This is the transcript of a Live Chat that David Harland, FINH’s Managing Director, participated in on 10th December 2015 for CPA Australia. The subject was Adviser Tips for Managing Communication and Conflict In a Family Business.
Question: I have a family of dentists whom I look after. Father, daughter and son. Tax sheltering and actual fees generated are different causing conflict between brother and sister. The patriarch for the moment is helping hold everything in line. I am wondering how best to handle this once his daughter and son succeed him. I am most concerned about the youngest son as he is of a choleric temperament which I find hard to reason with.
David: This sounds like it is bound up in a lot of tension.
I think we need to think not about the event of succession but the process and it is important that the process needs to start well before the event.
To do this you need to think of all of the different roles i.e. Owners, Family and Operators and start introducing some simple governance at each level. This helps separate the complexity of family business.
The best place to start on this is at the family level. Have them all come together and go through what their beliefs are and goals for the future. This helps bring them together on some high level “values and beliefs”.
Comment: the business may really revolve around what the father wants from it. This, of course, is his decision. The next step is finding out what each of the children expect. Is it already established that they wish to succeed him? The children may be perfectly satisfied to commence independent practices taking clients they already deal with. They may continue sharing resources – premises, support, equipment and hang their own shingles. I think trying to continue the same business honouring the father is likely to be the source of continuing dissatisfaction. Particularly when the goals and ambitions of the children’s partners are considered. For me, the question really is how long will the present arrangements survive? Then, the question becomes – how do we best take care of the needs and wants of the new generation?
Question: If the family do not think that they have a problem i.e. say that we are all just stressed/tired/no time what are some good clues to start the process of making a plan.
David: This is a great question because it is always the difficulty – how to engage ALL of the family.
It is important to tell them that while they are all thinking it is ok, it is actually the time to start talking so they can come together and communicate about the things that are working in the context of planning for the future.
Once you get off on a positive footing and they are communicating in a structured way (Governance at the different levels), it better positions them for dealing with unforeseen problems in the future.
Question: Can you recommend any good books that outline the issues and strategies in simple terms clients can understand? I have a couple but they are from my perspective as adviser and quite technical.
David: Yes there are a whole lot of resources. Firstly the best is insights.org.au. This has a great deal of short videos and material to help families to go from not knowing what they need to know about succession to knowing what they do not know.
We also have our global partner that writes a book called “Family Wealth Sustainability Toolkit”.
Soon we will launch a great tool you can use called a “Family Constitution”. This helps with the process as well.
The Cleardocs Family Constitution will be available at the end of December, just google Cleardocs to source it.
Of course we are always happy to work with you and your client.
Question: Governance is a difficult term for lay people. Any idea of a simpler way to describe what it means? For example, how to spell it out?
David: Yes. Think of “Government”, “Govern”. Therefore it is the structure and policies not for Government but for a Family in Business. Alternatively, for the business you have an advisory board and a board, but for the family you have a “Family Council”. All of these are part of a Governance model.
Brief facts: 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?
David: 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.
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.
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.
Question: 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?
David: 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.