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Dear David, Parents are in a farming partnership with two sons. The father is 70 plus so unable to work as a 30 year old. One son does not contribute the same as the other son in terms of time on physical, or management or marketing. Thus significant responsibility lies with the first son to ensure virtually all aspects of the business happen effectively. Drawings are not equal, and sometimes in favour of the son who does the least as he has different financial needs. Any pearls of wisdom?
Dear Beleaguered Adviser, This is “Classic”. Many of our rural communities have great need but reluctantly few engage in the communication required. Here is a matter of identifying what is Family, what is Ownership and what is Operations. Operators need to have an employment agreement and remuneration structure and owners need to understand financial returns in the context of a dividend policy. I may suggest that when the family meet on something like this it is important to understand what the family policy is. I often see children getting equal payments and there being no recognition of the different roles etc. If the family have sat down, discussed this, understood this and all agree with it then that is fine although from a sustainability perspective, this is unlikely to work in the long term. I think the best thing to do in this situation is talk to all family members and get a perspective, understand the estate planning wishes and think about how best to move from now to when the father has been succeeded. Have the family have the “manager son” report to the family about the operations on a regular basis (structure/process) and then build a written job description and a set of accountabilities. From this assign a salary package that directly links to that. I mentioned the free resources on insights.org.au before and again I would encourage your clients to have a look around this catalogue of free videos and watch some which deal with the subject of remuneration and how other family groups have dealt with it. You will find most successful family businesses revert to best practice, which is market value, but a few conversations will have to happen before then. Scenario 1: One of the questions we get asked is how do you get two brothers, each 50% shareholders in the second generation family business, but who haven’t spoken for five years, to make a shared plan for their business? The response is that it is not easy. I suppose the question has to be do they want a shared plan for the business? They may prefer the option of splitting the shareholdings and having separate businesses if there is that much conflict. A conversation perhaps individually may help get the ball rolling on the longer term plan. If they wish to continue with the shared enterprise I would think facilitated meetings to define a shared vision would be the medium term plan. Scenario 2: Another question that we get asked revolves around accountants who sit in on several advisory board meetings with their clients but which often break down into emotional chaos, with family members reverting to family roles. How do they manage this so that some outcomes can be achieved? The response is that it is not uncommon (and often the first point of business) in family meetings to set guidelines for behavior for these meetings. They can set them themselves but they need to be documented and agreed e.g. speaking respectfully, not talking over each other, equal air time, everyone is equal.
Dear David, What is a “family business”? I have many clients who are family owned and operated but they do not (and I don’t) refer to themselves as a family business. What are the benefits of calling them a family business rather than an SME?
Dear Family Adviser, There are many. Firstly there is a lot of research that shows marketing as a family business is beneficial because people trust family businesses. Why not leverage that? Being a family business is a competitive advantage in the market. Also why not take the opportunity to create an ongoing legacy by harnessing that familiness?
Dear David, What would be the best approach to family mediation – being inclusive in the one meeting or having separate meetings and using two Partners to work on the matter?
Dear “It Depends”, This really does depend on so much. The processes we use are international best practice and rely on an annual retainer (to conduct a process of independent facilitation). By your use of the word “Mediation” I suspect that there is tension, disagreement or conflict. In that context an important first step is for an expert to talk confidentially with all family members, not just the conflicted parties, and only from that can you formulate a reasonable strategy designed with the uniqueness of the family in mind as all families are different.
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 insights.org.au
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.