Workshop: family business

Communication and fair play improve chances for multi-generational success

By Andrew Tellijohn

Photographs by Tom Dunn

When Rick Wall and his siblings started showing early on that they might be interested in becoming second-generation business owners in the future, Wall’s father immediately began planning.

After college, their preparation was finished after each kid went off to work in different companies across the country, both to gain experience and make sure coming home to the family business was what they truly desired.

Now Wall is CEO of Highland Bank and his siblings run the real estate businesses started by their father. They communicate regularly and help each other make sure they’re on the right track for long-term success.

“I have to hand it to my dad for having some good counsel and foresight,” Wall says.

“Because he started the process of setting us up to work together early on, when we started showing some indication that we would be interested in working with him.”

The path into working with family was a bit more circuitous for Eric Gustafson, now managing partner for the The Gustafson Group, a family business advisory firm.

He was in Washington, D.C. attending graduate school after having worked with Sen. Dave Durenberger, expecting to pursue a career in public policy when his brother called asking if he’d like to go into digital printing.

“I said ‘what is digital printing,’” Gustafson quipped.

But becoming less enamored with the East coast, he took the opportunity to move back home. And together, he, his brother and father grew the business from a $2 million entity to $10 million and sold it to a public company eight years later.

“I grew up talking business at the family kitchen table,” he says.

“My father was an accomplished entrepreneur. I never gave it much thought that I would go into the business with my brother and father until my brother called.”

Family businesses come in all shapes and sizes with all the same issues traditional businesses face – along with the added layer of family dynamics.

Several business experts discussed those challenges and some best practices for ensuring their long-term success during a September workshop at the Minneapolis Club co-sponsored by Upsize Magazine and Rick Brimacomb’s Club Entrepreneur.

Lessons learned

Gustafson says his experience left him with a wealth of knowledge on what to do and not do. The family did have a partnership agreement in place and a good buy-sell agreement that they regularly updated. That helped when it was time to sell.

“We were approached by a buyer unexpectedly,” he says. “And the sale went quickly. If we’d had to monkey around with buy-sell and formulas and all that stuff, I think it would have been a lot more complicated.”

There are a few things he’d do differently, however. He wishes there had been a more formal onboarding process because he found the learning curve steep and stressful.

He wishes the company had hired a conflict resolution facilitator to check in periodically.

“In hindsight I think just a little planning and training would have gone a long way,” he says.

Not forming a subcommittee of the family’s advisory board to deal with compensation, bonuses and reinvestment strategies was also something he’d do differently if another such opportunity arose. Gustafson and his brother set their compensation via a handshake.

“My brother and I shook hands and said ‘we’ll make the same amount of money forever,’” Gustafson says. “Of course, things change, people change.

It was a good handshake on my part, maybe not for my brother. It shouldn’t have been done that way. It was informal. It should have been done more professionally.”

Compensation and fair play

Compensation between family member employees and those who don’t share the birthright along with making sure that those family members pull their own weight and fulfill their responsibilities can be a major challenge for family businesses, says Lisa Holter Ankel, attorney and shareholder at Avisen Legal.

It’s important, she says, to make sure you’re not creating two classes of employees, she says.

“You’ll disincentivize your good employees who aren’t part of the family who may think ‘I’m never going to be eligible for the same bonuses and pay,’ she says. “That’s not a good thing to do. You want to keep your good employees just as happy as your family employees.”

Holter Ankel also often sees family businesses where there is someone not pulling their weight but they cannot be fired or moved to a different role because of family relationships. The resulting workload shifts onto other employees are unfair and ultimately a source of dissension.

Family members, she says, should be subject to the same reviews, coaching and practices as non-family employees.

“Someone else has to do their work,” she says. “It leads to resentment and dysfunction within the business, so it’s not a great relationship, and it’s also bad for the business.”

It’s important to communicate upfront and prove with actions that family employees will be treated the same as non-family workers.

They’ll have job descriptions, comparable market play, and they’ll get coaching and training if they have difficult personalities or shortcomings in their skillsets.

“If you set mechanisms up in your business for that in advance, when there is a problem it’s much easier to implement,” Holter Ankel says.

Outside advisers

One method for dealing with such challenges is bringing on outside advisers who can help mediate issues in an unbiased way. The advisory board utilized by Gustafson’s family met three times annually.

It had two non-family representatives who focused on financial performance, sales, balance sheet items and performance evaluations.

Sharon Bloodsworth, CEO of White Oaks Wealth Advisors, says she belongs to a peer-to-peer group for CEOs and family business members and she notes that those discussions often highlight advisory board dysfunction. That said, they can prove useful as long as organizations are filling them with smart people with a variety of viewpoints rather than just those who agree with management.

“I always think if they are not smarter than you, you’ll have nothing to learn,” she says. “Fill your boards with people who are different from you.”

Those advisers can come from any number of places. Some recommended starting with a personal network. Others suggested looking at facilitated peer groups, such as the Women Presidents’ Organization.

And do it early.

“If that isn’t put in place when things are going well, it can be really difficult to add it when things are going poorly,” Wall says. “Because by then people have entrenched positions and they don’t hear the outside voice as reasonable as they might if it was always there.”

One other word of caution from the experts:

Be clear upfront, Bloodsworth says, whether you are looking for people to advise you or truly people who are going to have oversight over the company and have the ability to, for example, remove the CEO if needed.

Holter Ankel agrees. Statutory board members have legal and fiduciary duties and there are a lot of responsibilities and liabilities associated with the role.

“An advisory board,” she says, “you can take or leave what they say. You have to think about them in different ways. Organizations can have both.”

Succession planning in advance

Experts were united in their belief that creating a succession plan and actually communicating with members of the potentially incoming generation about their roles and what it takes to succeed is vital for the future of the entity.

“Your succession plan has to start today. Otherwise you’ll reduce the value of your business, unintentionally,” Bloodsworth says, adding that as part of the discussions, families should update buy-sell agreements and make sure other legal documents are in place, just like in any other business.

“Go back to your documents and really live them,” she says.

“Quite often you put a buy-sell together pretty quickly and you put in place a valuation metric that you think is reasonable, but it may have been 20 years ago. So, really refreshing and really planning for your worst-case scenario is the smartest thing to do for a family.”

Figuring out what the current owners want out of a sale and what their long-term goals are also is a big step.

“If maximizing cash flow is the goal versus having a legacy left to the family, those two goals may not be fully compatible,” Holter Ankel says. “If legacy is the priority, the business owner should start thinking about funding their retirement early. They’re not going to be able to cash in or extrapolate all the value of the business.”

Consider getting valuations of the company, she adds. “Sometimes knowing your company has a high value and a high marketability is going to give you insight that the best choice would be to sell to an outsider.”

The earlier the better, adds Gustafson. He works with one company whose CEO is likely to stay another decade. He notes that it’s better to be safe than sorry.

“My experience is every family is different, every business is different,” he says.

The family council established by the Wall siblings decided, for example, the age at which children can start working with in the business.

“We did that when our oldest was about 4-years-old,” Wall says.

Communication

And make sure to communicate, he adds. The family council established by the Walls was in place for a couple years.

“It was a good opportunity for us to join, especially, the spouses into the process,” he says.

We also had a retreat where we would go away and talk about business. Spouses eventually rebelled against traveling to sunny places and sitting in boardrooms rather than on beaches, so that soon turned into a vacation instead.

But the Wall siblings still have weekly calls to discuss immediate issues. As a banker today, one of the biggest challenges Wall sees is the older generation’s unwillingness to be clear to the next generation about their succession plans.

“If you find yourself in that situation, you can certainly find someone to help you with that,” he says. “It can be really bad for the business.”

Gustafson suggests having an outside facilitator help with some of those discussions. He works with a few companies in such capacity, creating agendas for meetings and helping keep talks professional.

“In my experience, that helps a lot,” he says.

Bloodsworth put it bluntly. Share information with your heirs about how quickly wealth dissipates and talk with them about what must happen for the family to stay financially healthy into future generations.

“There is a lot of conflict avoidance and lack of planning just because you don’t think your adult children are ready to start the process,” she says. “You would be surprised how ready they are before you think they are.”

CONTACT THE EXPERTS

CONTACT:

LISA HOLTER ANKEL, attorney shareholder at Avisen Legal: 612.584.3401; lh**********@*********al.com;
www.avisenlegal.com.

RICK WALL, CEO at Highland Bank: 952.858.4753; ri*******@***********ks.com; www.highlandbanks.com.

ERIC GUSTAFSON, managing partner at Gustafson Group: 612.239.7833; er**@***************up.com;
www.thegustafsongroup.com.

SHARON BLOODSWORTH, CEO of White Oaks Wealth Advisors: 612.455.6900; sh****@*************th.com; www.whiteoakswealth.com.