of your unique situation.

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Professionalizing the Family Business

Bernie Kliska

What is the meaning of the term professionalizing?  For some families, professionalization means transparency and accountability; for others, it means more formal structures and systems, yet for others it suggests they have a non-family CEO….  But are these always an improvement on what came before?

One of the issues with the idea of “professionalization” is that it is based on assumptions.  One assumption is that the family business is not already professional.   Second is that other models of business are better than the one they have and if they duplicate it, it will improve their enterprise.  Neither of these assumptions are necessarily true. 

There is often a perception that family businesses are not professional.  However there are many family businesses that are incredibly professional. The meaning of “professionalization” should not be whether a family member or non-family member heads the enterprise.  Instead, it should be a company that exhibits high standards of performance and ethics. 

One should not fall in the trap of assuming that the way to make your business more professional is to get rid of family members who are employees. The word “professional” implies strong leadership that nurtures formal processes for setting clear goals and rules, appraising employees performance, hiring based on ability to contribute, and promoting based on merit.  If that is what you have – you have a well-managed business, and that is the key to long-term success for any enterprise.

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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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