The Dynamics of a Family Business Someday

The Dynamics of a Family Business

Someday, Honey, this will all be your brother’s

Someday, Son, all this will be yours - assuming I can get my father to give it to me

Types of Family Business c. Ivan Lansberg Ph. D

Types of Family Business cs SP OMB c. Ivan Lansberg Ph. D

Types of Family Business Football cs SP Tennis OMB Golf c. Ivan Lansberg Ph. D

Family Business Syndromes § § Procrastination Selective amnesia Paranoia/ fear Conflicts of interest

Typical Conflicts of Interest § Trustees of settlements v Directors § Minority shareholders v Directors § Mum / Dad v Boss

Overlapping systems FAMILY Emotion based Subconscious behavior Inward looking Minimizing change

Overlapping systems FAMILY Emotion based Subconscious behaviour Inward looking Minimising change BUSINESS Task based Conscious behavior Outward looking Exploiting change

Overlapping systems FAMILY Emotion based Subconscious behavior Inward looking Minimizing change BUSINESS Task based Conscious behavior Outward looking Exploiting change

A good scare is worth a pound of advice

Succession Issues Planning the process

As far as we can tell, the only thing keeping you alive is the realization that your son would inherit the business.

Passing Down the Business - The Key Questions § Who is to own shares in the next generation? § Who should have control of the company? § Can equity ownership and voting control be separated? § How can I guarantee financial security for my spouse? § How can I be fair and be seen to be fair to my heirs ? § Does treating children fairly mean giving them equal shares? § What is the best way to ensure my heirs are not burdened with estate taxes?

Obstacles to Planned Succession by Founders § § § § Fear of death Reluctance to release control & power Threat to personal identity Bias against planning Inability to chose among children Fear of retirement Jealousy and rivalry

The Founder's Options

A Succession Checklist § § § § Start planning early Develop a written succession plan Involve family and colleagues in your thinking Take advantage of outside help Establish a training process Plan for retirement Make retirement timely and unequivocal

The Main Worries § § Will I live up to the founder's expectations ? Will I be able to establish my independence ? How will I get along with the founder at work ? Will I be able to establish good working relationships with siblings ? § Will the non - family employees respect me ?

Essentials for Smooth Succession § § Training Mentoring Teamwork Honesty

Succession § § § Identify the real issues Decide what is fair Be honest Create environment to plan the process Be Sensitive to others (especially elders) Create intergenerational teamwork

Inter - generational Teamwork § § § Avoids conflicts Facilitates the succession plan Avoids emotional blackmail No secrets Promotes a constructive discussion

Key Retirement Considerations § Two sided – Bigger issue for retiree than successor § Often feelings of elders not fully taken into account § Issues not resolved in one generation will be played out by the next § Difficulty in choosing between the kids

Separation of Finances IF the finances of the generations are not separated, research shows that the business is more likely to fail

Someday, Son, this will all be yours - unless I can come up with a better solution

Four Exit Styles § § Monarchs Generals Ambassadors Governors

FOUR EXIT STYLES - 1 MONARCHS § Do not leave office until they are decisively forced out through the death of the chief executive or internal palace revolt. § This palace revolt may be in the form of ultimatums, the resignations of top officers, or the action of the board of directors.

FOUR EXIT STYLES - 2 GENERALS § Departs in a style also marked by forcible exit. (Here the chief executive leaves the office reluctantly, but plots his return and quickly comes back to the office out of retirement to rescue the company from the real or imagined inadequacy of his or her successor). § The General enjoys being the returning savior and often hopes to remain around long enough to take the firm and himself to even greater glory.

FOUR EXIT STYLES - 3 AMBASSADORS § Leave office quite gracefully and frequently serve as post retirementors. § May remain on the board, but they do not try to sabotage their successor.

FOUR EXIT STYLES - 4 GOVERNORS § Rule for a limited term of office, then shift to other vocational outlets entirely after retirement. § Despite their fairly graceful exits, governors maintain very little on-going contact with their firm once they have left.

AVERAGE ANNUAL COMPANY GROWTH DURING REIGN, BY DEPARTURE STYLE % growth

COMPANY GROWTH DURING LAST TWO YEARS OF REIGN, BY DEPARTURE STYLE % growth

Two Types of Shareholding Models § Custodian § Value out

Shareholding Models § Custodian – No Capital sum – Shares held for later generations – Sufficient cash benefits during tenure – Sufficient pensions to maintain living standard

Shareholding Models § Value out – Cash on retirement or exit – Company or others purchase shares

Custodian Model: Advantages § § § Cost spread over many years Very Tax efficient Reduced demand on cash flow Balance sheet will be stronger Clarity and simplicity

Custodian Model: Disadvantages § May not be enough profits / cash to fund benefit packages § No lump sums available for shareholders § Needs clear governance § May not be liked by succeeding generations

Value Out Model : Advantages § Provides cash § Makes clean break

Value Out Model : Disadvantages § Pressure to buy out shareholders may inhibit company investment strategy § Valuation issues § May accelerate tax payable § Causes emotional stress § Balance sheet weaker

Concluding remarks

Key Skills § § Learning how to delegate Establishing goals and accountability Clarifying your expectations Encouraging individual growth and development § Facing up to difficult emotional issues § Getting support and being supportive § Managing your time to give to others

Work to Be Done § § § Maintain positive attitude Avoid procrastination Generate sound leadership Give time to family relationships Innovate and change Attract and keep high quality management team § Trust the family § Plan long term, & maintain energy commitment and vision

Family Business Resources www. familybusinessinstitute. com www. familybizz. net www. london. edu/familybusiness. html www. business. uc. edu/goering www. ifb. org. uk (Grant Thornton) www. bdo. co. uk (Stoy Hayward) + key word search “family business institute/centre”

The Family Business Stoy Hayward Centre for Family Business 8 Baker Street London W 1 U 3 LL, United Kingdom www. scfb. co. uk