Equitas Knowledge Library

From Family Business to Family Office

2012-01-16T22:03:54Z

The term “family office” conjures up images of the rich and famous, families like the Rockefellers, Pitcairns and Carnegies who needed a full-time staff of high-paid professionals to look after the needs of family members ranging from sophisticated wealth management to household services.

Today, the term is used to describe one of a number of different off-shoots of that concept. It is relevant to an increasing number of individuals who are shifting at least some of their focus from creating wealth to preserving it either due to the sale of abusiness or the realization that it is time to plan better for the future.

Simply put, a family office is the structure used to manage the business of a family. It need not be an actual office nor need it consist of full-time help. Think of it as a concept, as a kind of virtual office that organizes you for an intended purpose such as:

• Structuring your affairs for retirement or death;
• Helping a spouse or children to be more financially responsible with whatever assets you will be leaving them with;
• Diversifying your wealth, for example, where it is currently concentrated in an operating business or other asset categories;
• Minimizing taxes paid during your lifetime and on death;
• Giving to charities in a purposeful, organized and tax-efficient manner.

This virtual office should be “established” by a trusted advisor. As is the case with family businesses, often the stumbling block to creating the necessary structure is the reluctance to involve family members in the process. The result invariably is bits and pieces of structure that the wider family often knows little about, and understands evenless.

Studies show that the most important single issue that undermines successful transfers of wealth is the breakdown of trust and communications within the family unit. This leads to a failure in preparing heirs for their responsibilities. These two elements combine to cause 85% of the failures of wealth transition plans.

A mere 3% of wealth transition plan failures are due to professional errors in accounting, legal, or financial advisory planning. These professionals are generally very good at what they are trained to accomplish. But many families paying for their advice develop a false sense of preparedness. While tax, legal and financial planning is essential, it is not the complete answer to achieving success in estate transitions. Make sure that you have the well-rounded advice that you and your family require.

Ron Prehogan is a Partner at BrazeauSeller.LLP and President of Equitas Consultants Inc., a consulting business that provides business and wealth transition planning and implementation services for businesses and families using a unique combination of facilitation and transactions expertise. Ron can be reached at rprehogan@equitasconsultants.com or (613) 569-7001. For more information about Equitas, visit www.equitasconsultants.com.

FAMILY BUSINESS LONGEVITY: THE TRUST FACTOR

2011-05-30T13:15:40Z

“Shirtsleeves to shirtsleeves in three generations” is the norm with family businesses. Another way of describing it is the first generation makes it, the second generation preserves it and the third generation spends it.

Business owners in their 50s, 60s and older looking to transition their wealth to the next generation often ask themselves if their family will be in the same position. They wonder if there is some way that their family can beat the odds so that subsequent generations in their family do more than just preserve or certainly spend what has been built up.

I recently met a 60-something-year-old second generation owner of a successful family business who told me about some of the challenges he and his siblings were facing trying to incorporate the next generation into discussions about the business. On the one hand, they were leery about providing too much information about the business yet on the other hand they realized that in holding back information they were failing to engage the next generation.

I told him that his family was at a critical tipping point in terms of the long-term future of the business not unlike the tipping point that we as parents face when our children are adolescents.   It is the balancing act between protectionism and growth, otherwise expressed as how much trust should we put in our children.

I will never forget the first time my wife and I allowed our then teenage son to drive the car on the highway on a particularly snowy night. There was a big part of us that said to ourselves “are we crazy for letting him out in this?” and yet that part was overtaken by “he has to learn to drive in these conditions so why not now?”. Thankfully, he arrived home safely later that night. The point is that we showed him the trust and as a result he learned important driving skills that will benefit him for the rest of his life.

It is a similar situation with this gentleman I met recently. If he and his siblings continue to withhold financial information about the business, the likelihood is that the children will never learn what it means to be an owner. If on the other hand the parents decide to open things up a bit and go down a path of educating the children about what it means to be an owner, then at least they have a chance to have strong ownership in the next generation.

For those who are leery about trusting family in a family business, remember that openness builds trust and secrecy destroys it. Disclosing financial information to family for a company with a history of doing the opposite does not happen overnight, nor should it. If it is to be done at all, it should be done in measured carefully laid out steps following consultation with a skilled family business professional.

Ron Prehogan is President of Equitas Consultants Inc., a consulting business that provides business and wealth transition planning and implementation services for businesses and families using a unique combination of facilitation and transactions expertise. Ron can be reached at rprehogan@equitasconsultants.com or (613) 569-7001. For more information about Equitas, visit www.equitasconsultants.com.

THE MILLENNIAL GENERATION: What Does It Mean To Your Business?

2011-03-21T12:55:35Z

I recently attended a session given by a Generation Y expert at a client retreat. The purpose was for the owner, the board and senior managers of the company to learn how better to engage that generation of workers in the business.

The key buzzwords that we learned were how “special” that generation has been made to feel by their “helicopter parents” (parents who hover over their children solving all their problems for them). This special feeling is then reinforced in school where there is apparently no longer such a thing as failing a grade without the parents’ permission.

So far so good, I suppose, for the blessed child until he or she then enters the workforce and is now hearing anything but “you are special” from his or her boss! I now get it why this generation bounces around from job to job – they’re busy looking for an employer, any employer, who will tell them how special they are.

The lessons we learned for the employer who relies on having millennials in its workforce go like this – understand what makes them tick and then “partner” with them in a way that works for them and for you (i.e. try to find out what career path they are looking for and see how you might satisfy that in your business). Coddle them in a way that works for you. Provide them with opportunities for advancement earlier than was the case for your generation, if possible. More than anything else, give them a reason to want to work for you, make it meaningful for them.

For the business owner, there are some key related questions that should be answered:

What is so special about your business? What would make someone want to work for you and stay working for you? What attracted them to your business in the first place? What attracts them to your business today?

If you have senior management that is “not getting any younger”, what are you doing about that? Are you unwittingly posing a barrier to entry for talented young people lower down the food chain?

Are you one of those “helicopter parents”? If so, does that somehow translate into your workforce and what are you doing about that?

A key starting point could be for you to write down 3 things in bullet point form that set your business apart from the rest in a meaningful way. Then bounce your list off others for their opinion – or ask them to create their own list and compare. Whatever you do, make sure that these are not “yes people” and encourage them to be as honest as possible with you. If you don’t feel comfortable doing that on your own, get someone to help.

Whether you call it a vision statement, a mission statement, a values statement, a this-is-who-we-are statement or whatever, the important thing is to be as brutally honest as you can be. The Four Seasons hotel chain became a world leader according to its founder, Isadore Sharp, because early on he decided to apply in every aspect of his business a simple lesson that he learned from his mother – “do unto others as you would have them do unto you”. His autobiography describes what he did and includes the company mission statement.

Another example is Robert Half International, the world’s first and largest specialized staffing firm. As far back as 1963, before the Civil Rights Act in the United States passed, Mr. Robert Half lobbied against racial discrimination in the staffing industry, urging fellow staffing firms to not only follow the letter of the law but to abide by an even greater jurisdiction: “the laws of common decency”. Everything that the company does to this day – long after the passing of its founder – is guided by its “ethics first” philosophy.

If brutal honesty leads to a re-assessment of what you are doing and how you are doing it, all the better. One way or the other, people out there whether they are employees, prospective employees, customers or prospective customers are looking for the authentic you. Not the trumped-up you, not the marketed you, but the real you.

Have fun and good luck!

Ron Prehogan is President of Equitas Consultants Inc., a consulting business that provides business and wealth transition planning and implementation services for businesses and families using a unique combination of facilitation and transactions expertise. Ron can be reached at rprehogan@equitasconsultants.com or (613) 569-7001. For more information about Equitas, visit www.equitasconsultants.com.

As published by the Ottawa Business Journal on March 21, 2011.

The 5 Keys To A Successful Succession Plan

2011-01-24T19:53:25Z

THE 5 KEYS TO A SUCCESSFUL SUCCESSION PLAN

In over 30 years advising families in business, I have seen the good, the bad and the ugly in terms of what the business can do to the family and what the family can do to the business.

In terms of what the business can do to a family, the upside is that it can make a strong family even stronger by working together to do good things for the betterment of the family, the people working in the business and the greater community. Unfortunately, however, for every situation like that, there are multiple cases of families being destroyed by the business due to factors like greed, ego or unresolved emotional issues.

As far as what the family can do to a business, the upside is enormously powerful – businesses run by people with a common purpose, common values and a common bond who understand the risk/reward equation and whose capital is patient. The downside, however, is equally powerful – i.e. businesses getting dragged down by family issues that can become so overwhelming that even the most successful business cannot withstand.

So what does this all mean to a family business owner who dreams of one day passing the business on to one or more of the children and wondering how to do it successfully? My answer is to do as much of the following as you possibly can:

1. Show the family the positives in your work, not just the negatives.

2. Guide, mentor and empower the children towards their dreams.

3. Let business be business and family be family.

4. Re-visit your personal financial and lifestyle plan before your succession plan.

5. Rely on good trusted advice.

Key #1 – Show the family the positives in your work, not just the negatives

If you find little joy or meaning in the work that you do, your dream of family succession may be in peril before you even get out of the starting blocks.

However, if you derive satisfaction out of things like providing employment for others or being engaged in community life through the business, then you should ask yourself the next question – does my family know this about me or do they only see the hardships that I endure and the sacrifices that I make in business?

If you want to attract others to what you are doing, then make it attractive to them. It might also be an important reminder to you about what you are doing and why you are doing it. The positive effects from that could be huge and long-lasting for you, your family and your business.

Key #2 – Guide, mentor and empower the children towards their dreams

Parenting 101 tells you to “let the chickies fly from the nest” at some point, and that the longer you let that point pass the more difficulty your children will have becoming mature and properly functioning adults. (There are exceptions to this rule for developmentally disabled children and other situations which are beyond the scope of this paper.)

This can often be one of the most difficult things for us to do as parents as there will always be an element of risk in terms of when and how to apply the principle. Our instinct is to protect our children and so we often err on the side of caution. There is nothing wrong with that, provided that we don’t let the pendulum swing too far to the side of caution and have it remain there without considering the damage that may do.

Bringing children into the business in order to provide them with a livelihood is an important example of this principle at work. On the one hand, a parent might think “if I have it why shouldn’t I share it with my children and spare them the risk and the hardship that I had to endure to get where I got?” This would be a normal and lovingly-based thought process. However, danger may be lurking below the surface.

With the very best of intentions, you could be sending a message to your children that they are not competent to make it on their own. Stop for a moment and think of how destructive that could be to their development. Think also about what it takes to be successful in business. How well would you have done in business if risk was taken away from you? How well would you have done in life?

Warren Buffett decided a long time ago to leave a tiny percentage of his estate to his children for a very basic reason as I understand it. His attitude was that he earned his money, let the children earn theirs. From the sound of things, he understands that the most important gift he can give his children is the benefit of his knowledge and experience so that they have the tools in life to succeed. Obviously, his wisdom extends far beyond the investment world.

Let your children find their way in this world, allow their dreams to emerge and give them the emotional support they need every step of the way. If their passion is to get involved in your business, great, now you have something to talk about in terms of the circumstances in which you may allow them in. If not, that’s great too, mentor them lovingly to help them find their chosen path. If you remember that your primary obligation to your child is to be a good parent, you can’t go wrong.

Key #3 - Let business be business and family be family

Keys #1 and 2 are in no way technical or limited to the family business. They can be applied in many other situations and walks of life. Key #3, however, is very much focused on the family business and the processes that should be in place to help ensure a successful transition of the business to the next generation or anyone else for that matter.

As business owners plan for the day they are no longer in charge, they need to think about who their successors will be - both as operators and as owners. When is the time for me to exit from the business? Who will take over from me? When should I dispose of my shares and what is the best way of doing that? If I want my children to one day acquire ownership, should it be by way of gift or sale? And so on.

Operational successors can be family members or from outside the family. My advice on that is to go for the best person you can find for the job at the price you are prepared to pay. If that person is a non-family member, you can still pass ownership of the business to family members. Whether the next CEO is a family or non-family member, be sure to pay what a position of that nature warrants on the open market. If you’re not sure, find out for yourself or from a hired compensation consultant.

This is but one of many examples of the golden rule of family businesses – that is, to run the business like a business and the family like a family. Once you allow family considerations to creep into business decisions, you are setting up the business and the family for failure at some point down the road.

Examples of processes to be considered include establishing a family employment and compensation policy; setting up a functioning board of business-minded people focused on the best interests of the business (as opposed to the best interests of a shareholder); and setting up a family council consisting of adult family members with a stake in the business. All of these processes are designed to ensure that the business is run like a business while family and ownership matters are dealt with in a separate forum.

Key #4 – Re-visit your personal financial and lifestyle plan before your succession plan

In this line of work, there are very few absolutes. In my experience, there is at least one and that is do not undertake a succession planning process before you and your spouse sit down and figure out where you are at and where you want to be from a financial and lifestyle point of view.

There are at least two good reasons for this rule: (1) the next generation needs to know to what extent, if any, the previous generation will be relying on the business for their livelihood following a transition to the next generation; (2) retirement planning discussions between spouses can be a vitally important opportunity to check assumptions and re-set expectations about the next chapter in their lives.

Good communication is usually the ultimate key to a successful succession plan. If communication between spouses is not as open as it needs to be for these purposes, it will have a negative impact on succession planning discussions with the next generation. One or two facilitated discussions between spouses can go a long way towards succession success.

Key #5 – Rely on good trusted advice

Statistics and anecdotal evidence indicate that most family business owners who say they plan to exit their business in the next five years have very little in the way of a detailed plan. Those who say they have a plan often confuse a succession plan with an estate plan.

A succession plan is a series of discussions with successors and key business stakeholders which culminate in a plan to most effectively transition the business. An estate plan, on the other hand, is a process which culminates in legal documents to record the wishes of the owner regarding the transmission of assets on death. A succession plan is a business-driven process. An estate plan is a legal and tax-driven process.

In their book How to Choose & Use Advisors: Getting the Best Professional Family Business Advice, Craig E. Aronoff, Ph.D. and John L. Ward, Ph.D say that a family business owner should examine relationships with an advisor who:

Fails to avoid conflict of interest
Fails to respect client confidentiality
Promotes dependency in a client
Works primarily in isolation
Is reluctant to deal with successors
Sells solutions rather than listening to problems
Ventures beyond his or her knowledge
Makes too many decisions for the client
Fails to foster good communication
Lacks empathy

On the positive side, they listed the following benchmarks of excellence in family business advisors:

Maintains up-to-date technical knowledge and shows strong interest in and commitment to the field
Communicates openly in clear, simple language, helping educate family members when appropriate
Seeks to know the family and business in depth
Understands how families work and how the family and the business relate to each other
Gives advice and counsel that suit both the family and the business
Initiates periodic meetings with the client for update and review
Is resourceful on clients’ behalf, spotting opportunities and sharing information and contacts
Shows empathy, patience and trustworthiness
Is willing to work with successor generations
Raises questions about the future
Promotes collaboration among advisors
Gives honest advice, even when it may jeopardize the client relationship

From time to time, it is important to pause and ask yourself whether you are getting the advice you need. For family business owners, there may be much at stake for the business and/or the family particularly when it is time to do succession or estate planning.

GETTING THE BEST FROM YOUR PROFESSIONAL ADVISORS

2010-11-22T20:47:49Z

I was at a bank’s succession planning seminar recently and at the end of the presentation someone in the audience asked why he should use the bank’s services in that area when he has his own lawyer and accountant to provide him with the advice he needs. The answer from the banker was that the bank is a catalyst for getting a succession and estate plan done, not a replacement for the work of the lawyer and the accountant.

The banker’s response made me wonder if business owners are getting the advice that they should be getting from their lawyers and accountants. In the perfect world, bankers should not have to be catalysts for business owners to be getting help from their lawyers and accountants. Why should the lawyers and accountants need the banker’s help in properly servicing their own clients?

The answer is likely either that the lawyer or accountant does not have sufficient expertise in this area, or has the expertise but does not have the relationship or is perhaps not being sufficiently proactive with the client. Whatever the case may be, it is the responsibility of the business owner to ensure that he or she is getting the proper advice. I know that that can be much easier said than done, so in an effort to help the business owner sort this through I offer up some suggestions.

If you are not sure if you are getting good succession or estate planning advice, you should challenge yourself to ask why that is the case. Perhaps you are shying away from seeking the advice because you are worried that it will cost you more money than you can afford or want to spend.   Or perhaps you do not know what you stand to gain by getting that advice.

Or you may be thinking “I can solve the problem myself”; “An outsider could never understand my business”; “An advisor will raise a lot of issues I don’t have time to bother with right now”; “I don’t want to share any information with an outsider”; “Our longtime lawyer (or accountant or banker) is a family friend and knows us best”; “I’m unsure of how relationships with professional advisors work”, etc., etc.

These may be reasonable concerns. They may, however, be getting in the way of you doing what needs to get done. I say this not to encourage anyone to leave their existing professional advisor, but rather to begin a dialogue with that advisor if you have a concern. Oftentimes, the advisor will have a perfectly good answer and merely having the discussion will help you along in the right direction to achieve your desired goals.

In their book How to Choose & Use Advisors: Getting the Best Professional Family Business Advice, Craig E. Aronoff, Ph.D. and John L. Ward, Ph.D say that a family business owner should examine relationships with an advisor who:

•   Fails to avoid conflict of interest
•   Fails to respect client confidentiality
•   Promotes dependency in a client
•   Works primarily in isolation
•   Is reluctant to deal with successors
•   Sells solutions rather than listening to problems
•   Ventures beyond his or her knowledge
•   Makes too many decisions for the client
•   Fails to foster good communication
•   Lacks empathy

On the positive side, they listed the following benchmarks of excellence in family business advisors:

•   Maintains up-to-date technical knowledge and shows strong interest in and commitment to the field
•   Communicates openly in clear, simple language, helping educate family members when appropriate
•   Seeks to know the family and business in depth
•   Understands how families work and how the family and the business relate to each other
•   Gives advice and counsel that suit both the family and the business
•   Initiates periodic meetings with the client for update and review
•   Is resourceful on clients’ behalf, spotting opportunities and sharing information and contacts
•   Shows empathy, patience and trustworthiness
•   Is willing to work with successor generations
•   Raises questions about the future
•   Promotes collaboration among advisors
•   Gives honest advice, even when it may jeopardize the client relationship

From time to time, it is important to pause and ask yourself whether you are getting the advice you need. For family business owners, there may be much at stake for the business and/or the family particularly when it is time to do succession or estate planning.

How to Say it to Seniors

2010-07-23T18:24:06Z

How to Say It to Seniors: Closing the Communication Gap with Our Elders
Author: David Solie, MS., PA.

For more information visit amazon.com

On the Shoulders of Atlas: A Story About Transitioning A Family-Owned Business

2010-07-22T15:44:35Z

Co-authored by Ron Prehogan and other professionals who work with family businesses, On the Shoulders of Atlas answers the key questions that haunt business families around the world: What should we do with our business? Sell it? Keep it? Grow it? Take it public? Should we keep it owned by all the family members? Or just the ones that have shown they can manage it? If so, how do we treat family members fairly? How do we possibly find answers to these questions? And how do we talk to our family members, key advisors, and executives about these issues?

Please contact us if you are interested in obtaining a copy.

The Equitas Transition Plan™ Q&A

2010-05-19T17:40:54Z

Transition planning for a business owner is a concept that is bandied about by so many, yet successfully done by so few. Why that is the case is not as important as what steps should be taken to make transition planning a more successful exercise.

The Equitas Transition Planning Process™ is best explained by the following Q&A:

Q: What do you mean by “transition planning”?

A: Transition planning is planning and providing for disposition of the business and/or liquid assets in a manner that works best for all concerned. It includes the legal, financial, personal and family aspects of the transition.

Q: When would be a good time to start thinking about a transition plan?

A: The sooner you start thinking about it the better. If you have children, you should let them see when they are young the joy and meaning in what you do. Your teenagers can work summers in the business and should be encouraged to pursue their dreams. If and when they are ready to work in the business, they must learn that it is a privilege, not an entitlement.

Q: When would be a good time to start working on a transition plan?

A: It’s never too early, but usually about 5 years before you are ready to execute on the plan.

Q: What does a transition plan typically look like?

A: There are four components to The Equitas Transition Planning Process™: (1) Personal Financial Planning; (2) Personal Life Planning; (3) Business Succession Planning; and (4) Wealth Transition Planning. We generally recommend that the components of the plan be done in that order.

Q: Why do you recommend that the components of the plan be done in that order?

A: The Personal Financial and Personal Life Plans attempt to capture yours and your spouse’s essential wants and needs for the rest of your lives. We recommend participating in at least one or two conversations about this before starting to discuss a Business Succession Plan which typically involves children and/or senior employees of the business. In other words, let husband and wife get their “house in order” before involving others. The Wealth Transition Plan should follow to ensure that it reflects the prior discussions. We have seen too many cases where people go straight to the Estate Plan which may be good at minimizing taxes but bad at capturing the essence of what needs to be done. If this is the case, the Estate Plan may be modified after completing the first three steps to reflect those discussions.

Q: Who should we use to help us with our transition planning?

A: Usually it starts with your most trusted advisor(s) and goes from there.

Q: Would my lawyer and accountant be able to handle all of this for me?

A: Yes, as long as they bring in others as and when required. Lawyers and accountants are trained to provide the technical advice of the Personal Financial and Wealth Transition Plans. Other professionals like Equitas who are expert in their fields should help with the Personal Life and Business Succession Plans.

Q: How does Equitas help with the Personal Life Plan?

A: Sometimes, spouses need to re-visit the “deal” they had at one time regarding retirement and what they would like to do in their retirement. Spouses can also have anxieties about knowing where things are and what to do and who to call in the event of an untimely demise. Equitas helps facilitate conversations around issues such as these.

Q: How does Equitas help with the Business Succession Plan?

A: Equitas helps facilitate discussions around the keep-or-sell decision and once a decision is made helps in its execution. If the decision is to keep the business in the family, Equitas helps with governance matters and with term sheets for shareholders agreements dealing with exit strategies. Equitas also helps co-ordinate other professional advisors if and as required.

Q: What if I have other questions?

A: Give us a call at 613-569-7001 or email us at rprehogan@equitasconsultants.com.

NBC’s TONIGHT SHOW: Succession Planning Gone Wrong

2010-04-13T18:30:32Z

It seems like a truism among business experts that it is never too early to start working on a succession plan. No matter how large or small the business and even when dealing with a not-for-profit organization, the importance of planning sooner rather than later for the day that the person in charge is no longer in charge cannot be under-stated.

The recent very public fiasco at NBC over the Tonight Show might at first blush seem to shake the assumption that early planning can only be a good thing. However, I see it quite differently. To me, NBC’s succession planning mis-step was not that it did it too early but that it did it poorly without thinking through the consequences.

In case you missed the story, from the early 1990s until mid-2009 Jay Leno had been the most successful host of the Tonight Show airing weeknights at 11:35pm. In mid-2009, Leno was replaced on the show by Conan O’Brien and moved to the 10pm time slot. In January 2010, as a result of horrible ratings on both shows, Leno was moved back to the 11:35pm time slot and O’Brien departed with a cheque for $32 million from NBC.

From this distance, it seems clear that NBC made at least two major mistakes, one from a business and the other from a succession planning point of view. The business mistake was not predicting the severe and immediate ratings free-fall in both time slots. The succession planning mistake is the focus of this article.

Leno was replaced on the show by O’Brien in 2009 as a result of a promise made by NBC to O’Brien in 2004 that the job would be his in 2009. Why did NBC make that promise? Some have speculated that it did so to avoid the public and nasty war of words that took place between Leno and the presumed heir-apparent David Letterman in the early 1990s when the legendary Johnny Carson announced his retirement from the show. Others say that this was what NBC had to do to prevent O’Brien from leaving the network after so many years biding his time on the late late show.

No matter the reason, we have to assume that NBC had good reasons to name its successor a full five years before the planned succession date. The question to be answered is why NBC would promise the show to O’Brien without first securing Leno’s agreement to depart at the same time. Failure to do so presumably resulted in NBC having to find another job for Leno in the 10 pm time slot with all its attendant disastrous consequences.

The story of the Tonight Show is a story that is played out in similar albeit far less public forms in many privately-owned businesses. Think of a next-generation child in the business as Conan O’Brien. In order to attract him to the business and keep him there, the owner promises the child that “one day this will be yours” but to the child that day never seems to come. In some cases, like in O’Brien’s, the child finally gets fed up waiting around and an ultimatum ensues which in turn forces the hand of the owner.

The succession planning lesson to be learned from the Tonight Show story is that it is alright and indeed advisable to plan for succession early, but then be sure to take advantage of the early planning to do it right and cover off all the bases. NBC seems to have been pressured to make the job offer to O’Brien without first properly securing Leno’s release and by all appearances that mistake cost them dearly. It might not cost you $32 million but it could cost you substantially nonetheless if proper steps are not taken.

THE ETHICAL WILL: Have You Considered Doing One?

2009-08-17T17:49:00Z

I wonder how many of you reading this article even know what an ethical will is. My strong hunch is that there are very few although I would imagine that every one of you knows what a legal will is.

An ethical will is a letter from an individual typically addressed to his or her next-of-kin that bequeaths a spiritual or philosophical legacy. It differs from a legal will in that it bequeaths values rather than money or other assets.

For parents who have worked during their lives at passing on their values to their children and grandchildren, there might be no need for an ethical will. For others, one might suggest that it is never too late. In fact, at the end of the day an ethical will could well turn out to be the only tangible evidence for succeeding generations of what the author stood for in his or her life. Looked at that way, it is at least as important as the legal will.

Another benefit of an ethical will is that you don’t have to spend money on a lawyer to have it done. There is no prescribed format for an ethical will. According to an American publication entitled So That Your Values Live On – Ethical Wills and How to Prepare Them, possible subjects include:

The important lessons learned during your life.
People and causes for which you feel a sense of responsibility.
Mistakes in your life you hope your children will avoid.
Your definition of true success.
Your hopes for loved ones’ futures regarding family unity, ethical conduct, charity, or business relationships.
Favourite sayings or stories.
Expressions of gratitude, hope or faith.

While the ethical will can and usually should be done by a person alone with a computer or pad of paper, there can be instances where outside help might be appropriate. For example, those who are mentally or physically incapable of doing it on their own might wish to have a loved one or someone else assist in drawing it up. Another example comes from a company based in Montreal called Memoirs Productions that specializes not only in writing ethical wills for individuals but also in writing corporate ethical wills and even producing videos for patriarchs and matriarchs of family businesses.

So basically the sky is the limit in terms of how one wishes to pass on a spiritual or philosophical legacy. The point is that people who wish to leave something tangible behind other than money and assets should be aware and thoughtful of this concept. Perhaps the best way to start is by googling “ethical wills” and take it from there.

One word of caution. Nothing in this article should be taken to suggest that one should place a higher priority on doing an ethical will over a professionally-done legal will. Legal wills are essential to ensure that your wishes are carried out at a minimum of expense and aggravation to your next-of-kin. The ethical will is something that should be done once the legal will is properly done and looked after. Make sure to look after the basics first.

CHILDREN IN THE FAMILY BUSINESS: OWNERS OR EMPLOYEES?

2008-11-10T17:57:28Z

This past Father’s Day, I wrote an article here about my beloved father. It was a tribute to him and told a story about family business owners who might not be quite as successful as fathers as they are as businessmen. It concluded with some words of advice from my father, including this:

“the most important thing a father can give his children is the respect they deserve and the opportunity to spread their wings”.

Nice words, Dad. However, many business owner fathers reading that would say “I have done just that, but the kids have blown it. It’s time for them to show me what they can do!”

In my experience dealing with family businesses, those that succeed most in passing ownership to the next generation are the ones where the fathers have the humility to think that maybe they too should bear some of the responsibility and then decide to do something positive and constructive about it. By doing so, they give their children “the respect they deserve and the opportunity to spread their wings”.

It starts with a true and deep appreciation that not one of us has all the answers, that there are no absolute truths in life. Instead, there are “my views” and there are “your views”, and the relationships that succeed the most are the ones where both sides believe that “my views are no more valid than yours”. They just happen to be mine, and I will try as hard as I can to listen to and understand yours and to respond accordingly with respect.

One of the hands-on ways to deal with this is to go back to basics and think about what it has meant for you to be a successful business owner. It might for example be the satisfaction of making money from a combination of hard work and smart calculated risk-taking along the way. There is a terrific feeling of satisfaction that comes with that. Is this a feeling that your children in the business have? If not, think of what you may have done or may be doing, perhaps inadvertently, that could be contributing to that.

Maybe you are not leaving enough room for your children to grow in the business. Perhaps by your presence, behaviour or reputation you have cast a shadow that no child could escape from. How would you have done in that situation? Could you have succeeded the way you did without having had the freedom to fail? Could you have succeeded the way you did knowing that there was always someone there to bail you out? Are you giving your children the opportunity to spread their wings, arguably the most important job that you have as a parent?

We know the difference between an owner’s mentality and an employee’s mentality. One involves risk and the other does not. If our children are working for us in our shadows and under our wings, is it any wonder that they do not seem to develop that owner’s mentality?

You know about risk. You would not have succeeded without it. There may be one more risk that you need to take to succeed in passing on your family business, and that is to trust that your children will succeed even if you have your reservations that they will! While this might sound crazy, consider your options. By continuing the way you are, you might feel that your business will do better in the short-run but how about the long-run and how about family relations? As Dr. Phil would say, “how’s that workin’ for ya?”

If you are reading this, then you are likely still able to do something about it and make a difference. Your willingness to take responsibility demonstrated to other family members may in itself be the single most important step towards developing strong ownership in the next generation. That and your willingness and ability to listen hard. You might be amazed at how much others might start listening to you once you show that you are listening to them.

Secret Weapon to Successful Generational Transition

2008-06-30T18:05:08Z

There is an epidemic about to occur in Canada and the United States as the baby boomers begin to retire. Many of these baby boomers created businesses as a means to support their families and have been very successful at doing so. But now, as they reach retirement age, many of their businesses are going to be changing ownership – a process that has proven difficult for most. Typically, it was the patriarch of the family who started the business, though the mother often worked by her husband’s side performing many of the daily tasks, especially in the first few years. As his family grew and the business became more profitable, his children likely also came to work in the business. Now, as the patriarch reaches the age of retirement, he not only needs to consider what that means for him but also what that means for the business to which he has devoted himself for the majority of his working life.

Many professionals recommend creating a succession plan to successfully deal with this issue. Succession planning is the creation of a plan that considers the many scenarios of how a business can be transferred. The transfer could be to the owner’s children, to management or to a third party, or any combination thereof. The succession plan then determines which outcome is the best for that particular business and how to achieve that outcome. For many family business owners, the decision will be to transfer the business to the next generation, for example from father to son. However, as Michael Higgins suggests, “(f)or family-owned business, continuing on isn’t easy. More than 70 percent don’t survive the transition from founder to second generation” (49). But businesses that successfully make the transition to the children have a secret weapon: the mother. Though the mother may not have been actively involved in the business for a number of years, she still plays an important role in the succession planning process.

The mother acts as a business associate to her husband in the privacy of their own home, helping him to make important business decisions. She is also a mentor to her children as they grow up and become adults, teaching them how to be successful in business. And the mother acts as a buffer between her husband and her children when conflicts arise in their business or personal relationships. These “hidden” roles of the mother are integral to the successful transition of a family business from the parent generation to the children generation.

The roles of the mother may be so hidden that she in fact does not recognize them herself. She has become so accustomed to listening to her husband talk about the business and providing her perceptions that it has become second nature. However, her role is crucial to the succession planning process. The decision of who should be the next leader of the business is an important decision. The mother will be able to provide insights that the father may not have considered. Once he has made his decision, he is unlikely to attribute it to his wife. He may not even realize that his wife helped him come to the conclusion. Therefore, it is impossible for anyone else to be able to recognize the role of the mother in this manner.

In a study of 9 different family businesses, Shaheena Janjuha-Jivraj found that husbands were not quick to recognize their wives’ involvement in the business decision making and that the children were completely unaware of their mothers’ contributions. In one interview of a father-son team, she asked the father if the wife was involved in any way with the decision making. He was reluctant to admit it but did concede that he sometimes spoke to his wife about certain business decisions. When the same question was posed to the son, he claimed that the mother was not involved at all. This example clearly exemplifies the “notion of the mother playing a hidden role during generational transition” (Janjuha-Jivraj 790). In this case study the mother acted as a sounding board to the husband behind closed doors. No one else was aware of her role, and the husband was even reluctant to admit it. However, her ability to listen to her husband and provide advice is critical to the succession planning process.

The mother’s hidden role as business associate is so effective because of the fact that it is hidden. Kaslow argues that patriarchs of family businesses tend to be goal oriented and stubborn in their determination to succeed (Lore and Lure 5). They are unable to acknowledge and accept their wives’ involvement in the decision making. The idea of business associate is as an equal. For this type of man, there is a lot of pride in being the leader of the family business and having all the control. To admit that his wife, someone who is not even actively involved in the business, is assisting in making critical decisions would be detrimental to his ego. For the mother, it is not a matter of ego that keeps her from realizing this important role. It is more a matter of ignorance. She has always been there to listen to her husband and help him make decisions and therefore does not realize the significance of this role.

The mother’s role as mentor is more recognized by the family, however not in relation to business matters. The mother influences her children and teaches them right from wrong. She instills the family values that her children will carry with them into adulthood. The way a mother teaches her children depends on her own beliefs and personality (Kaslow Maternal Mentoring 17). A mother’s mentoring is seen as a primary role of a mother in general and not specific to family business. Therefore, the importance of her mentorship is often overlooked in the succession planning process.

It is critical that the children have the proper business skills to effectively manage the business in the father’s absence. However, what the children are taught as they grow up has a significant effect on how they conduct business. A mother who teaches her children compassion, generosity and determination will likely produce children who are more successful in business than those children who were taught to be deceitful and conniving. Kaslow argues that “mothers want their adult children to like and enjoy their work as well as to perform well, be goal oriented, be aware of the bottom line issues and of upholding a fine family and business reputation in the community” (Maternal Mentoring 13). The mother is aware that what she teaches her children will reflect on her family and the business; however, this mentoring is not recognized as having significance in the business or in the transition process.

As a mentor, the mother also acts as a confidant to her children. The act of being a mentor not only includes teaching, but also counseling. A mother mentor is able to listen to her children and help them come to the conclusion of what is in their best interests without telling them what to do. She lets them know that they can approach her with any sort of concerns, whether they are business related or personal. As the children obtain more responsibility in leading the company, there are bound to be issues they will need to discuss with someone. Sometimes, the best someone is their own mother. She has been a confidential business associate to her husband for years, and as such has a general understanding of the business affairs and will be able to provide relevant advice. If the mother has always been there to listen to her children and help them make decisions, it will be natural for them to come to her now as well, during the transition process. Sometimes a mother knows just the right thing to say or do to encourage her children in the right direction. This is normally seen as ‘mothering’, and the mother is not given proper credit for her role in assisting with the success of the transition.

Perhaps the most important role of the mother in assisting in a successful transition is the role of buffer. The transition from father to children can be a constant source of conflict among family members. The mother’s ability to step in and smooth out those issues is what will ultimately make for a transition that works. She can use her other roles as business associate and mentor to broach the source of the conflict. Most often, the primary source of tension between the father and the children is the father’s inability to let go of the control of the business. The father may not have confidence that the children will be able to run the business in the same manner that he does. He feels that they do not have the same drive and determination to succeed that he had when he started the business (Levitt 16). He is afraid to see his business or his children fail. On the other hand, the children feel that they are not being given enough control in order to be able to properly assert themselves in the business. The father continues to meddle in the decisions the children are making, undermining their authority with staff and other business relationships.

As confidential business associate to her husband and counselor to her children, the mother is bound to be aware of this and any other conflicts between her husband and their children. She can use these roles to buffer out the issues and help resolve the conflict. Often it will be the children to approach the mother first, using her as an ally in the dispute with their father (Janjuha-Jivraj 791). In the private discussions of the mother and father, the mother is able to broach the issues presented to her by her children. In this setting, the father can be open with his wife and present his own concerns as to what the issue is about. In this capacity, the mother acts as mediator between her husband and her children to smooth out the point of contention. The role of buffer is essential in the transition of the business, as there are bound to many conflicts that arise. If the mother can keep the lines of communication open between the two generations, there is a better chance of success. Again, the mother’s role in the transition process is often not overt and is more often overlooked as having any relevance to the process. Janjuha-Jivraj argues that “the role of buffer between generations reinforces the hidden nature of maternal involvement in familial dynamics; as a result this is a status often not recognized by family members” (792).

Family businesses account for more than “90 percent of all businesses, employ half of the workforce, and create 80 percent of new jobs” (McCann 16). Therefore, they are a major presence in our economy. However, as stated above, 70 percent do not survive the transition to the next generation. This is a serious concern not only for those business owners who wish to see their businesses flourish into the second generation, but for all of society. It is to everyone’s benefit that family businesses find a way to reduce the failure rate and increase the number of successful generational transitions.

The mother’s role is but one factor in the transition process, albeit an important one. It is necessary that the mother’s influence in the success of a transition be acknowledged and that it be encouraged. Professionals advising family businesses in the succession process need to recognize the mother and use her strengths to encourage dialogue between the two generations. It is often a misunderstanding or miscommunication that intensifies the disharmony among the father and children, leading to one or the other not being able to commit to the transition. If the mother is able to play her role, she can often prevent or at least smooth out these conflicts before they put an end to the whole process.

Written by: Alison Madge

Alison Madge is an employee of Equitas Consultants Inc.

Works Cited

Higgins, Michael. “Passing the Torch.” ABA Journal 84.2 (1998): 48.

Janjuha-Jivraj, Shaheena. “The Impact of the Mother during Family Business Succession: Examples from the Asian Business Community.” Journal of Ethnic & Migration Studies 30.4 (2004): 781-97.

Kaslow, Florence. “The Lore and Lure of Family Business.” American Journal of Family Therapy 21.1 (1993): 3-16.

Kaslow, Florence. “Maternal Mentoring: A Relatively New Phenomenon in Family Businesses.” Journal of Family Psychotherapy 16.3 (2005): 11-8.

Levitt, Donald. “Family Business Forum.” Journal for Quality & Participation 28.3 (2005): 16-8.

Mccann, Greg. “Part of the Plan: A Holistic Approach to Leading in a Family Business.” Leadership in Action 24.6 (2005): 16-8.

The World’s Most Successful Dad

2008-06-15T18:00:34Z

My father, Jack Prehogan, is 86 years old. Today is Father’s Day. If they gave out an award to The World’s Most Successful Dad (which I would define as “the man who best empowers his child(ren) to be the best they can be”), I truly believe with all the objectivity I can muster that he would be right up there in the running if not the outright winner.

Over the years, Dad has talked a lot about his late uncle who was a very successful businessman during Dad’s formative years. Recently, Dad and I had an opportunity to talk about his uncle and how hard he was on his only son who never was able to achieve the success in business that his father had achieved. I share some of that discussion here in the hope that it will be of value to family business patriarchs who perhaps have focused more on building up a successful business than on being the father they or their children wish they could be.

First some background on Dad. He was born in 1921 in Winnipeg, Manitoba, the baby in the family with three older sisters. His parents had recently immigrated from the Ukraine fleeing from the pogroms. Dad’s father died in 1926 before Dad’s 5th birthday. The family had no money so when Dad was 14 years old he had to go to work to help support the family and took his high school classes at night.

He moved to Montreal in the 1940s to work for his uncle, the furrier. In the late 1950s, he and his friend opened the first ten-pin bowling alleys in Canada (which carry on successfully to this day through the friend and his son’s ownership). Dad decided in the 1960s to go into the real estate business which he carried on successfully until his retirement in the 1980s.

Mom and Dad have been loving life ever since blessed with good health, good fortune, good friends, 3 children and 6 grandchildren. My brother and I became lawyers and my sister, a chartered accountant, became the CFO at McGill University, the CFO at The Hospital for Sick Children in Toronto and currently heads the asset management company for the doctors at Sunnybrooke Hospital in Toronto. Most, if not all, of the grandchildren are professionals or on their way to becoming professionals in their chosen fields (the youngest is 19 years old and has not yet decided on a career).

Dad has always said that “the greatest assets on his balance sheet” are his children and grandchildren. Whenever one of us or our children did something to make him proud, he would describe the experience as “clipping coupons” (i.e. dividends on his investments). Dad knew from an early age that what mattered in life the most was not how much wealth he accumulated but rather seeing his children and grandchildren pursue and achieve their dreams. He and Mom have always made their family the number one priority in their lives – not by their words but by their actions.

In our recent discussion about Dad’s uncle, I got Dad to talk a bit about himself. According to him, the most important thing that he and Mom ever did as parents was to equip their children with the tools they needed to succeed. Whether that meant providing us with an education to pursue our dreams, sage advice or emotional support at critical junctures in our lives, they have always been there. Never ever judging, always supporting; never ever dividing the family, always doing what it took to build it.

We talked about the sacrifices that are required to build a successful business including the sacrifices at home when the children are young. It reminded me of a story Mom told me years ago about the actress Kathryn Hepburn who made the conscious decision to forsake family for her career as an actress. To be the best you can be at a career or in business or in any single venture, something has to give. It’s all about the choices we make.

At the end of the day, Dad believes as do I that to be the most successful father you can be is all about balancing the things in life that are truly important. If being a good father is important, it must be treated seriously as a job just like building a successful business.

In my dealings with family businesses, I too often see fathers disappointed in their children in the business while those children are hopelessly fighting for their father’s approval. In their drive to push the children to be the successes in business that they are or were, the father can lose sight of the fact that no one can become a success at anything without the confidence to succeed . . . and that the father has a huge role to play in helping the child with that confidence.

The day after my conversation with Dad, I received an email from a 40-something child in a family business that I am working with. The email included the following:

“(Dad has talked to us (his children) this way) all our lives and it is quite possibly why we are the way we are. One of us may have been a true entrepreneur but when you’re constantly criticized for doing something that you think is right or good, especially by a father you love, it wears you down – believe me, IT REALLY WEARS YOU DOWN.”

As Dad said in our recent discussion:

“you can’t leave the job of being a father to anyone else”
“you’ve got to show your kids love and support; for without that what do they have?”
“the most important thing a father can give his children is the respect they deserve and the opportunity to spread their wings”.

Great pearls of wisdom, Dad, thank you for sharing. Happy Father’s Day and best wishes for many more in good health. As you always say, “we’re the richest guys in the world”. I love you to pieces.

- Ron

Transitioning to the Third Generation

2008-05-03T03:15:38Z

Despite all the factors pulling against the second generation owners, they have successfully managed to transition from the parent generation to the sibling generation. There were bumps along the way, but most of the kinks have been ironed out and things are running smoothly… for now.

The transition from the sibling stage to the cousin stage introduces a whole new set of issues. No matter how far off that transition may be, now is the time to start preparing the business for that eventual transition as well as preparing the next generation.

Preparing the Business

One of the first steps to consider is establishing a family employment policy. If one is already in place, a thorough review may be in order to ensure that the particular issues specific to the cousin stage have been addressed. For example, the owners may want to add extra provisions for further education and experience before family members can enter the business, or remove any limitations that may exclude non-family members from being hired as managers/executives.

Other considerations are creating or revising the compensation policy and developing an exit strategy for the current leaders of the company. The number of people and the various skill levels will invariably increase from the second to the third generations. It is necessary to address compensation for family members, especially if the current situation allows for each sibling to be paid equally. Usually the current leaders are a combination of one or more siblings. As this is most likely not a viable option for the cousin stage, now is the time to address who will be the next leaders of the company. What is the criterion for the next CEO? Will only family members be eligible? Who makes the decision?

Preparing the Next Generation

It is important for the third generation to understand what it means to be a shareholder and what responsibilities that entails. The decision to enter the family business and to become a shareholder should be left to the individual family member. The cousin consortium will only survive if each cousin has made a conscious and educated decision to be there. Family councils provide a good opportunity for the next generation to learn about the business, to see how the sibling generation is working together and to determine for themselves what path they wish to take.

At the sibling stage the closeness of the relationships presents certain benefits and difficulties. Because the siblings have grown up together with the same parental influences, they tend to have the same values and beliefs. They have a certain bond that creates a certain amount of trust toward one another. However, due to that closeness, siblings can bring pre-conceived notions about each other that may not necessarily be accurate any more. Cousins on the other hand have grown up in separate households with differing values and belief systems which can be a source of conflict. But that distance also allows for cousins to begin working together without any prior judgement about one another.

Challenges for the Next Generation

The first challenge each member of the cousin stage must conquer is the actual decision to enter the family business, and then to decide whether or not to remain a shareholder.

Even before the sibling to cousin transition has taken place, the cousins should consider the following:

Who is going to take on the leadership roles? Will these roles be exclusively available to family members? What are the hiring criteria for each?
Developing a fair decision process. Who gets to make certain decisions? Are votes on a per capita or per share basis?
Addressing the changes in governance structure. Defining “family”. Clarifying roles and responsibilities of owners/shareholders/family members.
Establishing an exit strategy for shareholders who no longer wish to be a shareholder.

Conclusion

The transition to the third generation is bound to be a lengthy and complicated process. The number of stakeholders increases significantly and therefore so does the number of issues that can arise. It is never too soon to start the planning and implementation process if there is a desire to transition to the third generation.

Communication Needed to Make Family Succession a Success

2008-04-13T03:11:53Z

Picture a highly successful family-owned Canadian business. The owner, a man in his 70s, should be at the point when he can retire and hand off the company to the next generation.

But he just can’t let go. Or, perhaps more accurately, he won’t let go because he doesn’t consider his two children—both of whom are working in the company—to be ready to take over.

To make matters more complicated, his son, the elder child, thinks he’s the heir apparent to run the business. The father disagrees. He thinks his younger daughter should take over.

That decision has the potential to become a big problem for the business and for the family. So, of course, no one is talking about it. The father has never shared his opinion with his children, so the son has been working in the company for 20 years under the false impression that one day he’ll be in charge.

That, unfortunately, is a typical scenario in family-owned companies.

“It can get very complicated,” says Ron Prehogan, president of Ottawa-based Equitas Consultants, which specializes in succession planning for family business. “There are sibling rivalries. There are kids fighting for the reins. There are all these jealousies. And there are a lot of dads who look at the next generation and lament that their kids don’t have the same work ethic that they did.” And since more than 80 per cent of North American businesses are family-owned, this scenario and others like it are being played out regularly across the continent. According to one study, only 30 per cent of family businesses make a successful transition from the first generation to the second.

Equitas works with all members of the family on a succession plan that is developed and implemented over a long period of time. The process of building the plan requires a lot of sensitivity and recognition of generational gaps or different expectations of parents and children.
“Dysfunctions set in over the course of decades or generations,” says Prehogan. “To expect that to change over the course of a few weeks or a few months is unrealistic.

“We all get into the patterns of behaviour we have with each other in families. It’s pretty hard to pass on a business from father to son if they don’t know how to talk to each other.” The typical issues that arise in a family business are the same as those that pop up in families: Lack of effective communication, generational gaps in understanding, and the weight of expectations being played out in both directions. With a business involved, those issues are magnified, creating the potential for strife, anxiety and even major conflict.

“Think of a guy that starts up a business and he’s been working at it all his life and he’s done a phenomenal job getting it to a certain point,” says Prehogan. “And he brings his kids in along the way and they’re basically continuing to pursue his dream.

“They might find themselves going on for decades working in the business. But they’re still pursuing dad’s dream. In order for there to be a successful transition, they have to pursue their own dream.” That doesn’t mean they need to work somewhere else or start their own business, says Prehogan.

It just means they need the latitude to conceive of how to take the family business in their own directions.

“I see in a lot of cases where kids in their 40s and 50s are really still employees of the business,” says Prehogan.

“They’re working for dad. You can’t have a business that continues to grow as long as the children have that mentality.

“It’s the difference between an employee mentality and an owner mentality.

“I worked with one company recently where the dad sold the business because he really didn’t see that he had an alternative. His son was working in the business but dad didn’t see him as being more than an employee.” In the first example, the case of the father who didn’t want to let go, Prehogan says that after a long facilitation process, the son accepted that he would not be taking over the company. A succession plan is now in place that includes training and an advisory board to support the daughter, who will take over when her father retires.

Also a partner in Ottawa law firm Brazeau Seller, Prehogan launched Equitas two years ago because he saw a number of family-business clients who didn’t address the issues until it was too late.

“People go to lawyers when they’re in trouble, when it’s too late,” he says. “We charge handsome fees to divide up the spoils.

“I saw the significant limitations of the service that we provide to family business. And I didn’t find that particularly satisfying.” Prehogan says it came at a time in his own life when he was looking for something more meaningful from his own work.

“I didn’t go out and buy a sports car,” he says. “I did this instead.”

© The Ottawa Citizen 2008
Written By Mark Sutcliffe
April 12, 2008