Sean Hutchinson and Barry Goodman, co-founders and partners with SVA Value Accelerators, do a deep dive continuation of the SVA episode as they talk about the challenges and perils of transition and the issues facing families in business. Sean is an expert in business value acceleration and transition readiness, while Barry is an expert in multigenerational family businesses with an advanced certificate in counseling family-owned businesses.

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The Challenges and Perils Of Transition And The Issues Facing Families In Business with Barry Goodman, President SVA

Creating The Path To Higher Valuation with CEO/Partner Sean Hutchinson and Barry Goodman, President/Partner SVA Value Accelerators

We’re doing a deep dive continuation with Sean Hutchinson and Barry Goodman, Cofounders and Partners with SVA Value Accelerators. This is a continuation of the SVA episode. We’re going to dig deeper into this complex topic. We’re going to talk about the challenges and perils of transition and the issues facing families in business. Sean, let’s recap where this segment fits in.

Here’s the interesting thing about family-owned business in our value accelerator. If you think about our seven value accelerator sprints as vertical columns, family-owned business is the horizontal issue that cuts across all of them. It’s a different animal when you’re in a multigenerational family business. It’s great that we have on our team an expert in this area who is Barry. He’s got advanced certificates in counseling family-owned businesses. This as a resource that when we are working with a family-owned business, Barry’s expertise comes to bear. It cuts across all the sprints in value accelerator not just one but the constant issue when you are dealing with families.

Barry, why are the family-owned businesses so different than perhaps other businesses?

I believe you need to look at a Venn diagram where you have three circles.  Family, business ownership and management reside in each of the circles and intersects with each other. This is the family business system. You have one circle and it talks about ownership and another circle is family and the third circle is the management of the business. You can have people that are members of the family that are not involved in the business and members of the family that are involved in the business. You can have members of the family who own shares but have no participation. We’re going to have family and employees that are employed that are not related by blood or marriage. There are all these different conflicts going on, different needs, different objectives of each of these different parties. As generations move from first to second to third and along with the history of the business, you put another circle around that and that’s called the cousin of consortium. It’s no wonder why this is a confusing area and an area where there could be conflict without intending to have a conflict because of the different needs, wants and objectives of each of the individual family members or nonfamily members.

That’s the pool that you’re navigating in.

It’s a big pool and it can get a little tenuous at times.

Business Transitions: Transition-ready businesses are more valuable.

In looking at the family business space, you were kind enough to provide a bunch of material for me to review. When you walk into a business situation where you’re working on value acceleration, what does that initial meeting or interaction with that business and/or family-owned business look like?

It is to understand what’s going on in the business and what’s going on in the family. It goes to the central theme that we have at SVA. We believe that transition-ready businesses are more valuable. The discussion is around the concept and the idea of transition readiness. Transition readiness consists of three things that we talk about. One is operational excellence, two is financial and three is, is that business being treated as an investment for the family or for the business owner? The concepts around how we treat a family business are no different. It’s just that we need to recognize that there are different goals and objectives that all need to be addressed with each of these different categories.

When talking about transition readiness and what does it mean. It includes operational excellence and financial efficiencies and looking at your business in terms of a dispassionate investor. Across the board in all businesses regardless of whether you’re a family-owned business or not, when you get down to it, look at your business through the eyes of an investor dispassionately for instance. It’s harder in family-owned businesses, potentially multigenerational with all of the competing interests or just different perspectives of family members to achieve that dispassionate position that allows you to look at it clear-eyed. Every owner is emotional regardless of whether they’re family owned or not. Every owner is somewhat emotional about their business. It’s their baby. They’ve invested a lot of their lifetime in it. When you throw the family dynamics into the picture that becomes even more difficult to achieve. The emotional currents that are running through the business in and out constantly, maybe old conflicts and they’re rearing their head again. It’s amazing what can come up in these situations and the investor’s perspective, it’s more difficult to settle into that viewpoint.

It is more difficult and it also relates to the operational excellence of the business. A business which is not family-owned would look for the best person they possibly can to fill the position that they may have within the company. The whole idea of the two aspects, bringing in a family member into the business just because they are family or are they the best person for that position versus bringing in an outsider. An outsider working in a family business has its own challenges both for the employee and for the business and for the family so that needs to be reconciled. That ties directly into looking at it as a dispassionate investor. That creates a lot of conflicts and a lot of discussion within families.

You’ve got the patriarch perhaps of the greatest generation or the Baby Boomer Generation. You may have the next generation that has been in the business for a while working their way up and starting to develop and demonstrating core competencies. You have the Millennial generation that’s behind that, not to mention the spouses that might be involved along the way. I think about the various viewpoints and aspirations of those various members. The patriarch is still present or some member of the family is present and they’re still making a living out of the business. You’ve got the next generation that’s functionally operating the business perhaps that has their own aspirations and input from their spouses. You had them thinking about maybe can they take and ask the business at some point to these young kids that maybe are just starting as they did. When you come into that organization, what do you do to start trying to address perhaps known landmines in that field?

A business which is not family-owned would look for the best person they possibly can to fill the position they may have within the company.

We need to drill down and understand what is in the mind of the patriarch. What are they looking to do? What’s next for them? We talk often about three legs of the stool. What is that life after business for the patriarch or matriarch in that family? How were they installing their values, their goals and their mission in the second and then possibly that third generation? You often see family businesses only lasting until that third generation. That goes to that patriarch who was the one that started that business from the trunk of his car or his garage developing values and then brought in to the next generation which is continuing the values. That third generation may not have an interest or maybe technology has changed. It’s understanding the goals and objectives and understanding the values of the family and how they fit in with the business because the business can’t just operate as a separate unit. They are intertwined especially in a family situation.

They always say that family issues will trump business issues every time. If you go into these situations and you think this is going to be like anything else, there’s going to be a rational dimension, just the business issues. Not to say that the family issues are irrational but they add a dimension to the environment which cannot be ignored. As an advisor, if you miss it, then you’re not doing a good job as an advisor. You’re wiping away this very important aspect. I do agree with Barry and one of the things that you were getting at, Bob. The shadow that the patriarch or matriarch has can be quite long in a family business especially if they’re first generation or founder generation in the business. They have an emotional investment and that entrepreneurial venture that the following generations will not have. Let’s acknowledge that right from the beginning.

However, where it was pointing at the values of the family are the things that are going to carry it forward because the business situations will change. The question is how good is the family at managing through that? How much of that knowledge and wisdom have they been able to transfer generation to generation and how have they done it? How has it gone? How good was the plan for that mobility of the values across multiple generations because it becomes more fragile as you move away from the founding point? It’s just more distance so it’s going to become less connected.

If you study families that are in their fifth, sixth, seventh or eighth generation, there are a number of those families that are still around or those businesses that are still in existence. They are successful because they’ve been able to discuss their values, discuss their mission and have a mission and vision and values not only within the business but within the family. The two must be in alignment with each other in order for that family and that business to succeed from generation to generation. It’s always fascinating to me to read and learn about how many have succeeded.

There are so many generations and statistics show that only 4% will last into that fourth generation and beyond. Also, to recognize that the business that you entered into when you were in your first generation may not be that same business that you have in that second, third or fourth generation for a number of reasons. It could be technology, it could be a change of interest. It could be a number of different things. A family may have somebody who wants to enter into the business and somebody in the family that does not want to enter into the business, but they want to go into a different business.

Business Transitions: Statistics show that only 4% of family-owned businesses last into the fourth generation and beyond.

In the progression, you start with family-owned business. That’s what you’d call it, a family-owned business but at some point along the way, you do become a business-owning family. That’s a subtle but very important shift where you might have multiple ventures going on within the family ecosystem. You may have become a more passive owner in your own business but you’re still a business-owning family. If they start to see themselves that way, it changes the conversation.

It changes the conversation and it also reduces the risk. Investments are about diversification so why not diversify your business interests and engage those family members who have an interest in technology with the Millennials? The younger generations have an interest in technology. Don’t fight that and look at developing the business-owning family.

Let’s say I’m that business owner and we’re going to pretend I’m the patriarch. I’ve got issues facing me and there’s the sibling rivalry that’s been there since day two. There are competing interests and competencies. I want to create a method or mechanism, or some go forward steps where my children are still friends after I passed. The business endures and there is some mechanism that the children get to deploy or exploit their particular skill sets. One may be a CEO, one may be a different business. What steps would you recommend that a patriarch or matriarch could take to start trying to get congruent in the family towards preserving what they’ve done?

You’ve seen a lot of this concept in Europe where it started. It’s not in its infancy but more and more families are forming family offices. They are looking at the entire business and the entire ownership of the family but it’s starting around the goals, values, and mission of the family. That is then going into the family office where they can foster this entrepreneurship within the family and different family members involved in different business interests. Yes, you will have conflicts among family members. It’s there but if you implement governance within the family as you do within the business, that helps provide a non-legal way of mitigating some of these conflicts and giving a mechanism of how conflicts are resolved. It develops a culture. If you develop a culture within the family to resolve conflicts, find common ground and then expand on that common ground to resolve issues as a family. We can’t be so blind to the fact that some conflicts will never be resolved. If you can come together around something, you are then able to operate the family interest and act as a family and at least get together on Thanksgiving at two sides of the table.

There are a couple of other things that you could think about as a family that anticipates multigenerational ownership or creating an entrepreneurial culture that may spawn multiple ventures. Dennis Jaffe, who is a well-known and respected in the area of family-owned business did a study on 100-year family enterprises. It means that there are at least three, four or five generations in the business and they made these tricky transitions each time to keep it together. Many of the things that Barry said were things that they did. They’re creating a family council constitution, figuring out what matters together, and figuring out how to make those tough decisions. It’s similar to what we talked about in our decision dynamics episode where we were applying it within a business. Some of these same principles have to apply within the family itself. What Dennis was looking for in his study are the common characteristics or the things that are happening in these multigenerational 100-year business families that are common across generations.

He found that the families that existed, their businesses made it to the sixth generation, which is so rare. They had done two things by the second generation. They had hired professional outside management and they had a board of directors with outside independent directors. Right from the beginning, the family had made the choice to implement professional best practices for operational excellence. The governance that carries the business forward beyond where the family could carry it if they were doing it themselves. I was fascinated by that. It was two factors that we knew made a difference but we didn’t know that it was going to be the two things that the sixth-generation families had done by the time they made their first transition of ownership.

There are families and there are businesses that have done exactly that, Sean. There is one business I can think of. They have no family members involved in the business whatsoever. From the board level down to the punch press. It’s treated truly as an investment and they have brought in professional management and they also have a board of directors. The family gathers however around philanthropy. I’m finding this more and more that families that are in their seventh or eighth generation are around the philanthropy or some other interests that they can do together.

There’s a point in any business no matter who the owners are whether it’s a business owning family or an individual or partnership or management team where they have to make a decision about letting go. They have to know their limits and understand like, “We’ve taken it this far and maybe it is the right thing to take it further as a family. Maybe we’ve got the talent. Maybe we’ve got the desire to move it forward across generations.” If you’re a multigenerational-thinking business family, then you’re going to say that this is not just about getting to the next generation. It’s about moving as a family in a multigenerational strategy well beyond. All of these conversations are happening. I would like to see them happening early in the process rather than having to have them while you’re trying to make an ownership transition because the chances of failure, going from one to two, founding generation to the second generation, is very high. The statistics are not good. I don’t see a whole lot of evidence that being a family business necessarily guarantees you a better success rate on subsequent generational transfers. The failure rate for nonfamily businesses and family businesses is pretty close.

I believe that it’s more difficult for a family-owned business to get to that next level and to get to that next generation. PricewaterhouseCoopers did a study. They do a study every two years of family-owned businesses throughout the world. They asked three questions. One question is, “Are you going to transition that business to the next generation, both the business and management? Are you going to transition ownership and bring in professional management? Are you going to prepare the company for sale?” There has been a spike in preparing the company for sale or they just don’t know what they’re going to do. There are two things in that third category. They don’t know what they’re going to do and they are going to prepare it for sale. It has almost doubled from 2014 to 2018. It’s fascinating to see that change.

Are you saying that family businesses are used to prefer intergenerational now that it’s clear that there’s a movement away from that towards we’re going to sell it to an outside party?

Yes.

What’s driving that? Did Pricewaterhouse talk about it?

Business Transitions: You have to get an education. If you want to be in the executive ranks, you’ve got to have an MBA or some advanced degree.

They talked about it and a lot of the issues are that new generation wanting to go into other types of businesses. It’s not that their family is getting out of being a business-owning family. It’s the business itself. At some point in time, you need to bring into the business outside management which is a very difficult thing to do. When it grows, you have different financial needs that are a drain on the business. The