Ask David

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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.
Dear David, When a family business evolves and grows to a considerable size, would it be advisable to introduce non-family members to the Board so as to get a fresh perspective and inputs devoid of the emotional and politics of family members working in a family business? 2nd Gen Family Member
Dear 2nd Gen Family Member, Yes there is definitely a time and place for the introduction of independent members to the board of a family owned business. Global research indicates that this is a key element to sustainability; all too often families in business do not recognise the need for the governance structure and process before the selection of the external directors. You would be better placed seeking an advisor that can help with this and then importantly identification of the skills required and then seek out those skills. That contrasts with going out and getting Dad’s local golfing partner who happens to be the local professional and thinking that this is a genuine attempt at this strategy.
Dear David, When structuring a partnership/shareholder agreement are there clauses a family should also incorporate into the agreement which are different to the commercial agreements or norms? B.M
Dear B.M, Maybe but generally it is important to think of these things as separate. That is you can be family OR you can be family and a legal shareholder. The other element is that because you are family you are likely to be what we refer to as an “Emotional Shareholder” because of your last name or the bonds created via the history of the family business. It is important that the family communicate and have a formal structure to do this and document what they agree to, more commonly referred to as a family constitution.
Dear David, How do you convince other employees (non family) that the succession plan agreed on by the family is for the best? Family Business Founder
Dear Family Business Founder, This is a process of change and human nature will naturally be suspicious of change. Time, “runs on the board”, ongoing communication with staff will help. You need to let them know the benefits of keeping the business as a family legacy for everyone and that you want them to be part of that. No doubt they are valued. There are many documented examples and case studies of this and I can share with you after if you like.
Dear David, If I believe my family business (property) is ready for external funding, even in the case where my family is only selling a portion, shouldn’t I be worried about US equity providers interfering in the customary family business operations process? What is your experience in this regard, how can we tell if (for example your) US investors share the values of Australian family business? M.B
Dear M.B, I suppose the question is why does your family business want to sell? Liquidity for the exit of the outgoing generation (Liquidity)? De-risking the family capital? Or looking for growth capital as part of a “becoming global or larger strategy? We are globally recognised as bringing capital to family groups firstly because that capital is from a family group that recognises the unique characteristics of families in business and importantly are patient and not looking for any quick turnaround and exit. We would want to see that the family has commenced or well developed family governance processes and that the reasons for raising capital are strategically aligned between the business, its owners and both of these systems succession needs.
Dear David, Our experiences have shown that US investors don’t normally have the same values and have their own guidelines. This has a negative effect on the vendor Australian family, especially if they have been retained in the business to assist the new operators.
Dear X, I think that this identifies as an example why the characteristics of the supplier of capital are important in a family business situation. I wouldn’t be too harsh on US investors and particularly those that have a genuine interest in the family retaining control and that are patient. I think your investor doesn’t sound like a family patient capital investor but more buy-out. I think you could give the same example for many nationals that invest in any asset across their boarder. The key is do they understand families in business and want to nurture that because they see it as a valuable part of the investment. You have indicated that you think the issue is whether they understand the concepts of a family business and that it was treated by the purchaser as a buy-out. This is a major cause for challenges. I recently had a large group in Sydney who sold a very large business to a Chinese company. The patriarch of that business thought he was making the right decision until after the sale proceeds were in the bank, the sons then said, “Why did we do it dad as this was our legacy and we will have to go a long way to replace such a good long term asset. We would have liked to expand globally and really kept things going.” A bit of an extreme case to make the point about the human element/capital and delving beyond financial success.