Family Business Forum

Tips to Investing With Family

2010-10-23T13:25:00.000-07:00

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!

2010-08-10T04:56:00.000-07:00

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

2010-06-29T05:35:00.000-07:00

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!

2009-12-22T17:38:00.000-08:00

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.

Now I agree with Open Book Management, but in a family business, that is akin to pushing water uphill. It just won’t work 85% of the time. Why 85%? Read further :)

Few people really know the basic structure of a family business.

A family business is best defined in a Venn diagram of three overlapping circles, Family, Business and Ownership. It is the overlap of each where things just get messy and conventional business strategies and tactics fail. The vast majority of business professionals do not understand the dynamics of a family business and hence try to apply these, for the most part unsuccessfully. It is no wonder that 85% of family businesses fail prior to the 3rd generation.

Usually Nepotism is pointed to in situations such as this but that over-simplifies the problem here. Family businesses are surrogates for the family system and as such they act more like a family than a business. So, can you imagine running an Open Book family? How many of us knew or know what our parents made or their net worth? How many of us remember our parents warning us never to tell anyone how much dad or mom made? "Family Secrets" rule Family Business… and one of those secrets are money and wealth.

Also, another thing that bothers me… Family Business is referenced repeatedly as some sort of homogeneous business group. Larger family businesses are different from the typical mom and pop family business picture we conjure up in our minds. Those will never open their books… they do not have the business sophistication to understand what you are proposing.

In the business he blogged about, they were 3rd generation. At that point, a family business naturally moves toward more structured methods in their operations and has a more management focus. By the 3rd generation a Family Business is ready for some house cleaning so the Open Book project he blogs about just moved things along a bit faster.

I asked Jack to have a follow-up to this story.

I find there are not enough business stories on Family Businesses and for those in family businesses, stories such as this can be "teachable moments" that may help them sustain to the next generation. For those who interface with family businesses, either as outside professionals or managers, these are examples of the necessity to better understand the unique characteristics of family business and to modify their classical business techniques to effectively deal with the Family, Business, Ownership boundary overlap.

Dom

Sometimes a Business Needs To Rid Itself of The Family

2009-12-06T19:29:00.000-08:00

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.

I tried to comment without making my post a full blown class in Family Business so here are comments and responses to several of her questions. Please note that I highlighted Barabaras questions in quotes.

“Julia, grew up in the business and loved it. In fact, it was hard to tell which she loved more, the work or the clients…”

This is called Dual Identity and occurs when the work and your life become so intertwined it is hard to see and mange the boundary. I will cover Dual Identity in greater detail in future posts.

Julia brough the family business from her mom. Buying a business from a family member is really a transition and NOT a transaction from the prior generation. And a great deal of Stewardship sets in upon this ownership purchase from family member to family member. Stewardship is a concept not well understood outside the very small profession of Family Business Consultants. It is not uncommon for a family business to prefer passing it on to another family, in the hopes of propagating the family traditions and family relationships through another family.

“Does there come a point at which loyalty to the family business comes at the expense of the family itself?”

Yes and this expense is a result of the lack of understanding that the family should strive to be a family of affinity and can continue to reinvent itself after the sale. Family Business consultants really practice Family Wealth Transition Planning. This illustrates that the wealth of a business is more than just money; it is the Human and Social capital in the business. A sale, with proper planning, may be the only way a family can continue these two additional wealth components.

“Should I have found a way to contact Julia about selling…”

No. The family was not emotionally ready and all us who practice in this field periodically ask this question of ourselves since we know that we can preserve the family for generations to come by intervening early. The famous Family Consultant Jay Hughes has a great phrase; "hasten slowly" and is very appropriate here in this example.

There was an accountant who had a comment that is unfortunately illustrative of the lack of knowledge between transactions and transitions. He reccomends to his family business clients “..the benefits of operating their companies purely from the entrepreneurial stand point….”. This is where most professionals err in so far as taking what works in non family enterprises and applying them in family enterprises. The “Family” part of the business dynamics will always have influence. It is akin to asking a family to run the family from an entrepreneurial standpoint.

One only needs to look at the successful chain of Supermarkets, Wegman’s, to see how the successful balance of both entrepreneurship AND Family has created one of the most dynamic retailers in the country.

Making the effort to have the family understand how to best utilize the Human, Social and Economic capital to preserve the Family Business and The Family is a far better way to advise family businesses.

I really appreciate that Barbara created such a wonderful post addressing Family Business in a forum, The New York Times, that will reach so many people and maybe…just maybe… this forum will help several avoid the heartache of her article.

In closing I too aggree with Barbara... yes there is “…nothing more important than family. Not even the family business.”

Dom

How Family Businesses Work

2009-10-19T05:53:00.000-07:00

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