Ask David

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Dear David, You have said in the article that setting up family governance structures is very necessary but also faced by most family groups with extreme reluctance. If I have a client that I think needs to have formal family governance structures in place, how do I make starting that process more appealing to them? BR
Dear BR, It is sometimes difficult to know whether to encourage governance on the basis of hope or fear. Hope of creating a long-term legacy, hope of seeing others stepping up in the business and grow and innovate. Fear of a sudden health crisis with no contingency plan and the business crumbling, fear of still doing the same thing when you are 80 years of age but not by choice and fear of damaging family relationships over succession conflict.
Dear David, I have a client who is 70 years of age. The business is going well. He has one son (50 years) working in the business and two children not working in the business. He has recently been widowed and any conversation I have with him about making a plan for the future and handing over some leadership is met with complete denial. His business is his life now more than ever, however his son is being increasingly disenfranchised and may well walk away. How do I approach this in a different way so that an effective transition can occur? Starting Slowly
Dear Starting Slowly, Some people will never start a succession journey and unfortunately as advisers there is not a lot we can do except gently encourage. Encourage him to include his son in the planning and decision making. There are resources for education of family businesses in the market which also may help such as
Dear David, Access to capital from other global family businesses sounds high risk. What measures are put in place for the investor and the local family business? And how much capital are we talking about? “Another Way”
Dear Another Way, Families providing capital to other families can be from the hundreds of thousands to tens of millions of dollars. We work closely with our U.S based alliance partners on providing patient capital to our clients and others and there is clear and well used risk management process that has been in place for 20 years.
Dear David, Many of my clients are managing the division of their assets in their will. What is wrong with that?
Dear There is More, That is OK if it is just assets and they have worked it out as a family. If the assets include a family business however, they need to start planning early. Too many times we hear “they can sort it out themselves when I’m gone” absolving all responsibility to others and increasing the chances of conflict.
Dear David, What are the most popular (and successful) exit strategies when you need to close down a family business?
Dear What’s the Process, The question I should ask you first is why would you want to shut the business down? If the owners are approaching retirement and have no-one to pass the business to, I assume that means that they have no one who wants to operate the business. This is distinct as to owning the business. I think the answer somehow lays in the previous question as the owners would want to extract the wealth they have created. You have indicated you are considering all options including sale externally and that you are particularly interested in wealth extraction strategies. It starts with identification of the likely buyers who are going to value the business the highest. All too often I find that it is the business owners who usually know that and that is mixed and varied. You would never dismiss competitors wanting to increase market share. Extracting value depends on the size of the business (small business tax concession availability), franking credits etc. This is really a corporate finance exercise.
Dear David, A question I normally encounter is when setting up a business structure there is always a fear if a child is named as a specified beneficiary, they get married, then there is a marriage break down. They want the child to be named for succession purposes but don’t want the problems associated with a marriage break down. Is there a better way to approach this? D.V
Dear D.V, This is a major area and one that requires consideration of a number of perspectives. Clearly people do not get married for the short term. You often find that separations in families when there is a business can be caused by an inability to communicate about the complexities of running a business and a family together. In the context of planning and being thoughtful around “spouses” entering the family in business unit, it is suggested that you include them in some form of formalised education and communication strategy. On the other hand when all else fails it is good to include in that education/communication strategy the introduction of Financial Agreements, also known as Pre-nups.
Dear David, How do you know when’s the best time to step aside and let someone else run the business? Are there certain signs or indicators of when is the optimal time? KT
Dear KT, There is no “best time” but it is good to be thinking about it and acknowledging it. We often refer to succession as transition. It is a process and happens best when there is good communication and over a period of time.
Dear David, Are there certain steps that need to be completed when changing command in a family business? D.S
Dear D.S, If the business is small then the owners and governors are probably the same. The first step is to get everyone together to communicate and make a plan. This needs to be facilitated by a third party otherwise those issues of family/business/owner all become too blurred for the participants.
Dear David, Regarding your comment that you work closely with American-based alliance partners on providing patient capital to clients and others, does that mean you are dealing with family business clients capital raising needs, whether as a result of identified succession or not? Are your US counterparts providing patient capital on a minority interest basis? R.W
Dear R.W Yes your statements are correct and in fact we typically only deal with minority interests as when you really understand family business you know that the significant value is in the families continued control.
Dear David, I also have clients concerned about “in-laws” and business assets. Is separating the ownership of assets away from the operation of the business an advisable strategy to commence succession planning? Family Business Adviser
Dear Family Business Adviser, As an adviser you are drawn to the technical aspects of succession whereas typically the initial work around the human element is the first step. The fear of the “in-laws” almost becomes a self-fulfilling prophecy. Global research says that the inclusion of in-laws in the initial step is important and that the more family members you include in the conversation (we say “inside the tent”) the more sustainable will be the outcomes. Specifically your question needs me to ask you if you mean that simply because you are family and an operator doesn’t that entitle you to ownership? You say that your client is prepared to hand over the day-to-day operation to the son, but not ready to fully “give him the farm” at the same time and that you are trying to determine the best ways to deal with these as separate issues. You have said that there is one other son, who is not working in the business and that there are some other assets to offset any inheritance issues. It is a farm over a couple of titles, which does give you some options. The key here is that it is unlikely that Dad and the rest of the family have actually had a robust conversation around what each party thinks. Again we all jump to the financial/ownership issues and in farming operations this is a major challenge as it is possible that the economies of scale are just not there. Ordinarily there needs to be consideration of the farm as part of the family capital and is it making the appropriate returns and are the operators being paid the appropriate returns for their labour. The brother who grew up on the farm but does not work the farm probably has the same if not higher level of connectedness to the legacy that the farm represents. An approach is to establish a formal family governance process to discuss these issues and work through just what is going to be sustainable for the future when considering not just the two boys but also possibly their spouses and their children. Sustainability means harmonious family relationships and financial capital that achieves appropriate returns necessary for financial sustainability in a growing family.