Tag Archives: schwarz

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.

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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.

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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.

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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.’

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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.

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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.

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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.

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Distribution Policies

Norb Schwarz

When the family business has shareholders with diverse financial needs and interests, disagreements over distribution policies can be challenging to the business and the family.  To better manage these discussions, it may be helpful to know or consider the following:

  • Estimate the financial needs of the business utilizing both strategic and operational business planning.
  • Determine the shareholders’ risk tolerance –are they willing to utilize leverage to finance future needs o the company?  The current environment for obtaining outside capital should be taken into account.
  • Determine shareholder attitudes regarding desired ownership percentages into the future. Are they willing to take on outside investors? 
  • In situations where shareholders are taxed personally for business profits, allow for tax related distributions at the highest tax level applicable.
  • Set a base annual living expense distribution that the business should be able to accommodate without endangering its ability to compete.
  • Based on best estimates from the business planning process, estimate the capital needs of the business over the next 3 to 5 years.
  • Establish a distribution formula based on the needs of the business and risk environment of the business. Some businesses have relative low risk levels as a result of stable markets, strong customer base or niche products or services not easily challenged or duplicated. Potentially higher business volatility will generally demand a higher level of reinvested earnings and a lower level of shareholder distributions in excess of tax and baseline distributions.

Remember these issues are not static, it is important to review shareholder concerns on liquidity and risk on at least an annual basis. Discuss with the board potential implications of the answer to these questions on the existing distribution policy and capital needs of the business. This also underscores why it is critical that management of the company establish and review strategic initiatives with the board on a regular basis, and that the board consider the impact of those initiatives on shareholder objectives.  Finally, shareholders need to revisit their objectives and distribution expectations in light of the strategic opportunities identified for the business.

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The Year of You

Norb Schwarz

By now most of us have made our New Year’s resolutions and have put them on a back shelf.

For 2012, I am working on a new challenge. I am concentrating on self-improvement as opposed to focusing on the business. The process will be much the same as my business planning process. First take an inventory. Who am I? What are the elements that make up “me”? I came up with eight potential elements for myself; the spiritual me, the emotional me, the relational me, the financial me, the professional me, the experiential me, the intellectual me, and the physical me. Given those elements of “me”, the next step is to look at how I have fared in each area in the past, where I am now, and where I want to be in the future. The final step is to outline what I have to do to meet each of my future goals and begin the process for each.

I like to keep the following favorite verse in mind as I go though my “year of me” process:

Isn’t it strange that princes and kings
And clowns that caper in sawdust rings
And common people like you and me
Are builders of eternity?

To each is given a bag of tools
A shapeless mass and a bag of rules
And each must make, ere his life is flown,
A stumbling block or a stepping stone.
R. L. SHARPE

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Silos are great for corn but destructive to your business.

Norb Schwarz

John had been working for the company for 25 years and is close to the patriarch. In fact, Dad hired him and has consulted with him in making key decisions over the years. Today the company is facing some real challenges.  The market appears to be growing, and its products are still well received, but profitability is lacking due to internal inefficiencies.

An outside consultant was called in to assist in getting the company on track again.  What he found was a common problem in many previously successful family businesses. Over the years, the company had developed management “silos”, the most destructive of which was led by Dad’s valued confidant, John. Because of his position as a top manager in the company and his close relationship with dad, John was thought to be immune to challenge by the other managers, even when they knew that his departmental decisions were harming the rest of the company. In order to cope with the situation, the other senior managers began to develop their own silos to protect their departments from John’s power plays. Interdepartmental teamwork and communication almost ceased to exist, as did overall profitability.

It took the outside consultant’s report on the situation to open Dad’s eyes to the cause of the problem. John was given an ultimatum to destroy his silo and become a collaborative team member or retire. John chose to retire. On his retirement, other silos began to collapse and an effective management team began to evolve. Internal efficiencies began to improve and profits began to rise again.

Silos are not restricted to farms or companies. Some of our worst defeats during WWII were caused by admirals or generals who were not team players. The resulting lack of communication often led to lapses in intelligence and failure to coordinate battlefield or naval campaigns, causing unnecessary loss of lives.

Unfortunately we see many family businesses using silos as a way to ‘work around’ family tension – where one brother is put in charge of one area, and another in charge of a different division and they make a ‘pact’ to stay out of each other’s sand boxes as their personal dysfunction prevents them from working effectively together.

Don’t be blindsided by loyalty and longevity, and don’t use silos as a way to ‘divide the enterprise’ between feuding factions of the family. Silos in the company lead to unhealthy internal competition, breakdowns in communication and opportunity for your competition.  Beware the silos as they can really set you up for failure.

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