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(c) 2006 Family Business Resource Center, a member of The Rawls Group



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Wednesday, February 14, 2007

Don’t Miss a “Do-Over” Opportunity


As parents, ranking family members or managers, we are mentors to those under our direct authority, whether we like it or not. As direct mentors, we are the source of accountability to our children, siblings or subordinates with the opportunity to acknowledge their shortcoming as critics and/or guide them as coaches to enhanced performances. Furthermore, as managers who are commissioned to execute the business affairs of the business, we are indirect mentors to all employees who covet the position, who we have worked so hard to achieve. Under the hypersensitive eye of those who envy our positions of power, prestige and high compensation, every move we make is subject to exhaustive unrelenting critique. As indirect mentors, we have role models that establish the low water mark of acceptable professionalism, commitment and behavior.
Unfortunately, none of us are perfect. Since the serpent made his pitch about the apple, we have predictably made mistakes and experienced varying degrees of regret and embarrassment. It is just part of life and certainly part of business. As fate would have it, in the contemporary business environment, one of the defining characteristics of a successful manager is his or her willingness to work outside the box, be vulnerable, take chances and make mistakes. And in contradiction to the opinions of our mothers, we are known to occasionally make the wrong decision regarding an employee, say the wrong thing to a family member or just step on ourselves regarding teamwork. For those fortunate among us, we usually know when this management “do-over” opportunity occurs. We feel it in our souls, “that was the wrong thing to say…or do.”
As you embark on developing family members and managers to support your succession goal, you can teach no greater lesson than “good, managers make mistakes and still continue on the pathway to survival and long-term success.” In the wake of your indiscretion, insensitivity or blunder with your son, daughter or subordinate, you have a unique opportunity to illustrate two indispensable characteristics of a good manager:  humanity and humility. Managers are human and all humans make mistakes. Humble humans don’t let their pride block the best opportunity they will have to illustrate how family members or managers should not communicate or interact. Taking advantage of “do-over” opportunities not only illustrates how much you know, but most importantly it illustrates how much you care, not only about the individual you are mentoring, but also the business. And no doubt, the most dependable management axiom is “caring and communicating are inseparable partners.”  Don’t miss a “do-over” opportunity. Humility is a small price to pay for an extraordinary opportunity to make a lasting impression on the future leaders of your dealership.

"Don’t Miss a Do-Over Opportunity" ©, Loyd H. Rawls.

Tuesday, January 16, 2007

He's My Brother and He's Heavy

By Jeff Faulkner, M.S.

“Steve, explain to me your top reason for hiring me,” I asked. Steve kicked back in his oversized black leather chair, raised his cigar to his mouth, puffed slowly, and exhaled for what seemed like a full minute. As the smoke began to clear he responded, “I want you to help me find a way to buy my brother out.” I asked, “Does he want to sell?” “That’s beside the point,” Steve responded. “The employees don’t like him. He’s disruptive to teamwork, he doesn’t contribute anything around here and I can’t count on him. I’m tired of carrying his dead weight and I want him out!”

The song “He Ain’t Heavy, He’s My Brother” popularized by the Hollies in 1970 is packed full with positive images of a man who believes in his brother and that “his welfare is of my concern.” While this sentiment is nice, it can be idealistic. The reality is that in many family business environments, nothing could be further from the truth. My colleagues and I often seem to be permanently ensconced in the middle of some intense sibling rivalry, where the sentiment is more like “he’s my brother, he’s heavy, and I’m not about to carry him another inch.”

What we have discovered in most cases is that the “carrying” is a perception that is often based in past family dysfunction and relational bitterness that the family has never worked through. In more cases than not, the reality is that each sibling is carrying his own weight. However, the business relationship between them was established on some poorly understood principles and dynamics of sibling partnerships. The misperceptions, misunderstandings, and the consequences of such have taken root and taken a toll.

If you are a part of a sibling partnership in business, please understand that your relationship, just like any other relationship, will require a significant amount of effort to make it an effective one. Effective sibling partnerships will not happen by default. It takes an intentional effort and there are many factors that lead to its effectiveness. Here are a few of the primary factors that if addressed, will help you establish an effective working relationship with a sibling:

  1. Rise above Sibling Rivalry by recognizing that you are no longer fighting each other for your parent’s approval. You are now in business together fighting for the success of your business. You should now be more interested in earning your sibling’s approval. If the dysfunction runs deep, admit it, and seek professional help together.

  2. Engage in Family Strategic Planning to determine a “shared vision” of your future together. If there is a shared vision or dream that you are both pursuing, it will serve to assist you through some difficult times.

  3. Agree upon a Leadership Model. It doesn’t matter whether you take the more traditional route of one sibling being the leader, or the more contemporary co-CEO approach, as long as you have agreed upon the basic model and how it will work.

  4. Create a set of Covenant Agreements that will dictate how you will make decisions together, how you will communicate, how you will resolve conflict, how you will hold each other accountable, how you will represent one another to the senior managers and employees, etc. Then, stick to the agreements.

  5. Establish a Supporting Outside Board. If necessary, agree to have outside independent advisors to facilitate debate and discussion.

  6. Develop a comprehensive Family Business Employment Policy. This policy will cover everything from the criteria by which members of the next generation become eligible for employment in the family business, to compensation, bonus, and perk structures, to behaviors and attitudes expected on the job. Agreeing upon these sensitive issues ahead of time will serve to minimize a lot of disagreement in the future.

  7. Provide assurance that your Estate Plans are in order. We have seen on many occasions the tragedy of an untimely death without appropriate estate planning and the subsequent challenges it can create in family business circles. Having your estate plans in order will provide peace of mind regarding your sibling’s affairs and the impact it could have on the business.

  8. Agree upon an Exit Strategy. It is inevitable that eventually one or more siblings will want to exit the business. Knowing that you have an agreed upon strategy for handling this difficult discussion and transition will alleviate concern.

If you are in the beginning stages of a sibling partnership, putting these Best Practices in motion will serve to provide you with a firm foundation for future growth of the partnership and the business. If you have been in a sibling partnership for some time that has gone awry for lack of implementation of the above principles, realize that it’s never too late to pull it together…if you want to. It will require hard work, but with resolve and determination you can forge an effective sibling partnership. Recognize that you may need the services of an outside facilitator to help you work through the issues. Otherwise, you may not have the resolve to continue working at it. And understand that it’s okay to need help. In the end, remember that the family business is all about family and sometimes we need to bear up under the load and carry each other through. For “the load doesn’t weigh me down at all…he ain’t heavy, he’s my brother.”


Word count: 901



Wednesday, December 13, 2006

So You Think You Have It All Done?


By David J. Ciambella and Loyd H. Rawls


Over the years we have encountered hundreds of successful business owners who have made the statement “I have it all done,” as they describe how well they have planned and documented their business succession plan. Unfortunately, in most cases these business owners were referring to the work they have done to implement their wills, trusts, buy/sell agreements and life insurance, which we would constitute as business continuity planning. You may be asking yourself, what is the difference?  

Business continuity planning addresses transferring a business TO the next generation, whereas business succession planning addresses transferring a business THROUGH the next generation. Frankly, achieving business continuity is a relatively simple transactional project addressed within your will, trust and/or buy-sell agreement to transfer your business to your children or partners.  On the other hand, business succession planning is a more ambitious process that addresses both transactional and operational issues. A predicate to succession is operational success. Therefore, business succession planning addresses several interdependent operational issues over and above typical estate planning transactions.

Achieving Succession Successsm requires the willingness and dedication to stay involved in a process that addresses issues such as exit strategy, family communication, key manager retention and strategic planning. The fact is, the majority of family business owners indeed “have it all done” only within their limited scope of understanding. According to industry experts, approximately 33% of family businesses succeed from first to second generation and approximately 10% succeed from second to third generation. Unfortunately a large portion of business succession failures are due to the misunderstanding that the succession of a business legacy can effectively be addressed completely through wills, trusts and life insurance.


Frequently, the business is the greatest source of an owner’s self esteem. Therefore, reluctance to pursue genuine succession planning and activate an exit strategy is understandably difficult as it can be associated with a loss of self esteem or even severing a relationship with the business owner’s “first born,” (the business).  For the balance of this article, we will focus on this challenging aspect of succession planning, because unless you want to be carried out the door with your boots on, an exit strategy is essential.  
               
Some business owners simply cannot step back and give their successors an opportunity to validate their ability. Having “no clue” is a cute reaction at a surprise birthday party but a pathetic approach to an issue that is critical to the succession of a business. Unfortunately, at 65 or even older, many self-made business owners have concluded that they are just hitting their prime. After many years of sacrificing to build their architectural, engineering or construction company, they have finally achieved the personal satisfaction of business success and want to enjoy the fruits of their labor. As a result, they feel they have time to address those matters; “while failing to recognize their duty to allow the next generation to assume responsibility and be held accountable for their actions.

Unfortunately, we have no silver bullet that can relieve this behavior. Our best advice is to persistently remind the senior generation of their stewardship responsibility to reinforce the importance of developing successors who are capable of managing the business. It is also worthwhile to mention that in the absence of verifying that successors are capable, the financial security of family employees are at risk.

”Those with nothing better to do” have characteristically been so absorbed by the business that they have failed to develop hobbies and friends. Relationships with employees, key managers, vendors and business colleagues represent their world. Their families usually lack intimacy and these “work-a-holics” consequently abhor the possibility that the only things to look forward to are household chores and an escape to the golf course. With this business centric mantra, the concept of stepping aside is tantamount to the end of a life’s mission.

For these business owners the solution should not be “find a hobby.” It is not difficult to convince an owner “with nothing better to do” of the virtues of developing an exit strategy; it will just be a battle to pull it off. The message should be that an exit strategy is a transition not a transaction. Identifying and obtaining agreement to a transition time line is the best approach.  Seek conservative time lines, give parents/owners the opportunity for emotional preparation, then patiently and persistently hold them accountable to follow the agreed upon course of action.

Concern about the competency of the next generation can also be a major impediment to an exit strategy. This can be a complex issue because unfortunately some business owners, will attempt justify staying in charge by pointing out the imperfections and mistakes of prospective successors. On the other hand, there are circumstances where successor managers are sending perplexing messages that they are not ready for prime time.

Addressing a business owner’s successor competency concerns involves forcing questions regarding the successor’s management abilities. Assuming successors have the experience and the training to assume responsibility, wise counsel will urge the owner to confirm those assumptions.  The sooner “Mom/Dad” makes this conclusion, the sooner anxiety will recede about the transition of management responsibility. From a negative perspective, keep in mind that there is no such thing as a perfect successor. If the fundamental competencies have not been confirmed, strategies are available to lock in key managers to supplement short suits of family successors, as described in the book The Succession Bridge..

The last category and the most common reason for a business owner’s death grip is “personal financial concerns.” This insecurity is justified because business profitability is often reinvested to grow the business. Other aspects of financial insecurity are based upon subjective considerations of how much is enough to be secure. Regardless of the derivation, as a business owner approaches 60, the amount and source of income needed to support a retirement lifestyle becomes a hot issue. An entrepreneur’s worst nightmare is to fall on hard times and become financially dependent upon their children. The ability to address financial security concerns is dependent upon building wealth outside of the business, which can be developed through implementing a wealth accumulation program.

Hopefully we have provided insight into the importance in developing an exit strategy. No doubt an exit strategy dilemma can be perplexing. However, like all succession issues this one can be mastered. You simply must maintain a “we will get it done” attitude and continue to engage the subject. You may find that before too long, you just may “have it all done.”

For further information on this subject email Loyd Rawls at askloyd@rawlsgroup.com or David Ciambella at djciambella@rawlsgroup.com

     

Thursday, November 02, 2006

“I Love My Kids Equally But They Don't Produce Equally!

By Hugh B. Roberts

“How do I resolve this issue?  If I don’t address this, there will be a mess after I’m gone, but if I open up this can of worms, my life may be hell and my family will be in a uproar.”  I asked this frustrated dealer if he was paying his sons the same amount and not surprisingly he said, “yes”.  “Do they own equal amounts of stock?” Again, the answer was “yes”.  Clearly he had identified the problem but did not know how to resolve it.  In almost 25 years of working with car dealers, I have heard this story retold many times.  Why?  What is the impact upon Succession Planning?

When dealing with family members, dealers often disregard sound business practice and make decisions from the heart, instead of what is best for the business.  Ironically, this usually backfires, creating family problems on top of business problems.  Equal pay plans, regardless of responsibility or productivity, promoting children before they are ready or qualified, allowing children to operate in a free-lance style, coming and going as they please, are the behaviors my partners and I see all the time in dealerships.  

When your child begins working in your business, are you/were you willing to apply the same ground rules that you would if he/she were not related?  For instance, did your son/daughter have to qualify for a job in your business on the same basis that a non-relative applies?  Would his/her resume qualify your son/daughter to be given their initial job? Future jobs?

It is amazingly common for children to be paid the same, regardless of their position within the dealership.  You certainly would not do this with employees who are not related to you.  Undoubtedly this happens because Dad is unwilling to make business decisions that appear he is playing favorites. He may also feel pressure to help his children equally so that they can take care of their own families and have similar lifestyles.

This is a problem that must be addressed NOW if you plan to have your legacy continued via your children.  Sooner or later the more productive child is not going to put up with equal pay and equal stock ownership when he/she is carrying the major load.  In most cases, the turmoil is brewing below the surface, but it will definitely boil over when Dad is gone, if not before.  In order for the dealership Succession Plan to be successful, this issue needs to be resolved NOW while Dad is around to help reach a solution.  But, many dealers are reluctant to get into this discussion because they are fearful of not being able to find a solution without tearing apart the family.  Unfortunately, unless Dad addresses the problem, his family and often the dealership will be torn apart after he is gone.  Therefore, a third party advisor is usually necessary to open up these potentially volatile issues and achieve amicable solutions.

Key to getting this problem resolved is to engage all the players in discussion regarding their expectations.  What do you expect from your sibling?  What should your sibling be able to expect from you?  What should Dad be able to expect from each of his children who are working in the dealership?  What should they be able to expect from him?  Values, job descriptions, roles and responsibilities, decision-making, communication, hours, authority, vacations, pay plans, stock ownership, bonuses, etc. etc. – all of this needs to be discussed.  The more detail the better and they need to be written down.

Often one or more parties perceive things entirely differently and this will present problems.  As a result, each of the parties is likely to have unreasonable expectations.  This is where a third party intermediary is critical, helping each of the siblings and the dealer to work through their differences.  If done properly this process will take several meetings, culminating in all parties signing what has been agreed upon.  There is no short cut, if you want to find solutions that will work for everyone.

The stakes are very high – the future of your business and the ability of your family to enjoy harmonious relationships.  Find someone soon who can help you tackle and resolve this crucial issue or risk having to sell your dealership in the future.  What could possibly be more important?

Hugh Roberts, CFP, Partner of The Rawls Group: hbroberts@rawlsgroup.com

Wednesday, October 04, 2006

Don't Miss a Do-Over Opportunity

By Loyd H. Rawls

As parents, ranking family members or managers, we are mentors to those under our direct authority, whether we like it or not. As direct mentors, we are the source of accountability to our children, siblings or subordinates with the opportunity to acknowledge their shortcoming as critics and/or guide them as coaches to enhanced performances. Furthermore, as managers who are commissioned to execute the business affairs of the business, we are indirect mentors to all employees who covet the position, who we have worked so hard to achieve. Under the hypersensitive eye of those who envy our positions of power, prestige and high compensation, every move we make is subject to exhaustive unrelenting critique. As indirect mentors, we have role models that establish the low water mark of acceptable professionalism, commitment and behavior.

Unfortunately, none of us are perfect. Since the serpent made his pitch about the apple, we have predictably made mistakes and experienced varying degrees of regret and embarrassment. It is just part of life and certainly part of business. As fate would have it, in the contemporary business environment, one of the defining characteristics of a successful manager is his or her willingness to work outside the box, be vulnerable, take chances and make mistakes. And in contradiction to the opinions of our mothers, we are known to occasionally make the wrong decision regarding an employee, say the wrong thing to a family member or just step on ourselves regarding teamwork. For those fortunate among us, we usually know when this management “do-over” opportunity occurs. We feel it in our souls, “that was the wrong thing to say…or do.”

As you embark on developing family members and managers to support your succession goal, you can teach no greater lesson than “good, managers make mistakes and still continue on the pathway to survival and long-term success.” In the wake of your indiscretion, insensitivity or blunder with your son, daughter or subordinate, you have a unique opportunity to illustrate two indispensable characteristics of a good manager:  humanity and humility. Managers are human and all humans make mistakes. Humble humans don’t let their pride block the best opportunity they will have to illustrate how family members or managers should not communicate or interact. Taking advantage of “do-over” opportunities not only illustrates how much you know, but most importantly it illustrates how much you care, not only about the individual you are mentoring, but also the business. And no doubt, the most dependable management axiom is “caring and communicating are inseparable partners.”  Don’t miss a “do-over” opportunity. Humility is a small price to pay for an extraordinary opportunity to make a lasting impression on the future leaders of your business.

Friday, September 22, 2006

Succession Planning Builds Value

By Loyd Rawls
The valuation of a business is an assumption of future productivity based upon the perception that the multiple value drivers at play within a business will continue.  An appraisal (of value) is simply an analytical assumption of the future productivity of current value drivers supported by historical performance combined with assumptions as to how those value drivers can be or will be impacted by future circumstances.  Businesses have both social value and economic value.  For the purpose of explaining how succession planning impacts value we will dwell upon classic economics. The current economic value of a business lies in the demand for products or services provided, the assembly and distribution cost of those services relative to sales price, the adequacy of financial resources to support product development, assembly and distribution and the managers and leaders who are responsible for overseeing the business. These are components of current economic value because the marketplace fully understands that all of these value components are depreciating. Products and/or services will become obsolete. Assembly and distribution of products will become inefficient and/or ineffective. Facility and technology demands will consume cash resources. And most important, as has been an unfortunately predictable cycle, leaders and managers who have astutely integrated the development of products, sale of products, management of cash resources and the infusion of winning attitudes will move on, retire, become distracted or lose their edge.  Consequently any presumption of financial value is temporary and conditional. At some point these value drivers will expire unless they are being assessed, refined and as necessary, regenerated.The process of succession planning addresses all issues impacting the continuation of a business through the next generation. Of course, “all issues” includes value drivers which are part of the fundamental components of The Succession Matrix.  With resolute understanding that the predicate to succession is continuing success, succession planning assesses the value drivers that will be support the commitment of the next generation to continue the success required to perpetuate the business. This assessment predictably demands refinement to products and processes and a commitment to providing the financial resources needed to support those products and processes. Furthermore, succession planning demands a challenge to the assumed progression of leadership and management because the foundation of Succession Successsm is confidence that the next generation leaders will have the competency, capacity and commitment to not only maintain the current business value but also reach full value potential.  In summary, Succession Planning builds value because the succession planning process focuses on achieving Succession Successsm.  The process for achieving Succession Successsm, by its very nature confirms, refines and where necessary regenerates the drivers that constitute business value.

Wednesday, September 06, 2006

Answers to Commonly Asked Questions: Part 4

Q:  Why do I need written Stockholder Agreements when I am passing my business to my children?

  • Stockholder Agreements are needed in a family business to deal with two main issues:

  • Stockholder Security: Unexpected stockholder contingencies such as death, disability, bankruptcy or divorce can create uncertainty about personal security, estate liquidity, business control and stock disposition.

  • Precluding Disagreements: Harmony is a vital element for a successful family business.  Stockholder Agreements defining the procedures for buying and selling stock should preclude negotiations.  Documenting and communicating stock disposition agreements in advance significantly reduces the likelihood of disagreements between family members.  A well defined stockholder=s agreement will protect the family from negotiations during emotional circumstances and therein protect the harmony of the family.

Q: One of my children works in the business and the others are employed elsewhere.  How can I pass the business on to my active child and still be fair to the rest of my children?

The classic Aequal asset distribution@ approach to estate planning can be complicated by ownership of a capital intensive business.  Inactive children are classically better served by owning more liquid and/or less management intensive assets.  The family business complicates the question of asset distribution due to the subjective nature of business valuation and the impact employed children have on value. Experience has shown that acceptable solutions can be achieved by developing a reasonable method of business valuation and pursuing an equitable (not necessarily equal) asset distribution that addresses the circumstances, talents and needs of each child.  Family business Stock Transfer agreements are vital to success. The Rawls Company has experience in valuation methodology that takes into account the contributions of actively employed children to business valuation.  We also have extensive experience in intra-family communication that is necessary for agreement regarding asset distribution, business control, etc.