The Welsh Wire: Transitioning Leadership in a Family-Owned Business ft. Marlee D’Arco of Safety Services, Inc.
The Welsh Wire: Assimilating Non-Family Executives in the Family Business with Sherri Welsh & Robert Stead
Succession: Why Logan Roy Was Doomed to Fail
Image by HBO
If you are a family business leader, don’t be a Logan Roy.
For the last three years, millions of viewers have tuned into HBO’s hit TV show, Succession waiting for Logan Roy to identify a successor for Waystar Royco. The series magnifies all the complex drama which can plague a family run organization, but after 4 seasons, I do agree with Logan – they are all “idiots,” and Waystar Royco should not be succeeded to any of the family members. So, why was Logan doomed to fail in succeeding the business to his children? He ignored crucial components and best practices of family business leadership development. As each character develops through the series, viewers are tasked with evaluating them and trying to fit a square peg in a round hole. We come to understand that Connor has disengaged from the business completely and lives an entitled lifestyle without any sense of obligation to the business or community. He continues to purge his financial resources on an election campaign where he polls at 1%. Kendall, who appears in season one as the “chosen” son, lacks instinct, confidence, and organizational knowledge. When he appoints himself as CEO after his father’s airborne stroke in the opening scene, it is only then that he learns the organization is $3 billion in debt. He is also plagued with addiction and self-destructive behaviors attributed to his relationship with his father. Shiv, a politically savvy and competent political consultant, is filled with insecurity. Even when it comes to her judgement on picking a political candidate – the one area she is most qualified for – her expertise was undermined by Logan. And, finally, Roman, the youngest Roy child, constantly lives up to the “baby of the family” monolith and is enabled by Logan despite being incapable of cultivating relationships, personal or professional. We learn that despite being fired from an entry level role in the family business, he has earned a seat on the board and is eventually hired as Chief Operating Officer.
Image from Reddit / turdette_ferguson
- Define Leadership Needs of the Organization. Establish a leadership profile based on the opportunities, threats, and weaknesses of the organization. Consider the input from outside advisors, board of directors, and senior level management. What are the skills required to move the organization forward and to serve as the next steward of the organization?
- Define and Establish a Path to Leadership. No one starts at the top, even if they share the last name of the Company’s founder. Maybe the family member works through a management training program and experiences various aspects of the business, all these norms can be established through good governance.
- Utilize Leadership Development and Assessments Resources. History has demonstrated that the most effective leaders are self-aware. Assessments provide an objective view of the skills and capabilities of each family member. Once the assessment is completed, you have a professional development roadmap. Support individual development by engaging in leadership conferences that are dedicated to the development of family business leadership skills. Create opportunities for transparent and consistent communication through an annual review. Recognize the “perfect leader” does not exist and begin to develop a senior leadership team to support the next generation leader.
- Develop Professional Skills Outside the Business. A widely accepted best practice for family business organizations is to establish a governance policy which requires all family members to develop professional skills outside the business. This provides the family member an opportunity to build professional networks, gain organizational operational insight, and create diverse perspectives.
- Hire Based on a Job Opening and Alignment. Every Next Generation leader will be scrutinized when they join the business. Family members should be hired based on professional skills and experience to fill a need. Their entry point should be commensurate with the skills and experience they bring to the job and follow employment and market compensation guidelines.
- Identify Development Paths within the Organization to Build Confidence. Find opportunities for development within the organization in either roles or special projects. Many organizations rotate family members through departments to learn integral sections of the business. Others can create opportunities with new product lines, innovation projects, and market expansion opportunities. These roles provide learning opportunities for the next generation to develop confidence while also earning respect and credibility with other organizational stakeholders including other leadership, clients, and employees.
Key Questions for West Michigan Family Businesses
1. What are our core family values and how do they impact our success?
Family values are defined as the underlying beliefs, principles, and ambitions of the family. A shared value system can unite family members and provide a framework for relationships with customers, employees, and the community. Values serve as a compass to help organizations navigate difficult decisions, drive practices and policies, and distinguish itself from non-family run organizations. How do you best understand and identify your family values? Look back at your family business history. Identify pivotal points in the organization and define the value characteristics that best define how your family responded.
2. How do we deal with inherent conflicts?
All family businesses inevitably will experience conflict. Family run organizations operate in three spheres – ownership, business, and family. This is widely described as an intersecting three circle model, and the intersection of the three spheres is where you encounter common conflicts. Some issues that create the most tension include the direction of the business, roles and responsibilities of family members, and compensation. Having family business advisors, outside council, or more formal governance structures can help to navigate and minimize conflicts.
3. What governance systems do we have in place?
Many family business organizations begin with a founder whose entrepreneurial vision launches and builds the business. They prefer an independent operating style and full control over decisions and direction of the organization. As the founder looks to engage the next generation and families begin to expand, there is the need for a more formalized governance structure. Governance structures assist in developing family relationships, support effective decision making, and strengthen accountability of all stakeholders. Board of Directors, Ownership Agreements, Family Meetings, Family Councils, Family Foundation and Family Office are some common examples of systems that are available as the family grows and ownership becomes more complex.
4. Do we have clear compensation and equity arrangements?
Unsurprisingly compensation and equity are often the most contentious issues in a family business. What are the expectations of the family members (active and non-active)? What is fair? What is equitable? Family organizations should have well-defined job descriptions, compensation packages, and promotion criteria for both family and non-family members. Some organizations separate equity and profit structures to ensure that the distribution of profits to family members is documented and fairly distributed to avoid additional controversy. Equitable is not necessarily equal for many family run organizations.
5. What are the obstacles facing family businesses today?
All businesses are currently challenged with talent and retention issues as well as implementing growth and innovation strategies. Family Businesses are also challenged with unique obstacles concentrating in areas of family leadership and ownership. In a recent survey of family businesses in West Michigan, leaders identified they are most concerned with properly preparing the next generation, adapting governance strategies, and implementing their family values. In terms of ownership challenges, they are looking for information and resources on shareholder responsibility, evaluating equity, and shareholder agreements.
6. Do we have a business succession plan?
If you do not have a plan, you’re not alone. According to a recent study by PWC, only 34% of family run organizations have a robust, documented, and communicated plan in place. Succession plans should incorporate all aspects of a family business including ownership, governance, and leadership. Succession planning is a long journey and often includes defining when family members may work in the business, how profits should be distributed, who may serve on the board, preparing future leadership, and other matters such as taxes, liability, estate planning, ownership stakes, and voting rights. From planning to transition, succession implementation can be a seven-to-ten-year process.
7. How am I engaging the Next Generation?
As they say, “All the flowers of all of the tomorrows are in the seeds of today.” Successful succession planning begins long before the next generation can determine their future career choices. Engagement for family run business should include education, communication, and collaboration. Formal and informal education should include sharing and documenting family history and family values. Whether at the kitchen table or a more formal family meeting – these are key opportunities to share information. Families should also explore digital communication vehicles (websites, social sites, or newsletters) to build and connect family members. Finally, creating collaborative opportunities around a project or charitable giving provides tangible experiences to build relationships, reinforce values and cultivate engagement.
8. Do I participate in the family business community and take advantage of resources?
While every family business is different, many share the same operating challenges. Connecting with and learning from other family business organizations while developing a confidential and supportive peer network is a great way to tackle these dynamics. Sustaining a family business is a journey, but you don’t have to do it alone. Family Business Alliance seeks to help family organizations in West Michigan thrive by creating connections, navigating governance, and elevating leadership for over 165 member organizations. Learn more about how we want to help your family organization at fbagr.org.
Building Trust in Sibling and Cousin Partnerships: Moving from Partners of Chance to Partners of Choice
Your 7-Step Plan for Creating Chaos in Your Family Business
This article was originally published by Warner Norcross + Judd and has been republished with consent.
William Lentine
Most business owners know that proper succession planning can help keep their business running strong into the next generation. They understand the importance of creating a plan to prepare heirs and key employees to run the business when it is time. But sometimes owners are busy and fail to plan for the future of their business in a timely manner.
Executing an unplanned transition when the family business leader becomes incapacitated or passes can be painful for the family (at an already difficult time) and potentially damaging for the business. Families in this situation often engage Warner to help them create a path forward for the business.
We think it makes sense to offer some lessons learned by these families as a resource for current business owners. Instead of offering a typical “best practices” list, we took a different approach. Here are some “worst practices” that will surely wreak chaos in your family business after you pass – from families who have experienced an unplanned business transition
7 Ways to Create Chaos in the Family Business After Your Death
- Don’t document your good intentions. Think about succession planning for years, but don’t document any of your thoughts or planning ideas for the family. Or, to make it really interesting, keep jotting down ideas on various notepads, napkins or sticky notes over the years, creating obvious contradictions between the ideas.
- Leave business ownership to your family but without a skilled operator in charge of it. This spreads chaos over the widest possible range after your death, affecting family members, employees, customers, suppliers and professional advisors when the battle lines are drawn between children and possibly your spouse as they wrestle for control of the company while dealing with their grief.
- Pick one winner. Leave both the business equity and control to one child that seems reasonably responsible and ask them to do the “right” thing for their siblings and remaining parent. For maximum family strife, the “responsible” child should be married to a spouse who is greedy or difficult to deal with.
- Don’t do any estate or tax planning. This way your heirs will not only struggle with the above issues but will also inherit a huge tax bill that they were not expecting and will have to cover by taking out loans or by selling the business.
- Micro-manage future leaders. Allowing your children or other key employees to manage portions of the business will allow a leader or group of leaders to naturally emerge, whereas micro-managing those heirs and other key employees in their current positions will ensure that they won’t learn how to lead, make decisions or accept responsibility.
- Don’t discuss the future of the family business. Avoiding these conversations ensures that you won’t know whether your heirs or current managers actually want to run the business and allows you to create a pressing sense of obligation for the next generation to work in or run the business. Even better, this sense of obligation can create next generation business leaders who are resentful or who lack the passion that you brought to running the business.
- Keep your professional advisors under wraps. Failure to introduce your professional team to your children can create havoc for your business because neither of these groups will be prepared to handle the inevitable difficult discussions that ensue during a transition. Plus, your children will not know and may not trust your attorney, CPA, investment advisor or other professional advisors, adding even more obstacles to this transition.
Having No Plan Can Also Cause Chaos in Your Business
Naturally, we wouldn’t expect you to do any of the things on this list on purpose to cause disruption and bad feelings in your family. But sometimes, not planning for the future can have the same impact on your family as if you had intentionally tried to cause chaos, leaving loved ones in a less than desirable position down the road should something happen to you.
Many of the steps involved in successfully transitioning a family business can take years, even decades to complete, so it is better to start planning sooner rather than later. Contact your Warner attorney or Bill Lentine at wlentine@wnj.com or at 248.784.5061 to begin planning for the eventual transition or sale of your family business.
Originally published by Warner Norcross + Judd.
Why Won’t My Parents Retire and Let Me Run the Family Business?
This article was originally published by Warner Norcross + Judd and has been republished with consent.
Bruce Young
Partner, Warner Norcross + Judd
If you have spent your career preparing to take over the family business, it can be frustrating to wait for the senior generation to decide that they are ready to retire. It also may be hard to understand why mom or dad chooses to keep putting in the long hours and would rather deal with the challenges of the business instead of retiring and enjoying life.
For the next generation, the waiting is even more difficult if your parents have not created a succession plan. This causes great uncertainty regarding the role each person should be preparing for and how a successor will be chosen if a parent passes away without a plan.
Sometimes the wait exists because the parents may still enjoy running the business. They likely are in no hurry to let go of a company to which they have devoted their lives. Or, parents may not wish to deal with the complex emotions, the fear of the unknown or the hard feelings associated with choosing successors. These issues and others can create barriers to planning for a transfer of the business to the next generation.
If you want to help your parents focus on succession, it is important to understand the issues behind their reluctance to do this planning and understand the strategies for addressing them (warning: it might take years). Below are some common issues that our succession planning attorneys, working with the family’s other professionals, help families overcome to begin preparing for ownership transition and creating a succession plan.
Coping With Reasons Why Parents Won’t Leave the Business
1.They are uncertain about how they can be financially secure away from the business.
This one is huge, and succession will not be addressed if this concern is present. However, many options exist to solve this problem, and your wealth advisors and your attorney can certainly help you find one that is right for your family.
-
- Common approaches include taking higher pay for a few years and saving it, selling a portion of the equity back to the business or to other family members, creating deferred compensation arrangements, or retaining assets to lease back to the operating business.
2. Their identity is tied to the business.
-
- A parent may be able to identify a new role for themselves that is related to the business such as: Chair of the Board, consultant, informal advisor, trainer/mentor, representative to industry associations or other related groups, etc.
- Depending on interests and skill sets, a parent can develop a new role relating to a family foundation, family investments, family governance, next-generation education or a family office.
3. They worry that their life will lack purpose without the business to run.
After they have devoted decades to building a business, it may be hard for them to see that they could have an important purpose elsewhere.
-
- Help them realize that as they transition the business to someone else, they can use their lifetime of experience to benefit others. Examples of new ventures could include starting a consulting firm, speaking on business or motivational topics, serving on boards of other companies or nonprofits, leading philanthropic organizations, teaching business classes at a college, working with local business associations or business startup programs, or coaching students in business/entrepreneur programs such as Junior Achievement or DECA.
4. They believe successors are not ready to run the business.
Find out what their specific concerns are and take steps to alleviate these concerns.
-
- Seek opportunities to demonstrate the ability to succeed, including rotations through all functional areas of the company.
- Engage in learning and development such as an executive MBA program, leadership courses, mentorship plans, connections with other business leaders, and working with consultants or mentors from other businesses.
5. They believe that they are irreplaceable.
Some of the strategies mentioned above can help with this concern too. However, this one may be difficult to address without outside help.
-
- Make sure the senior generation gets exposed to the skills and successes of next-generation family members and a well-functioning management team.
- Identify friends or business acquaintances who have successfully transitioned their business who might be helpful examples or resources.
- Consider meetings with former owners of multigenerational businesses now managed by the next generation. This could provide understanding of the issues they faced during the process and help gather best practices.
6. They are avoiding hard feelings that will occur in the family when a successor is chosen.
This is where a good succession planning attorney or advisor can help your family design a plan that creates a win-win situation for the members of both generations.
-
- You may need to enlist additional help to move your parents to realize that if they want to ensure the continued success of the company after they are gone, they need to make decisions now that will make that happen. Help them see that it is bad for the business and for the family to have the children fighting for company control while working through their grief after a parent’s death.
7. They equate retirement with a decline in health or even impending death.
Everyone has heard a story about someone who died soon after retirement, and even though this is rarely the case, some people still equate retirement with the end of an active, healthy life.
-
- If you have solved issues #2 and #3 above, this may cease to be a worry for them, since they will be plenty busy. But if this worry still exists, there are plenty of resources and professionals to help you work through this issue.
8. They fear losing their prestige in the community (the business leader and/or the spouse).
-
- This is tough to deal with, although having the leader continue working in a new role in the business, foundation or family office – one that still provides opportunities for networking, speaking engagements and social visibility – could certainly help.
- Finding a board position or a leadership position in another organization, such as a nonprofit or industry organization, can also help with this.
If you are in a waiting situation that appears to have no end in sight, perhaps it is time to engage someone to help you have conversations about the future of the business. Our succession and estate planning attorneys can often facilitate these conversations and help families start planning for a successful business future. If you have questions related to succession planning or transferring the ownership or control of a family business, please contact your Warner attorney or contact Bruce Young at byoung@wnj.com or 616.752.2144.
Originally published by Warner Norcross + Judd.
Exit Planning Series – Are you Ready to Make an Ownership Transition?
This article was written and originally published by the DWH and has been republished with consent.
DWH and Adamy Valuation began a series called “Tactical Tuesdays” in 2020 in response to the impact of the COVID-19 pandemic on our clients and business partners. The goal of “Tactical Tuesdays” was to provide up-to-date information that would allow leaders to make tactical decisions to run their business. As COVID (hopefully) winds down, the Tactical Tuesdays focus is shifting to address longer-term issues. Over the next several weeks, DWH and Adamy will be publishing a series of blog posts around exit planning for business owners.
A transition of company ownership, whether internal or external, is a complex process. Before attempting to sell a business, owners should make sure they are ready. This means determining their desired outcome, developing transition thinking, understanding options, and assembling a solid advisory team.
Determine Your Desired Outcome
For an owner to successfully transition ownership of their company, they must first understand their desired outcome. Outcome considerations include:
- For family-owned businesses, is there a desire to keep the business in the family?
- Does the owner want to retire, stay involved in the business, or do something else entirely?
- What is the desired timing for a transition?
- How prepared is the management team or the successor generation to take over the business?
- What is the merger and acquisition (“M&A”) environment in the industry?
- How much does the owner expect to make?
The desired outcomes will drive the preparation and structure of a transition and transaction.
Develop Transition Thinking
Transition thinking involves two main ideas:
- The role of an owner – Owners should focus on maximizing the value of the business through optimizing cash flow, minimizing risk, and putting the best possible leaders in place to run the business. The owner should discontinue any activities that do not maximize the value of the business.
- Understand what creates value – Business owners should understand how investors value their business and what actions they can take to increase the value. Investors are interested in the strength and sustainability of the company’s future cash flows. Investors will also adjust the amount they are willing to pay based on the risks a business faces, such as expiring customer contracts or high turnover in key positions.
Understand Transaction Options
There are many options available to owners and we will cover this topic in a future blog post.
Assemble a Solid Advisory Team
Owners must have an experienced team of advisors to support them through the transition and transaction. Steve Whitteberry of Invictus M&A says, “Owners should invest the time to find qualified advisors including M&A attorneys, CPAs with transaction experience, and an experienced investment banker. A strong team is a key to a successful transaction.” Members of this team include:
Succession/Transition Advisor – This advisor supports the business owner by developing a transition plan, which includes the identification of opportunities to maximize the business’ value, and then helps facilitate execution of the plan.
M & A Attorney – Transactions can have a significant amount of legal complexity, so engage with an attorney that specializes in M&A activity in your industry and can support your team throughout the process.
Certified Public Accountant (CPA) – Many owners do not consider the impact of taxes on the proceeds from a transaction until it is too late. Have a CPA with M&A experience get involved early in the process.
Wealth Advisor – The wealth advisor works with the owner to develop a plan for managing the proceeds of the sale to achieve ownership goals.
Estate Attorney – In conjunction with the wealth advisor and CPA, an estate attorney can help an owner and their family setup a structure that minimizes taxes and protects wealth for the current and future generations. (We will cover estate planning in-depth in a future article.)
Investment Banker – The investment banker will help prepare offering documents, bring the company to market, vet potential buyers, and guide the company through the sale process.
Valuation Advisor – Many transactions fall apart due to misalignment in the purchase price. The valuation advisor provides owners with a comprehensive valuation of their company based on the company’s performance, asset valuation, and/or market comparisons. (We will cover business valuation methods in next week’s article.)
Key Takeaways
- Determine the desired outcome of a transition.
- Cultivate a mindset of transition thinking from an owner’s point of view; focus on maximizing the value of the business.
- Owners should understand the value of their business and the ways to maximize it; increased cash flow and minimized risks.
- Owners should have an experienced team of advisors to assist in the transition.
Additional Reading
- Transition Before Transaction in Family Business – DWH | The Importance of Transition Before Transaction | Blog Post (dwhcorp.com)
- Value Driver One – Value Driver One: Higher Profits and Cash Flow | (adamyvaluation.com)
- Value Driver Two – Value Driver Two: Lower Risk | (adamyvaluation.com)
- Value Driver Three – Value Driver Three: Higher Growth Potential | (adamyvaluation.com)
- Strategic Planning and Value Creation – Webinar: Tactical Tuesdays | (adamyvaluation.com)
Written By:
Ben Borisch, COO, Partner, DWH
bborisch@dwhcorp.com
Monica King, CEO, Managing Partner, DWH mking@dwhcorp.com
Succession can be Non-Family Too
Several weeks ago, Amway made the headlines – the privately-held, family-owned company hired its first non-family CEO, Milind Pant. Mr. Pant brings tremendous leadership and business experience to the company and has worked extensively in Asia, Africa, and Europe. Nevertheless, this is big news as the company has been led by a family member for nearly sixty years.
Many family businesses believe that succession only involves developing leadership within the next generation. Often this is true. But with the advent of millennials seeking careers outside the family business, many companies are looking for other succession options.
In the case of our family business, my husband’s great-grandfather, grandfather, and father all took the reins of the company. But by the 1990’s, my father-in-law was ready to pursue other interests. My husband was in his late 20s and was practicing antitrust law in Washington, DC – not yet the leader the company needed. The board reached out to a nonfamily president who stayed with the business for over 20 years and achieved tremendous success.
Fast forward to today where my husband has been serving as CEO for three years. The transition process was extensive and involved him getting his MBA, gradually taking on new responsibilities, and gaining the support and confidence of the board. It has been a rewarding, but sometimes stressful, process – one that we may need to repeat with our teenage daughter in 20 years.
We relied heavily on family business consultants, family council meetings, and an engaged board and staff to assist in the transition. If you are facing a change in leadership in the next 10 years, we encourage you to join our annual forum on November 8 with Joe Astrachan. This presentation will provide you with the guidance and resources that you need to be successful in your journey. If you’re looking for an in depth more personal focus, please look at our follow up Deep Dive on succession as well. Please see the links below to register.
Written by Diana Schad
CEO, Family Business Alliance
Diana@fbagr.org
Family Succession: How to Achieve Equity
Written by Haans Mulder, JD, MBA, MST, CFP®
Last month, I wrote about the importance of balancing two principles in family succession. Family businesses need to pass along ownership to certain members of the next generation who are most capable of continuing the business. Second, they should also strive to equally divide “all” assets so family members who don’t receive business ownership will still feel they are treated fairly.
This month, I want to write about one way of achieving this balance. By definition, family businesses have an entity or multiple entities that are the “operations” of the business. At the same time, families very often have acquired real estate that the business operates on. This real estate typically has significant value and can be used to “equalize” the distribution and achieve the second principle above. In other words, the children who don’t receive ownership in the business can instead receive ownership in the real estate holding entities.
While this approach can work very well to achieve equity, there’s a key issue that needs to be addressed. The business relies on that real estate for its location and the real estate owners rely on that business for a financial return. It would be extremely disruptive if the business was no longer supported by the real estate (such as the rent being above market and not affordable for the company). On the other hand, if the rent was “below” market, the family members who owned the real estate entity would inevitably resent the lease terms.
Because of these considerations, structuring a fair long-term lease with options for the term to be extended and rent escalations is critical. If these provisions are built into the structure, each side should then be able to feel they’ve been treated fairly and the business operations can have a reliable location for future operations.
If you have any questions on this approach or need assistance with his kind of planning, feel free to contact me.
Haans Mulder, JD, MBA, MST, CFP® Partner, Cunningham Dalman, P.C. PHMulder@cunninghamdalman.com
