Tips to Investing With Family

The New Yor Times Your The Boss Blog had an intresting post titled Investing in a Child’s Business.

Immediately it came to mind that as soon as you decide on doing this it begins to resemble a Family Business… and this where the complications begin. If you want to learn more about Family Business visit my Fairleigh Dickinson University Academic Site

This type of investment begins to have the overlap of Family, Business and Ownership, and needless to say the "Family" part has the most influence. The ven diagram here is the illustration of this overalap and is the cornerstone of decribing a family business.

The article generally was on point.

I would not advise banking solely on your accountant, as the article suggest, to evaluate the business plan.

Use the accountant to perform a critical analysis of the proformas.

However a business plan is much more than financials.  My viewpoint is this:

• It is the articulation of how an idea is put through a feasibility analysis
• If feasable, then the development of a marketing plan. All business rest on the success of "going to market", hence the critical importance of a marketing plan.
• If you can create a convincing markeing plan, and this is another areas where you should have a 3rd party review, an Operating Plan would come next.
• Buid Up Sales and Cost Assumptions come next to create your financial financial forecasts.

A better approach to 3rd parties is to include other business professionals along with your accountant. These can be consultants and Small Business Development Centers. A great resource is seeking out a university that has an Entrepreneurship Department. There are many professors and MBA students that can help in the business plan evaluation. For example we have our Business Ventures Program, that works with entrepreneurs to refine their plans for greater success. This is one way to be objective AND create the necessary boundaries between parent and investor.

A wonderful structire is The Family Bank. It allows you to invest in your children and have some structure and boundary separation. You can structure this as formal as your needs determine. It allows the parent to wear two hats:

• the parent hat
• the investor hat

It allows you to say "as your parent I want to support you as my child", and then you can flip the hat to say "as your financial backer, here is what the 'bank' needs to make a decision".

The great thing about a Family Bank is it allows the return of capital to the "bank". The Family Bank is what we call patient capital, giving your children the extra breathing room they need to establish the business with feeling entitled the money, just because they are the son or daughter.

The return of priciple and intrest to the bank allows the parent to reinvest in the future for other children and/or to preserve and hopefully grow the family economic capital. It preserves the financial estate for the next generation.

All the best!

 

Dom Celentano

Visit my Silberman College of Business Academic Site

You may be married but you are in charge!

Jay Goltz had a post in the New York Times, "Do Sales People Make Too Much Money?" The entire post with comments is at http://boss.blogs.nytimes.com/2010/08/10/do-salespeople-make-too-much-money/.

The story articulates how the companies very successful sales people left the company due to the owners spouse having concerns that the sales people had better homes then theirs.

I suggest the REAL lesson learned for those in small businesses; consider addressing boundaries between you and your spouse. A spouse is a stakeholder in the business, irrespective of whether your spouse has ownership interest or not. However stakeholders do not have automatic authority to make or influence business decisions.

In this case, the spouse had undue influence here... crossing the boundary that the husband never set up.

So "Mixing bosses and employees at a party can be dangerous." may be a result of a gathering but not setting boundaries with your spouse in the business can be devastating... as you point out... he is now out of business.

All the best! Dom CIG (Chief Idea Generator)

Bringing in an Outsider

I participate in numerous Family Business Forums. A recurring issue is how to bring in an outside C Level person to run the family business. I consult with Family Businesses and teach several courses on the subject at Fairleigh Dickinson University.

I find the question is always posed as a transactional one, but familes are not transactional, they are transitional. Trying to develop the transaction puts the cart before the horse... there are deeper family issues and needs to address first.  This direction is part of a new area of Family ?Business called Family Wealth Transition Planning. So, from family business "toolbox", here are a few suggestions.


The first issue I would address is why does the family want or need to bring in an outsider as a CEO? Where is the business at in it's growth curve... early stage, growth, mature, declining? Does the family have the "Human Capital" to run and grow the company or do they realize they are missing key components here? If so, what areas have they identified where they need to augment their capital?


Another issue is addressed through the answers to these questions:

1. Why does this family have this business?

2. Why does this business have this family?

I find these two questions are thought provoking for clients and they start to think a bit differently about the business and the family.

Next, a family would be well served first to identify

○ Needs
○ Capacities
○ Constraints

Each of the three above are related to the Family, Business and Ownership issues and the overlaps that occur in every family business as outlined in the ven diagram to the left. These have to be identified before the family tackles bringing in an outsider. If not done correctly, the outider has a high degree of probability of failure.


Family Businesses are one of the areas in business rife with ambiguity and there are few proven solutions since Families view their businesses as extensions of their family and we all know how different families can be.

This is not an easy "transactional" solution since families and their businesses are "transitional" by nature.

All the best... Dom

Family Business & Open Book Management? Never Happen!

My interest is always peaked when a blog post references family businesses. I teach Family Business Management, consult with them and have 30 years experience in a major family business.

Jack Stack is a blogger on The NY Times You’re the Boss Blog and he writes about Open Book management, you can check this out at http://www.greatgame.com/.


His most recent post, Messing With The Family, http://boss.blogs.nytimes.com/2009/12/22/messing-with-the-family/ discusses the difficulty of Open Book Management for family-owned companies and tells the tale of Jacks friend who was hired as a CFO to as he says "… help a nice little specialty packing company in the Midwest go open-book". Jack hears many excuses why businesses can’t open their books to employees and hears it more frequently from people who work at family-owned businesses. His point is "families have gotten used to running the business a certain way and trying to go open-book is a massive cultural change".

Many family business run non-business-related expenses through the business… for those of us who teach Family Business and consult to Family Businesses… no big surprise here. In fact sometimes one family member is unaware of what the others are charging to the business. So if you opens the books, it's all out there for every employee to see and of course question.

Sometimes a Business Needs To Rid Itself of The Family

Barbara Taylor is a regular contributor to Your The Boss Blog in the New York Times Business section. Her company helps small business buy/sell transactions and she works ith family-owned businesses regularly. She recently had a post "Even a family business is Sometimes Just a Business" She commented that "it can sometimes be a challenge to navigate not only the complexities of the business itself, but also of the family dynamics. The family and the business become so intertwined that it’s hard to tell where one ends and the other begins." .

Barbara had a prior article on working together as Co-Preneurs with her husband in her business and she was kind enough to mention my prior comment on this subject. She referenced the essence of my prior post on Family Business:

"Domenick Celentano, a family business consultant and adjunct professor at Fairleigh Dickinson University in New Jersey — who has left thoughtful comments on this blog — point outs that a business is often a surrogate family member, an inextricable part of the lives of the owners and even the community at large."

Barabara brings up that there may be a point where the business needs to move on from family onwership to preserve the business entity. However the process can be irrational and the sale of the business she discusses almost did not occur due to this irrationality.

A famous author in this area, Dolores Curran defines a family as “a group which possesses and implements an irrational commitment to the well-being of its members”. Members also include the non-family business employees and the “irrational” commitment is what baffles professionals on the workings of family business.

How Family Businesses Work

Here is a brief overview of the challenges and key differentiators in a Family Business