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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.

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Unity, Yes! But I Prefer Harmony

Dana Telford
Dana Telford

Two brothers (Ron and Kim) each own 50% of a half billion dollar manufacturing company in the western United States.  Both are over 60 and have large, dynamic families filled with talented, creative, hard-working daughters, sons, in-laws and grandchildren.

During a three day, intensive family business workshop a brave member of the 3rd Generation posed a difficult question to his father, Ron – “am I expected to look and think just like you do if I want to be a leader in this business?”  The query spurred a memorable discussion about individuality, guiding principles and the difference between unity and harmony.

To help facilitate the discussion I suggested we use music as a point of reference.  I am not a musician, but I was taught how to carry a tune (or some semblance of one) at a fairly early age.  I remember singing with my family at church meetings while watching mom’s finger track the melody line of the song.  As she sang the words in her clear alto voice, I tried to mimic the sound.   Only after adolescence had exacted its toll on my vocal chords, however, did we both realize that alto was no longer a viable option.

Using the same “follow my finger and mimic my voice” strategy, my mom helped me to become comfortable with bass and tenor notes.  Soon I was able to pick out the sounds of harmony in the church congregation and felt an increase in my appreciation of the power and language of music.

Ron spoke up in the middle of my analogy.  He said, “I know right where you’re going with this Dana.  Please allow our family to provide a live exhibit to the case you’re building.”  He then called 5 of his 7 children to the front of the room.

He asked them to sing the first verse of “O My Father”, a popular Christian hymn, in unison.  Obediently, they all sang the melody line, and did so beautifully.  He then asked them to sing the first verse again, but in harmony, each using her or his own voice.  What followed brought tears to my eyes and still sends chills up and down my spine.  I remember the absolute clarity and heightened energy that came into the room as they broke into alto, soprano, tenor, baritone and bass parts.   All singing the same words, but in their own voice. The verse is beautifully written.  When sung in unison, it’s lovely.  But when sung in harmony, it’s moving and emotional.

Simon & Garfunkel, Don Henley and Glenn Frey of the Eagles, Peter, Paul and Mary.  Would the art they have created influenced the world if each had been singing the same tune and mimicking someone else’s voice?  On that same note, isn’t a family business system that much stronger when family members use their unique talents, aptitudes and perspectives rather than try to mimic the style of the past leader?

Guiding principles and core values are the words of the song.  Those words – such as integrity, loyalty, respect, hard work, innovation, gratitude, frugality, – convey ideas about expected behaviors.  Let’s make sure that future generations know that we want them to live those ideals, but in their own unique way.  Let’s help them to know that we believe that when they add their own voice to the melody the song will be that much more compelling and beautiful.

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Home- to-Office Transition Challenges in a Family Business

“From each according to his ability, to each according to his needs, “  is a slogan popularized by Karl Marx in his 1875 Critique of the Gotha Program.

Dana Telford
Dana Telford

Often when giving a presentation about the challenges of running a family business, I use this quote to highlight the differences between the economic system we use in our family and the one we use at work.  If you are the main bread-winner for your family, it’s not reasonable for you to use all of the income you produce for your own wants or needs. Resources you bring in are allocated to family members based upon their needs.  Parents typically determine what is a “need” versus a “want” and set up a priority system.  Once the basics of food, water, shelter, clothing, transportation and communication are covered, the question of where to allocate resources is answered by finding the greatest need.  As an example of this, consider the family with a member who becomes ill and needs urgent medical care.  A family will sacrifice almost everything to ensure the well-being of the one member.  Once the member is brought back to health, however, the priority system and allocation of resources will change to fit the needs of the family as judged by parents. It’s a system that we are all used to and that feels natural and right.  And it is socialistic by nature.

I’ll state the obvious:  it’s important to make a hard break between our family and our family business. If a member of the next generation of a family business arrives at the workplace with an attitude akin to “Congratulations all who are here employed, I have arrived!  Me of Royal Blood!  Bow down and worship the future heir and bring gifts and resources to lay at my feet” we create problems for employees, family members and ourselves. At the family business, we must operate as capitalists, allocating resources based on forecasted return on investment and fit with strategic goals and culture.  Employees who don’t perform according to expectations lose jobs or get demoted, regardless of relationship to the owners or managers. Those who do perform get promotions, accolades, corner offices, bonuses, perks, more responsibility and prestige.

So how can we successfully make the transition between home and office in a family business?  How can we make sure that the Next Generation understands how important it is that the business can succeed only if it is managed by principles of merit and competition and performance?  Much of the answer is found in creating a set of shared expectations and understandings with family members, employees and owners to define which behaviors and attitudes are acceptable and which are not in the scheme of the family business system.   What does this mean on a workable, practical level?  Tune in later this week for a specific example or two of family rules and policies that can provide immediate help in keeping family socialism at home and capitalism at work.

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Playing to Strengths

Dana Telford
Dana Telford

There are many ways to create wealth – particularly if you use your strengths.

Consider the trophy wife.  In her husband’s final days he whispered, “Barbie, promise me something.”
“Anything, Baby Cakes,” she replied.
“My money means a lot to me,” he said. “Please bury me with it.”
She nodded solemnly, thought carefully, and agreed.  He died shortly thereafter.

As the funeral concluded, she placed a small box inside his coffin. Her girlfriend, seeing the box, asked incredulously, “Did you really do it?”

The widow replied, “Yes. I promised I would.  Call me old-fashioned, but I believe in keeping a promise.”

She dabbed carefully at the water welling in her eyes and continued,” After he passed, I put the money in my checking account.  Inside that coffin is a check I wrote to him for the full amount. If he can figure out how to cash it, he can have it.”

Of the many paths there are to creating wealth, I believe they all start with playing to strengths.

I have a client with a son named Henry. After years of frustrating his teachers and parents, Henry was diagnosed with ADD.  By his mother’s account he couldn’t sit still for 10 seconds, let alone concentrate on a blackboard. She became obsessed with finding something that would hold his attention.

Then she took him to a go-kart track. He drove with confidence, zoomed past everyone, and loved it.  From then on all he wanted to do was race go-karts.

She got him involved in circuit racing.  He won nearly every race.  In one particular race she noticed him raise and shake his right hand as he passed her seat in the bleachers. As she congratulated him after the race, she noticed that he seemed upset.  When asked about it he replied, “You changed seats in the middle of my race. I know where you sit.  I watch you every lap. Don’t you see me waving at you?  It’s hard to concentrate when you change seats while I’m racing.”

The realization hit her that her son’s ADD brain was wired to manage lots of images and information simultaneously.  A 16 year- old who did poorly in math could drive a go-kart 60+ mph, maneuver corners and opponents, locate his mother in the stands, wave to her, and win the race.

We all have inherent strengths. Let’s all get better at helping the young people around us discover theirs — whether it’s driving go-karts, sculpting, singing, running a business, or a myriad of other talents.   By so doing we’ll help them build self-confidence, attain individual fulfillment, and succeed.

 

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The “Why?” Exercise

Dana Telford
Dana Telford

I refer to a favorite consulting tool as the “Why?” Exercise – a process that utilizes repetition of the question “why?” to discover the guiding principles behind decisions. I’ve found that when working through the question, some clients realize they may be abandoning long-held values for other perceived short-term gains in status, power, wealth or comfort.

Some years ago a client (Jeff) and his wife (Rhonda) were given the opportunity to go on a service mission to a developing country in Latin America – something they had both hoped for and worked toward for many years.  When faced with the question “what to do with the family business?” they felt it was time to completely dedicate their lives to charitable service, to include gifting their assets to their church rather than passing them to their 8 children.

As I talked them through the Why? Exercise regarding this decision, a fascinating complication came up.  I learned that early in his career Jeff had been employed by his church to manage charitable gifts.  When pressed, he confessed that he did not believe that the well-intentioned folks in the charitable gifts department could fully appreciate the blood, sweat and tears he had invested into amassing the wealth.  He knew that their job was to graciously accept the gifts, assess value, provide tax documentation, meticulously dismantle the empire, sell the pieces to the highest bidders, and collect the funds for the benefit of the church.  With careful thought he realized that the thought of his businesses and assets going through this process left him feeling empty.

The alternative – to give and sell assets to their children – also caused them concern due to long-standing sibling rivalries and an overall quest for peace in the family as they prepared to leave the USA for two years.  Based on my time spent with their children and in-laws, I felt that they were talented and diligent and capable of working together, and I told them as much.  I also voiced my opinion that they would have a much higher chance of appreciating the Legacy and protecting it for another generation.

After further Why? questioning and discussion, Jeff and Rhonda realized that keeping the assets in their family was a more authentic reflection of the guiding principles they had followed as they raised their family and built their businesses – faith, family, hard work, education and service.

Jeff and Rhonda’s dilemma over the future of their business is only one example of the myriad emotional decisions that you face as a business owner. No matter what your own motivation is for building, nurturing and growing your business, keeping your “why” centered in your view through the decision making process will help you ensure that the business continues to grow in keeping with your  values and in a way you can be proud of.

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Are Your Children Ready for the Financial Truth?

Dana Telford

 

If you are wealthy and have children, you probably worry that your money will negatively impact the development and motivation of your children. Put bluntly, you don’t want your kids to become lazy because they assume that your money will soon become their money. Telling them prematurely may increase the chances of this happening. Keeping information from them may cause resentment and mistrust. When to tell them, and how – these are the tough questions. 

Consider Steve, the 28 year-old son of a wealthy business owner, who did not know that his family was wealthy until he reached his mid-twenties. His dad had created a significant amount of wealth in his life, but maintained an austere lifestyle.  Steve thought his family was just like all the others in his affluent southern California neighborhood. 

I asked Steve how he had learned of his family’s financial status. He said, “I was a 25 year old graduate student in Oregon. My mom came to visit me at the apartment I shared with three other students. Mom didn’t stay long – it wasn’t a nice apartment. As she left she said, ‘I’m going home and talking to dad, you’re getting a different place.’ I said ‘I can’t afford anything better mom; I’m a struggling graduate student.’ She said, ‘You can afford it, we’ll call you.'” 

Steve continued, “As you can imagine, that comment intrigued me. I got a call from my dad that night. Dad doesn’t say much, so the conversation went something like this. 

‘Steve, it’s dad.’
‘Hi dad.’
‘Mom says your apartment is a dump. We want you to buy a house, and yes you can afford it. You do have some money and it’s time you know about it.’
Long pause.
‘How much money dad?’
‘Liquid?’ About $18 million.’
Longer pause.
‘Have a nice day, son, talk to you later.’ And then he hung up the phone.”  

I asked Steve how this realization that he was a multi-millionaire affected him. His answer surprised me. He said, ‘I sat on my bed in a sort of stunned silence. The first feeling was shock. The second feeling was anger.” 

“Anger?” I asked, a bit shocked myself.
“Yes,” Steve answered. “I was disappointed that they waited until I was 25 to tell me. I had done a lot of things by then, earned money to travel around the world, taught English in Asia, volunteered in charities. I just wondered why they felt like that information should be kept secret from me. Why hadn’t they trusted me before that time?” 

Steve could have been made aware of his wealth earlier in his life. His parents came to realize this as we worked together. He had accomplished much. He had gained some amount of wisdom. Why hadn’t they told him sooner? I posed this question to them one morning. 

In short, they waited out of fear. First, they were afraid that the knowledge would harm him. Second, they feared the discomfort of the actual meeting. They are often unsettled by these types of discussions and put them off for as long as they can. 

In our discussion, I added a third reason. In my opinion, they were unaware of the level of maturity Steve had reached while working abroad. Had they established more consistent communication patterns with him, and known what he was spending his time doing, his parents would have made a better decision about the timing of their announcement. By waiting longer than needed, they damaged the trust between them. 

What’s the right age to tell them? It depends on their maturity. A better question is – what’s the right time to tell them? Answer: When they are prepared to handle the financial truth. And the only way to know that they are ready is to stay close to them, learn about their lives, what they are accomplishing, how they are spending their time. And then, dear parent, you must make a judgment about their maturity. 

Certainly Steve’s case could have ended up much worse. Though Steve was disappointed, and his relationship with his parents damaged in the short term, everything has worked out just fine. Too many similar situations end with long-term damage to relationships and development. 

By the way, you may be interested to know how Steve’s money changed him. I asked him how he celebrated his new found wealth. Did he buy a mansion? No, he rented an apartment on his own. Did he drop out of school? No, he completed his degree, a master’s in teaching. Did he buy a flashy new sports car? No, he bought a mountain bike. “But not an ordinary one,” Steve continued. “This one cost over a thousand bucks.”

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Don’t treat your in-laws like a mushroom

Dana Telford

At the end of a recent presentation, I entertained a number of questions from audience members. One executive raised his hand and asked me how the best family business leaders in the world handle their in laws. His question was met with commiserating laughter from a number of other participants – so many family business owners struggle with exactly the same question.

Luckily, I’ve had a number of years to consider this question, discuss it with colleagues and observe the best practices of some outstanding leaders. So here’s how I came to my conclusion, and what it is:

– Put yourself in the moccasins of the in-law.  Walk a mile or two. How does it feel when you are excluded? Not good. You wonder why – are you not smart enough? Not trustworthy? Or is there a scheme being put in place? Exclusion breeds mistrust and mistrust is dangerous to business owning families.

– The cost of mistrust in a family business system far outweighs the risks associated with appropriate inclusion and information sharing. Share information about the family business, educate in laws on the basics of the business and ownership structures. But don’t invite in-laws to be a part of making decisions that they are not experienced or knowledgeable enough to make.

Is it possible that an in-law will create undue turmoil and tension in a family business? Absolutely. Is it probable? Only if business owners treat them like mushrooms – keeping them in the dark, nourishing them with bull puckey and cutting their heads off when they stick their heads up. The probability that they will add value to the system increases as they are given basic information about the business, ownership group and governance process and are included appropriately.

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Contingency Planning

Dana Telford

Contingency planning is important, but difficult to get excited about.

Consider the true story of a man (we’ll call him John) who built a healthcare business from nothing into a $300 million conglomeration of facilities and operations in 6 different states.  At age 58, at the behest of his persistent family business consultant, he developed a simple, three paragraph contingency plan that outlined his wishes should he pass away unexpectedly.

Essentially, the plan called for John’s wife (we’ll call her Lynnette) to take over as the interim CEO of the company for a period of 12 – 18 months while his most trusted advisor (Steve) started the process of selling the company to a strategic buyer.  Though Lynette protested, arguing that her lack of management training and experience would potentially hurt the company, John was adamant that her main priority would be to cradle and protect the culture that he’d worked his entire career to build.

It didn’t seem to be a point worth arguing much about – after all, John’s father had lived to be 84, so his exit did not seem the slightest bit imminent. 

Two years later John died tragically of a heart attack at age 60. 

Once the shock of John’s passing became bearable, Lynette and Steve put in motion the steps outlined in his contingency plan.  She took over as interim CEO, and did a fine job.  The employees rallied around her as their new leader, buoyed by compassion for her circumstances and human decency. 

Steve contacted strategic buyers and let them know of their intent to sell.  A deal was struck and consummated within the 18-month window that John had identified in his plan.  The proceeds, coupled with solid estate planning already in place, provided a solid financial foundation for Lynette and their family.

Now, many years later, Lynette is able to pursue personal goals and activities thanks in some part to a simple, three paragraph contingency plan.

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The Novocain of Diplomacy

Dana Telford

On a morning not long ago, while sitting in the dentist’s chair for my first (and please, please, please last) root canal, I was reminded of the importance of communication style.

“Dr. Payne” (or as my kids call him, Dr. Thick Fingers) shot my upper right jaw with Novocain, left me to my own thoughts of nervous anticipation for the appropriate amount of time, and re-appeared, eager to see if my gum was indeed numb.

“You gonna jab it to see?” I asked. He smiled, paused and replied, “We don’t use the term ‘jab’. We prefer to say ‘poke’.  Conjures up a less violent image, wouldn’t you say?” and then proceeded to stab me, which I (happily), could not feel. “Any pain?” he asked. “Nope,” I replied, relieved.   

And out came the screeching, high-speed, demolition drill.

As I shut my eyes against the smoke pouring from my mouth, I was reminded of a previous argument with my wife. I don’t remember what it was about, nor does she. What I remember is how diplomatically she “poked” me in the heat of battle. We were yacking back and forth about who did what and who said what and how much or not it was really meant when she stopped, looked me square in the eye and said, “one of the strengths you don’t have is…”

I put the dot dot dot there because I literally have no recollection of what bit of constructive criticism she then delivered. I do remember being struck by the clever beauty of the statement, which made us both laugh and put a prompt and splendid end to our spat.

In dealing with family members, shareholders and colleagues, may we all remember to poke, not jab or stab, each other by delivering criticisms that are numbed by the Novocain of diplomacy.

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Behold the Tumbleweed and other thoughts on managing conflict

My brother has a saying – “Behold the tumbleweed. He is only happy if he learns to love to tumble.” I like the saying because it puts a positive twist on the inevitably lonely, dusty, tumultuous, waterless existence of a chunk of sage brush rolling through the desert. But that’s my predictably forward-looking, make lemonade out of lemons, put your head down and get it done, optimistic brother.

If family business members could see their conflict-laden world in a similarly positive light, much good would come of it. Conflict in a family is as predictable as feeling sleepy after a heavy lunch. The trouble is, conflict between siblings around the dinner table may be interpreted to mean failure in the family, but disagreement between business partners in the boardroom is viewed as productive – a competition between progressive ideas.

Since the family is the first organization we encounter in life, the norms and rules we learn as children tend to supersede all others when we are around our parents, siblings and cousins. Most children are taught to “go along to get along”, to avoid or minimize conflict. In a family business setting, this can lead to family business partners who avoid conflict at all costs for fear that it signifies weakness or is a harbinger of the impending demise of the business.

The best family business leaders I’ve worked with create a clear expectation that healthy debate and respectful discussion about important topics are necessary for the longevity and well-being of the business. They communicate to partners, managers and adult family members that they are not interested in everyone agreeing with every word that comes out of their mouth. On the contrary, they express their belief that, in order for their business to thrive, they need the best ideas to be put on the table, debated, scrutinized, refined and turned into activities that create value.

In order to improve the amount of respectful debate in your family business system, may I suggest the following: 1) make clear the expectation that you want a healthy debate between different ideas (not people), 2) create rules of engagement that specify how you will communicate with each other, in person or otherwise, preferably to ensure civility and respect despite disagreement, 3) replace the phrase “conflict resolution” with “conflict management” in your family business vocabulary, 4) talk openly with your family business members about the need and the mechanics for separating business and family issues and discussions (e.g politely change the subject when the family council leader brings up a business issue during a holiday dinner), and 5) actively listen to other points of view and consider them carefully as ideas that could potentially benefit your family business system.

Oh, and one other thought – think differently about the tumbleweed the next time you see one. It is entirely possible that under that coating of dust and blanket of thorns he may be immensely happy and smiling gleefully.

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