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Family business: How to pass the baton
Thursday, 14 April 2016 15:49
 
 
Retail CEO Jack Mitchell outlines how his family's business has been able to successfully pull off succession from one generation to the next.
 

FORTUNE — Fifty-four years ago — with three suits, a coffee pot, and a dream — my parents, Ed and Norma Mitchell, founded a men's clothing store in Westport, Conn., in a little 800-square-foot building.

 

In the mid-1960s, my brother Bill and I joined the family business, and in 1974 our parents passed the torch to us. By the mid-1980s, Bill and I had built the business into a dominant clothing store in Westport. In the 1990s, our seven sons came aboard, along with my wife Linda, and the business has grown into the largest family-owned upscale clothing store in the United States, with sales exceeding $100 million.

 

Can you imagine spending half of your working life in a family business, beside your mother, father, and brother, and all getting along? And then spending the next half of your work life with your brother, your spouse, your four sons and three nephews, and still all getting along? I pinch myself. We have been able to create an environment of mutual respect and trust, one where we can function as a team that shares the emotional and intellectual challenges of business along with its financial rewards.

 

The succession from the second to the third generation has been a joyful journey, so much so that we have already begun to plan for the transition to the fourth generation. When I think back over our half century, I can identify seven things that made it all go smoothly.

 

1. Passion to pass the torch

You have to want to do it. You have to want to pass the equity and the responsibility to the next generation. My mother and father had this passion, and my brother and I embraced it.

 

2. Asking for help

My father gave us a wonderful phrase that my brother and I adopted: "I need your help." To shape a successful succession plan, we needed help. We didn't know everything about family businesses and so we agreed to study successful ones. In 1979, we joined the Forum, a networking group of a dozen or so similar family businesses. At a 1985 meeting, David Bork, a family business consultant, gave a talk that resonated with us. The next day, we hired him. Bill and I worked with him for several years on our plan. We also set up an outside advisory board to assist with this and other strategic issues.
David shared with us from the beginning that we should think of our family business as a business first. In other words, run it as a business, and most of the time what is good for the business is great for the family.

 

We were blessed with seven bright sons who went to excellent colleges and did well. We wanted them to make their own decisions about their careers. If they wanted to enter the family business, our arms were open, provided that they satisfied two rules we established in the late 1980s. I intensely dislike rules, but David and Bill convinced me that we needed to have a couple of firm ones.

 

3. The five-year rule

Our sons had to work five years elsewhere after finishing college. This rule was not popular with our father, who was still very much with us. He worried that we were sending his grandsons "out to pasture" and that we might lose some of the great talent and passion for the business that his grandsons had already demonstrated.

 

While Bill and I recognized that risk, we felt they had to gain experience, self-confidence and an understanding of what a real job is about in the real world. They needed to know what it meant to be hired, transferred to a different city, promoted, pushed, and pulled by someone other than their father or uncle. If they decided on becoming an astronaut or a podiatrist instead, we would support it wholeheartedly.

 

The five-year rule not only gives the next generation work experience, it also gives them wisdom they can bring into the family business. When our sons join the business, they made positive recommendations, and my brother and I respected them even more because they had these outside experiences.

 

Russell worked at IBM, Bob at Sports Illustrated, Andrew at Footlocker and Godiva Chocolatier; Todd at Apple AAPL 0.02% ; Scott at Eddie Bauer, Abercrombie and Fitch ANF -2.23% , and Ann Taylor; Chris at NBC Sports and Neiman Marcus; Tyler at Henry Bucks in Australia, Brioni, and Harry Rosen in Canada; and Linda worked at her own family business.

 

4. No guarantees

The second rule was that a family member was not entitled to a job simply because their name was Mitchell. They needed to be qualified, possessing both the skills and the passion to grow within their area of responsibility. Our sons ended up choosing different areas: one picked finance and administration, another sales and merchandising, another marketing, and several managing newly acquired stores. Our outside advisory board and our consultant David Bork supported this policy.

 

And now, after 20 years, our sons and nephews hold leadership positions within our company. Two of them are co-presidents and will soon become co-CEOs.

 

5. Pass the equity early

When our oldest sons, Russ and Bob, were 29 and 27, and Tyler, Bill's youngest son, was only 13, my brother and I gave them a large percentage of the equity of the business. Sixteen years later, the remaining stake was transferred. We trusted them with our business early, and they became much more responsible and accountable because they were owners. They stuck by the guiding principles and values that had served us well, building relationships with each and every associate, customer, and vendor by treating them as friends, and measuring every facet of our business.

 

6. Provide financial security to the senior generation

A solid succession process requires a financial plan that allows the older generation to retire with enough assets outside the business to ensure that "money" is not the reason to remain in control forever. Often, when all of their assets are in the business, the owners not only tend to stay active too long and block the next generation from leading, but they also become too conservative, unwilling to take bold risks out of fear that they might cripple the entire business.

 

7. Communication: candid and transparent

Of course, our family has had its share of challenges. We are not perfect. And over the years, all of the family and senior non-family executives have agreed that a lack of transparent communication would be the only thing that could pull us apart. So we have many different, yet important, meetings.

 

Faithfully, we have scheduled weekly Tuesday morning family meetings. We discuss in a confidential way, in a safe haven of sorts, any issues that are on the active working family members' minds.

 

We have had a Family Council since the mid 1990s, which consists of all members of the Mitchell family descended from Ed and Norma, our parents, who are 14 years old and above, including spouses.

 

8. Have fun

We work hard and we play hard. Of course, things are not always perfect, yet we clearly all enjoy our family fun.

 

 

 

 

Source: http://fortune.com/2012/07/09/family-business-how-to-pass-the-baton/

 
 
Passing Your Business And Wealth To The Next Generation
Thursday, 14 April 2016 09:40

This Article is aimed towards Asian Business but there is advice that can be taken on board for the Irish Famiy Businesses out there... Enjoy! 

 

 

You've invested years of hard work to successfully build your own business and wealth, so it is natural to consider how you can successfully transfer the fruits of your labor to your heirs–the next generation of leaders and beyond—in order to carry on the family tradition. After all, if a family enterprise were a relay race, it would make no sense to lead first leg, then not provide those runners who follow with the best tools and training to keep the pace.

 

Unfortunately, very few Asian family businesses see the importance of having proper business or personal wealth succession plans. This is partly because succession planning is closely associated with the eventual demise of the founder, which is a taboo subject in Asian culture. Another common reason is the founder's reluctance to let go of the business, failing to see the family business enterprise as a continuum. It is not uncommon to find immensely successful entrepreneurs in their 60s who are reluctant to cede control to their children as they continue to play significant roles in driving growth of the business. In fact, by the time they pass control to their progenies, many of these founders would be in their 70s.

 

This preference to have direct control and ownership till the very last minute often has adverse repercussions. By then, either the founder has become physically or mentally weak, or conflicts would have arisen, with various family members bickering or having devised ways to get larger shares of the family wealth. Successful families often assume that their current harmony will perpetuate across the different generations, and this leads them to think that detailed estate and succession planning is unnecessary.

 

 

Your Strategy for Succession

As Benjamin Franklin once said, "By failing to prepare, you are preparing to fail." Procrastination or failure to plan for the future may result in your wealth being jeopardised by multi-jurisdictional claims such as offshore taxes and challenges arising from family disputes. It doesn't have to be that way.

 

Through thoughtful succession planning, you will be able to tell your family how you would like your affairs and finances to be handled when you are no longer around. It provides clear instructions on how to distribute your assets, including the business, money, property and other elements of your estate.

 

It is important to identify the most competent successor early on. Trying to divide the business equally among family members will leave it more vulnerable for takeovers, especially if it is not sizeable, or if there are many children involved.

 

Utilizing Your Succession Team

A will is one tool you can use to ensure the type of succession you want, since it serves as a roadmap that your family and the courts can use to deal with assets according to your preferences. Without this tool, nobody can accurately second-guess your wishes, and the courts will have to fall back on intestacy laws of the deceased's domicile country to settle asset distribution.

 

Estate and succession planning, however, goes beyond writing a simple will. It is a holistic exercise typically involving your accountant, private banker, wealth planner and lawyer. As part of the estate planning process, this team puts together a 360-degree system to expertly guide you towards achieving the optimal fiscal benefits from your investment activities. This approach also will ensure that trusts, insurance and collective investment fund solutions can be put in place to most effectively address your family's ongoing needs.

 

To be meaningful, discussions with your team are likely to be intensely personal, and more than one meeting will be needed. You will need to be prepared to share confidential details on all aspects of your wealth, including the finances and outlook for the family business, an inventory of all assets, and how you would like to provide for family members. You will need to identify the financial as well as human and intellectual capital you have amassed.

 

You also can specify the core values that you hope to perpetuate in the ongoing family business. For example, if you would like future generations to continue to support the needy, you can specify that a percentage of your company's annual revenue be dedicated to scholarships for disadvantaged students. This is not only intrinsically altruistic, but can educate successive generations of the family to look beyond merely whether the company is paying good dividends to preserve their financial futures, but also pursuing the more long-term social and economic values of the family.

 

Benefiting From Trusts

Trusts can be effective instruments for distributing wealth to your children, whether they are involved in your business or not, offering several advantages:

 

• A trust allows you to dictate how your money is to be managed and distributed, and by whom, during your lifetime, or after death.

 

• It can include systematic instructions on how your heirs will benefit, as well as pre-requisites with which they must comply before they can receive their funds.

 

• It can include a dispute mediation mechanism to dictate how key disagreements in relation to the use of the trust assets are arbitrated.

 

With comprehensive legal advice, a trust can also protect wealth by mitigating any tax exposure triggered by cross-border asset acquisitions or the multiple nationalities/residences of the family members.

 

Planning Now for Optimal Results

A successful estate and succession plan should start early, when you are still in charge. That way, you can put the right framework in place for your heirs to set the ground rules for every successive generation – helping to ensure wealth, sustainability and family harmony.

 

Ultimately, the key to achieving the full benefits from wealth and succession planning lies in the execution. The best estate and succession planning strategies will still need a dedicated team with extensive global experience and on-the-ground expertise to ensure seamless execution of your objectives.

 

Very often we come across Asian families being serviced by trustees located in distant tax havens, with no local knowledge of the needs of Asian clients or appreciation of the Asia methodology of dispute mediation. Bank of Singapore's wealth planning specialists, on the other hand, are all accredited Asian estate practitioners with decades of experience, and an acute knowledge of the nuances and sensitivities of Asian families. These attributes enable us to proactively suggest action plans that will address any evolving family dynamic and needs, thereby avoiding escalation of family tension and confrontations where possible.

 

Like a relay race, ensuring continued wealth and success for those who will follow means putting together a team and strategy that will give you the best shot at success. Doing so will ensure that you and your successors are winners.

 

 

 

 

Source: http://www.forbes.com/sites/bankofsingapore/2015/11/16/passing-your-business-and-wealth-to-the-next-generation/#60a1ea2a1763

 
4 questions every trusted family business adviser should be able to answer
Wednesday, 13 April 2016 14:53

David Harland CPA has seen generational family businesses fail for lots of reasons, but there are almost always common threads. He gives his advice on the questions that should be answered successfully. all family businesses should have these in order to survive and go one as one might hope with their company. Read more below:

 

More optimistically, I've seen lots of family businesses succeed to their third, fourth and fifth generations. Again, there are almost always common threads. The best advisers guide their clients away from potholes and into a smoother road to long-term success.

With that in mind, here are four questions every trusted adviser should be able to answer about their family business clients.

 

 

1. Does your family business client have a succession plan?

A family business needs a viable succession plan. The average Australian family business doesn't make it past two generations, in large part because the average family business has an ineffective succession tradition. It's a major obstacle and one too few trusted advisers take seriously enough.

Family-run businesses without serious succession plans have likely never had a robust conversation about how to construct one. The task could be simple, but it often isn't. Every major party needs to be consulted and lots of considerations must be made, which can seem a daunting task for an already busy family group.

A good family advisor realises this is a journey, not an event. The first conversation (or even conversation about having a conversation) may not go over smoothly. The current leadership needs to be prepared for life after the succession. The new generation ideally has sufficient financial knowledge, prudence and entrepreneurial instincts to take over. Multiple heirs only complicate the process.

As a general rule, more complicated families should start their succession plans earlier and re-evaluate progress more frequently. Planning is time consuming and often uncomfortable. That doesn't mean it's too difficult to understand or can't be done the right way.

 

 

2. Do they have family governance structures in place?

According to 2014 research by Ernst & Young, there is "compelling evidence that the largest and longest-lasting family businesses in the world became – and remain – successful by optimizing both family cohesion and profitable business growth."

How do you optimize family cohesion and business growth? Formally, intentionally, directly and professionally. Create a family governance structure and stick to it.

Formal governance structures are less commonplace than family succession plans. For serious families, though, a governance structure can be an excellent governor on behavior and encourage good practices for a long period of time.

What does a family governance structure do? In effect, it creates a formal process and structure by which important decisions are made and important issues are discussed and resolved. The formal structure should address everything from succession talks to raising capital to avoiding conflict.

In the past I've identified three essential ingredients of family governance. These include ensuring each family member (or other key players) has a voice, that the family defines its missions and values, and that governance structures are viable and enforceable.

Many family businesses initially push back against the idea of a family governance structure. I've previously argued one way to make it more attractive is through a combination of hope and fear. Both arguments are clear: clients should hope to create a long-term legacy and hope to see their successors grow, innovate and thrive; clients might also fear sudden crises – whether a health or financial crisis – crippling their business because they lack a sufficient contingency plan.

 

 

3. Do they have an employment policy that employs the best people for the job?

Success creates its own problems, especially in family businesses. Consider the case of Cornelius Vanderbilt, a 19th-century railroad and shipping titan who, at his height, build a family business worth more than A$322 billion in today's dollars. By 1970, no single heir was worth even A$1 million.

Between nepotism, favoritism, infighting, and a general sense of entitled privilege, the Vanderbilt family managed to squander one of the great family fortunes in history.
Today's family businesses must ensure they're employing the best people for the job, regardless of last name. This means professionalising the employment standards for family and non-family employees. As with succession and governance plans, employment standards need to be formal and explicit.

 

 

4. Are they engaging and embracing the benefits of the next generation?

It is a well-documented fact that family businesses benefit when they encourage children to first work outside before coming back to the family trade. A young adult can leave university and work for a neutral manager and for a business without his/her family name on the wall. This teaches the importance of self-reliance, accountability and merit-based achievement.

Often, they can return with new skills and outside ideas. Those can be seeds for future growth they wouldn't have otherwise had.

Current non-family employees will also benefit, because they'll know offspring have to earn their titles, just like anyone else.

 

 

Source: http://intheblack.com/articles/2016/04/04/4-questions-every-trusted-family-business-adviser-should-be-able-to-answer

 
Family businesses need to plan for the future
Wednesday, 13 April 2016 09:10

Recently ranked as the greatest street in Ireland and Great Britain, Cork's Oliver Plunkett St holds lessons for towns and villages across the country.

 

Key among these lessons is the importance of family businesses in creating a retail landscape that encourages people to become loyal customers over many years, as opposed to fleeting consumers.
 
 
There are many examples of well-known family businesses on the street — from Keanes Jewellers to Caseys Furniture. 
 
These are multi-generation family businesses which have been rewarded with people’s repeat custom because of the level of service they deliver.
 
 
When the recession hit, businesses depended more and more on those that had supported them over many years. Many family businesses which had maintained a personal connection with their customers were able to survive for this reason, and the vibrancy that has been sustained on Oliver Plunkett St is a real testament to that.

When I wrote Family Business: A Survival Guide, I discovered there are a lot of thingsfamily companies could teach the wider corporate community.

 

Paying attention to detail, going the extra mile, and developing positive relationships, by treating customers with respect and putting them first, are qualities that should be applied in every single trading scenario, and these are things family businesses do really well.

 

I also discovered there are challenges that great family businesses have to overcome which are not faced by other types of businesses.

 

These include sibling rivalry, unhappy parent-child relationships, and succession issues, where the involvement or non-involvement of the next generation has the potential to upset the running of the business.

 

The great family business owners I spoke to — including Darina Allen of Ballymaloe and Marian O'Gorman of the Kilkenny Group — had one thing in common. They have all adopted a collaborative approach to planning for the operation of the business now and in the future.

 

The impact of disagreements in a small business can be very significant. Other non-family employees will be unlikely to commit to the future of the company where there is discord.

 

It is a striking statistic that only 33% of family businesses survive from one generation to the next.

 

It does not help that perhaps the biggest weakness for family businesses in Ireland is succession planning. Every business needs to make a plan for when the current CEO or other senior leaders move on.

 

In a family business, this can be complicated because the question whether a family member or non-family will take the reins arises. If it is to be a family member, it is not always obvious which one will take control and non-family employees can depart the business if they feel they were unfairly overlooked when a son or daughter with less experience steps into the top job.

 

To make sure the succession is planned for correctly, the business leader should consult with the various generations involved, ensuring that the selection of successors is fully considered. The needs of the business must be thought about, as well and the opportunities and challenges it is likely to face.

 

A succession steering committee, consisting of certain management and family members, should be assembled and made responsible for the planning, preparation and transition management of the succession process.

 

The succession plan prepared by the committee should set out the expected date of retirement; the first in line to succeed; other personnel changes arising and any future role of the former CEO. It may take a bit of hard work to get there, but once you have a document like this, hammered out by consensus, it will clear the path to a successful handover.

 

As the success of Oliver Plunkett St makes clear, family businesses have an important contribution to make to the corporate and retail landscape in Ireland. With good planning, there's no reason such companies can't be around for generations to come.

 

* Kieran McCarthy is a partner and head of the Cork office at Hughes Blake and author of a book called Family Business: A Survival Guide.

 

 

 

Source: http://www.irishexaminer.com/business/features/family-businesses-need-to-plan-for-the-future-381749.html

 

 

 
Why the next generation should first succeed outside the family business
Tuesday, 12 April 2016 11:21

Ireland's next generation of family business owners should consider working in another company, and maybe even another field, before returning to the family brand. Each offspring, no matter how strong the bond with the family, should build on their formal education and test their skills in the open market, work for a new boss or two, and establish a threshold of responsibility to implement their own ideas.

 

 

Outside experience is healthy for individuals and the business. The specifics of the outside job are probably less important than the journey away from home. Of course, professional positions in sales, production, marketing, human resources, research or other operational fields can be very constructive. Young workers need to understand the value of uncertainty and meritocracy, both of which might be lacking when your surname is written on the company building.

 

 

If the new job is in the same industry, the future successor can develop his/her own personal network and learn crucial skills — maybe even gain first-hand knowledge of useful ideas from competitors.

 

 

A job outside the same industry as the family business can be equally useful, especially if the next genner has always wondered what life outside the family industry is like. An added bonus: young people get the chance to be young and possibly foolish away from the eyes and ears of their future colleagues or employees.

 

 

Most children share certain passions with their parents, but most have different interests, too. Much like a university experience, the next generation worker will benefit from being around those who share their interests and passions. They may even find someone of similar mind and talent to incorporate into the family business down the road.

 

 

The larger the family business, the more important it is for future leaders to have a sense of working for someone you aren't related to. No matter how objective and fair-minded the parent, a child won't get a true sense of that independence and perspective while shaded by the family umbrella.

 

 

In numerous surveys, Family Business Australia and KPMG have found that successful family businesses tend to have children who are more educated and worldly than the general population. "More than 75 per cent of respondents had completed some vocational or tertiary training after leaving school," one survey found. "These figures are significantly higher than those of the population at large."

 

 

One participant said that businesses don't just benefit in the long run when the next generation initially leaves the business. The short run benefits can be felt in the current staff. "It's also good for the other staff in the business, who can see a clear prerequisite for family members to join the business," said the unnamed participant. "In turn, it's better for the culture of the business."

 

 

There are obvious benefits whenever the next generation eventually return to the business. "If a role is created just for you," said another participant, "instead of a real business need, then it makes it more difficult to build respect with other staff."

 

 

Another study found "group participants agreed that entry rules regarding education and experience should be encouraged and even written up formally for future generations."

 

 

Stories of success

 

Ross Brown, third son of John Charles and Patricia Brown, has known the wine trade his entire life. His family business, Brown Brothers Winery, has been an institution in northeast Victoria since 1889. Ross served as CEO for ten years before moving to executive director in 2011, and he stresses the importance of long-term planning — for business and for family.

 

 

"In our business we plant a vine to make wine in five or six years' time," Ross said in a July 2011 interview, explaining why family members must work a minimum of four years at another organisation before moving returning to the Brown family business.

 

 

In a separate interview with Drinks Trade Insight, Ross reaffirmed his belief in the outside work requirement. "It has the potential to continue to bring outside skills and knowledge back into the business."

 

 

The Brown Brothers family formalised an outside work requirement into a non-negotiable clause, and it keeps their family values codified for each generation to share and keeps the next generation from becoming complacent.

 

 

Sheree Sullivan, director and manager of Udder Delights in South Australia, said outside work was critical for the business' early survival. Her father and mother, Trevor and Estelle Dunford, started the company in 1995 with just two goats. Sheree and her husband Saul bought 50 per cent of the company 10 years later and says her family's success can be traced to its "migrant model".

 

 

Everyone, including her parents, worked outside jobs when the business was getting off the ground. There, they learned "a unique and very diverse skill set," says Sheree, including business administration and equipment maintenance.

 

 

Source: http://www.theaustralian.com.au/business/business-spectator/why-the-next-generation-should-first-succeed-outside-the-family-business/news-story/edc68c531c0c6809db066ad2353d9379

 

 
Managing Conflict Creatively in Family Business
Tuesday, 12 April 2016 10:57
Keys to Success
 
Do you know what one ability has the most to do with longevity and success in family owned businesses? Well, if you guessed conflict management then, you're correct. It is up there on the list with Strategic planning.
 
 
What's So Important about Having a Conflict Management Process?
 
You've probably heard the saying "the bone is strongest where the break heals" (that is actually medically true!). The same applies to relationships, and this may, if fact, give family firms a competitive edge. Unresolved conflicts are harmful and put the family and business at risk. Family companies are emotional systems that are more likely to have conflicts. Families and businesses that have developed effective ways of managing conflict are those most likely to survive and thrive. Several studies on marriage and families suggest that the largest number of marriages fail because of lack of conflict regulation techniques. In my work with families in business, I have observed that those who do well are those who have found ways to regulate and appreciate differences of opinion even if potentially explosive. They enjoy a competitive advantage, as they are better able to work together, trust each other, and react faster to the changing economic environment. It also leads to better, wiser decisions. I have also found that families who were good at compromising and conflict regulation had less sibling rivalry among the children.
 
 
Remember:
 
Conflict is normal and differences of opinion are healthy. Managed conflicts are beneficial it can build self confidence in emerging leaders while also Strengthening bonds
It can create rich diversity and more options or the family but conflict must be dealt with quickly and fairly. The process is as important as outcome.
Hard bargaining is a poor second to interest based negotiations
 
 
 
Prevention is best, of course
 
The following are 'best practices' to prevent conflicts:
 
Clear strong leadership, meritocracy based.
 
Family employment policies: compensation, employment, exit and entry, reviews.
 
Formalized family meetings.
 
Strong, effective governance with independent board.
 
Formalized family meetings for processing individuals beliefs and creating shared understandings.
 
Communication is open and direct.
 
Good HRM practices in the business for family as well as non-family employees.
 
Dealing with issues and conflicts as they arise in a direct, timely and open-minded way.
What are the unique challenges for families in business?
 
Families in business have much greater challenges; the stakes are very high. Relationships and assets are at risk when conflicts are not managed. The family is an emotional system that can be the 'glue' but can often derail sound business decisions and create rifts. Since families exist in past, present and future, in emotional time, the past is always present. Old hurts, loyalty challenges, disappointment can last a long time.
 
What to do with conflict?
 
Remember any human system is also an emotional system, with a long, complicated history, working in emotional time. In any emotional system, a fair and timely process offers safety and predictability.
 
  1. Establish a fair process
  2. Build in safety and predictability so individuals will know what to expect
  3. Get buy-in from parties
  4. Use it!
 
What comprises a good, fair process?
 
Here are steps to follow in managing any conflict:
 
  • Ground rules
Who are the critical decision makers?
How will we make this decision?
How long will we give to this?
What are the rules of engagement?
 
  • Initial Positions
Statement of problem
Statement of each parties position
 
  • Interests
What do they each care about?
What is the motivation for taking their stands?
This answers the question 'why'?
 
  • Create solutions
"Out of the box" thinking
Invent options
Brainstorm
 
  • Get objective criteria for each option
Reality check
What is the industry standard?
What are the requirements for that position?
How do we review that investment strategy?
 
  • Reaching/crafting an agreement
Open discussion of the choices
Weigh the options
Combine elements, if possible
Make the decision.
 
 
Should you wish to seek more advice on Conflict and Resolution in Family Business you can contact us at any stage. We are happy to help you where possible. 
 
 
 
 
A New Paradigm for Family Wealth Planning
Tuesday, 12 April 2016 10:11

 

For some ultra-high-net-worth families, the idea of stewarding the family's wealth by committee was unheard of two generations ago when decisions were largely made by autocratic family elders.

 

Now, a new report, Family Decision-Making: North American Family Wealth, suggests that today's ultra-high-net-worth (UHNW) families (those whose wealth exceeds $25MM) are using increasingly democratic decision-making structures—and finding that this formality is actually a positive catalyst for family relationships.

 

This report from Morgan Stanley Private Wealth Management, in partnership with Campden Wealth Research, surveyed 59 individuals from UHNW families to examine how UHNW families make financial decisions as well as the effect these processes had on family relationships. Forty-four percent of respondents said decision-making about family wealth had a positive impact on their familial relationship. Only 16% said it had some negative impact and 3% said it had a strong negative impact.

 

A well-organized, democratic decision-making process, it seems, may actually help boost family harmony.

 

How Families Make Decisions

"We weren't set up for compromise. [For] my father's generation, the golden rule was 'He who makes the gold, rules,'" writes one third-generation member of an UHNW family. But when this survey respondent's parents died, chaos ruled. Some of the family wanted to keep the money together, but without a figurehead or a history of group decision-making, family members with "incredibly different goals" found themselves mired in conflict.

 

Eventually, with the help of a professional facilitator, the family set up an office that managed both collective and individual assets, and established a voting system. The family now reports they are generally able to come to consensus-driven decisions.

 

The report shows that many families are now addressing unique multigenerational challenges in new ways, including investment-policy and mission statements; organizing committees that meet regularly to make both family and financial decisions; consulting professional advisors; and sometimes hiring outside CEOs to run the family office.

 

An Evolution for Family Decision-Making

David Bokman, Head of Ultra-High Net Worth Resources for Morgan Stanley, has watched this evolution toward formalized decision-making with approval and says it's worth the effort to overcome any initial resistance from family members.

 

"Formality is often awkward to implement because family relationship issues are often unstated and difficult to acknowledge. Yet formality maximizes the opportunity for success by improving conversations both within the family and between the family and its financial advisors," says Bokman.

 

One of the most common ways families are formalizing decision-making is to create a family mission statement, which lays out goals and values. Two thirds of UHNW families either have a mission statement or plan to create one. Another popular avenue is an investment policy statement (IPS)—a document laying out parameters such as a family's investment goals and how much risk they are willing to accept. Just over half of families surveyed either have an IPS or plan to create one, and the majority (53%) consult an external advisor when they do so.

 

When it comes to decision-making structure, the family committee is popular, with nearly six in 10 families using such a group to make decisions about family governance. Family committees are also the most common way to plan philanthropy and family wealth education. The latter, Bokman says, is an area where many UHNW families need to make sure the next generation is ready to take up the mantle.

 

 

Family committees can also make financial decisions, such as determining asset allocation or investing in a specific opporunity, but those calls are more likely to be made by professional advisors or a CEO, who may or may not be a family member.

 

The Family Wealth Advisor Role

The report also found that the single biggest influence on an UHNW family's financial decision-making is the professional advisor. Nine out of 10 families said their Financial Advisor had significant influence in family wealth decisions.

 

Survey respondents reported that a professional financial advisor was used in 41% of cases for overall asset allocation, and a family advisor or family office executive in 38%. These same non-family members also helped make decisions about specific opportunities in 44% and 35% of cases respectively, and to divest in vehicles or companies 41% each of the time.

 

Recruiting an outsider to help steer the ship is wise since some UHNW families can fall victim to the same cognitive biases that plague other investors. For example, the study uncovered a common optimism bias, the feeling that one is at less risk of suffering bad outcomes than others. While nearly half of the respondents expect the overall investment climate and global economy to get worse in the year to come, eight out of 10 expected their own household portfolios to improve or stay the same.

 

Bokman expects this new report will help families and their advisors get the ball rolling on the two-way discussions necessary to preserve intergenerational wealth and harmony.

 

"Our hope is that the findings in the report provide perspective, contributing to family discussions on setting goals and creating strategies to achieve financial, social and philanthropic ambitions for ultra high net worth families."

 

 Need further advice on how to go about managing your Family Wealth, Contact us here at Family Business Ireland. 

Source:

http://www.morganstanley.com/ideas/family-wealth-planning

 
10 Questions to Ask Before Family and Friends Become Business Partners
Monday, 11 April 2016 11:55

 

Ringing a family member or friend on board as a business partner may seem like a fine idea, but the relationship can prove tricky to navigate--or to end, if things don't go well. "It's easy to get into business, but it's hard to get out," says Wayne Rivers, president of the Family Business Institute, a consulting firm based in Raleigh, N.C.

That means you need to take a step back and think carefully before partnering with a friend or relative. Here are 10 key questions to consider:

 

Are we in it for the same reasons?
Be clear about your goals. Do you want to expand your business and eventually sell it, or build something your family can pass down? "The mistake is not being clear about what your intentions are," says David Ransburg, a consultant with The Family Business Consulting Group, Inc., based in Chicago. If you don't have the same goals for the business, you'll have a hard time making plans or coming to a consensus on big decisions.

 

What is this person bringing to the job?
Don't let your relationship color how qualified and well suited for the job your potential partner might be. Think about the credentials and level of commitment you would expect from anyone you were giving such a key role in the company. You may want to write a job description with qualification requirements and see how the experiences of a friend or family member measure up, Rivers says.

 

Should you offer an equity stake in the business?
You need to decide whether you want to offer your new partner an equity interest in the company, and if so, how much and how soon. Not only do you want to be sure a potential partner can add value to the business before sharing ownership, but you also should consider giving the person an interest in the business over a period of time, say five years, rather than all at once, says John Davis, faculty chair of the Families in Business Program at Harvard Business School. It can be easy to deal informally with family and friends, but you want to make the terms clear in a signed shareholder agreement.

 

What will happen when we can't agree?
Resolving conflicts with family and close friends can be particularly challenging because personal feelings can easily get mixed up with business decisions. "With friends and family... you might make more knee jerk reactions," says Ira Bryck, Director of the UMass Family Business Center in Amherst, Mass. "You can be your worst self where you need to be your best self." You will need to figure out a way to remain professional by taking personal feelings out of decision-making and focusing instead on objective measurements and standards.

 

How in sync is our risk tolerance?
Despite your personal connections, you and a family member or friend may feel very differently about taking risks. For example, an older sibling who saw his parents take many risks when starting the family business might be more willing to take risks himself than a younger sibling who got involved later when the company was more established, Bryck says. Determine how in sync you are on such vital decisions as launching new products or trying out new forms of advertising. While you can certainly disagree from time to time, you don't want to constantly butt heads.

 

What will each of our roles be?
In a 2010 study of 518 family-owned businesses, the most successful ones had made each person's role in the company clear upfront, says Tracy Shaw, assistant vice president of business market development at MassMutual Financial Group, which oversaw the "FamilyPreneurship" study. For Lidia and Uli Fluhme, married founders of Gran Fondo NY, which began running an annual 110-mile cycling event in New York in 2011, the division of labor has been clear from the get-go. While Lidia Fluhme takes care of logistical aspects of the event, her husband is responsible for interacting with cyclists and handling marketing and legal matters. "He's the visionary, and I'm the implementer of what happens," she says.

 

How will we keep our personal and professional lives separate?
When working with family or close friends, the boundaries between your personal and professional lives are bound to blur. But you can maintain some work-life balance if you establish a few rules. For example, you might agree not to discuss work during family meals or to talk about personal matters at work only in an emergency.

 

How will this person be evaluated?
Family and friends tend to sweep a lot of things under the rug in business rather than addressing them, Rivers says. But you need to hold one another accountable and figure out how you will evaluate each other's performance on a regular basis. If providing feedback, especially criticism, seems too difficult given your personal relationship, you can seek out a third party for the assessments, Rivers says.

 

If it doesn't work out, what do we do?
It isn't unusual to want to change your career, but when you're in business with a close friend or family member, you might feel you can't leave because it will hurt your personal relationship. Before asking a family member or friend to become your partner, consider what might happen if one or both of you wants out. How will you handle the exiting partner's shares? Who will take over the responsibilities of the departing partner? What will this do to your personal relationship?

 

What will our succession plan look like?
Even if you both plan to stick it out for the long haul, you're still going to have to think about your successors. Unfortunately, succession planning often goes unaddressed because it suggests mortality, illness or other unpleasant life events you'd rather not discuss. But failing to address succession planning "is like getting on a plane with a pilot who hasn't learned how to land the plane," Bryck says. "You really need to sit down and have this difficult discussion."

 

Source : https://www.entrepreneur.com/article/225613

 
A loophole means people are waiting until a death to pass on family businesses
Tuesday, 05 April 2016 15:46

PEOPLE WHO WANT to pass on the family business to their children are unfairly slugged with a higher tax rate if they wait until retirement.

 

The loophole means those that want to avoid a large bill are forced to either make an early decision – or have their families wait until they are dead, according to one of the country's leading tax advisers.

 

PwC director and senior tax manager Colm O'Callaghan told Fora his top advice to successful family business owners was to pass their enterprises on to their children before they hit the age of 66.

 

"Historically, if you were passing on a family business to the next generation, you could get a capital gains tax (CGT) transfer to the next generation and the next generation would get relief from capital acquisitions tax," he said.

 

"But if you're aged 66 or over, you only get the first €3 million CGT free (now), the remaining balance is taxed at the normal rate."

 

O'Callaghan said that there are a variety of reasons why someone may not not be willing or able to pass on their business before the age of 66.

 

"Most people still work well into their late 60s or early 70s," he said.

 

"(Another reason could be) the next generation aren't ready to take over the business or through the recession they weren't able to because banks wouldn't let them or it wasn't the right time. Businesses are now having to wait until the person dies."

 

He added: "Unless they pass the business at the age of 66, it'll be tax inefficient and there's no reason why that should be the case."

 

 

Tax Change

 

The tax system as detailed by O'Callaghan was introduced when the treatment of capital gains was tweaked in the 2012 budget.

 

Capital gains tax is a charge applied to the profit made from the disposal of any asset. It is currently set at a headline rate of 33% in Ireland. Previously, full relief was available to someone aged 55 or over who gifted their business to their child.

 

However, Budget 2012 introduced a clause where this relief only applied from 55 to the age of 66. Once someone is over that age, the relief has a cap of €3 million, after which the normal rate applies.

 

"Most people would say that a business worth more than €3 million is a huge value, but you'd be surprised," O'Callaghan said. "You think of something that might be built up over a few generations, or even one generation.

 

"If it's a relatively successful business employing 20 or 25 people, it could be worth €10 million. If you had a €10 million business and the next day you had a €2 million tax liability, any business would struggle and it may not make it worth their while passing it onto the next generation."

 

O'Callaghan said that although it was difficult to quantify the number of businesses affected, entrepreneurs who built up and sold off their firms were probably in the minority compared to those handing over their operations to the next generation.

 

"There are a huge amount of family businesses in Ireland," he said.

 

O'Callaghan said he was a "happy man" when he spoke to business owners before they hit 66 and the relief should be extended past the retirement age

 

 

 

Source: http://fora.ie/capital-gains-tax-business-2678272-Apr2016/

 
Surviving in a Family Business When You’re Not Part of the Family
Thursday, 31 March 2016 14:48

We see all kinds of office politics – the good, the bad, and the ugly – in family-owned businesses. Families can be intensely political organizations, and non-family executives must know how to play politics both in the business itself and in the dangerous borderland between the business and the family. After reviewing the work that our firm has done with more than 200 business families around the world, we've identified some winning political moves that non-family executives can make:

 

Play in your "room" only. We like to explain to client family and non-family members that family businesses are like a home: Different discussions should be held in different rooms. Non-family executives who survive and thrive are those who either know intuitively or learn through experience how to separate the business into the management room, the owners' room, the family room, and the room for the board of directors. Successful non-family leaders stick to the "management room." They understand that when it comes to the "family room," the family has all the power; it's never going to be a fair fight. Blood is usually thicker than water. Yet family squabbles do spill over into the management room, and non-family executives must be able to isolate the business from the family when family members can't see past their own internal squabbling.

Ironically, it often turns out to be harder for the manager to stay out of the family room than one might think. That's because many business families either deliberately or quite naively try to involve the non-family executive in family affairs. We worked with a client family whose patriarch was continuously trying to engage the very talented non-family CEO in a bitter family fight with his son. This was a losing proposition for the CEO who, to his credit, refused to take sides in family disputes. He was empathetic, but he firmly pushed back against being used as a pawn in a game that he could never win. He repeatedly told the patriarch, "That is a family room issue; please take it there." So far at least, this non-family executive is turning out to be very successful.

 

Be highly discreet and competent. Restricting your influence to the management room does not mean that you are powerless as a non-family executive. Far from it. Given your position in the company, you typically have access to an enormous amount of privileged information, and information is power. As we noted above, the problem for many non-family executives is not that family members try to keep vital information from you, but rather that you are deluged by potentially explosive information. Woe to the manager who cannot keep confidences! Lose the trust of family members and your career will tank no matter how good you may otherwise be at playing the game of office politics.

This is not to say that family members always keep non-family executives informed of important business decisions that are in the offing. They don't. But the best way to avoid being left out of critical conversations is to demonstrate your competence. We've seen this type of situation with another client family where major business decisions get made outside the office when the family gets together on Sunday afternoons. The non-family executives can't force the family to involve them in these extra-office discussions, but in this case at least, one financial analyst is so good that the family invites her to all of these meetings. She has demonstrated her talent, her dedication, her discretion, and her commitment. She works extremely hard and has been careful not to align herself with any one family member or branch. She knows how to be professional in a family environment, and the entire family has come to respect her.

 

Avoid proxy wars. Alignment with one family member or branch is dangerous because families can act out their rivalries by "taking out" a relative's favorite non-family executive. While proxy wars are hardly limited to family businesses, they can often be more intense in families due to volatile group dynamics. For example, we're currently working with a client family member who is very vocal about his intent to break up the team of employees that is fiercely devoted to his sister, with whom he has a particularly contentious relationship. Our advice to non-family executives faced with this dilemma: Never hitch your wagon to just one star. Aligning yourself with a particular sibling or branch is always risky.

 

Give credit and invoke the family's higher angels. In our experience, the non-family executives who survive the longest are those who know instinctively how to deflect credit from themselves to the family. While this is important for career success in all office environments, in family environments this tactic takes on far greater significance. Make a son look important in front of his father – a battle that child may have been waging all his life – and you will win the loyalty of that adult family member for life.

What's more, most family owners are intensely proud of their companies. When negative family politics break out, you can nudge the family members to remember their family's greatness. Do this with genuine respect for the family's legacy, and you can go a long way toward helping them bridge their immediate political differences.

 

Make use of impartial outsiders. Giving feedback to executives about their performance can be tricky in a family business, where the sibling or cousin that you are evaluating may someday be the boss. Your instinct may be to step back and tell the truth, but to tell it "slant." And, indeed, caution is the appropriate response. The fact is that you must deal with the reality of the power dynamics at play. Look for opportunities to make your feedback truly independent of you, and truly confidential. Encourage your business to conduct 360 reviews using an outside provider. Or find an honest broker – for example, a trusted, external board member – who can give constructive criticism without risking his or her career.

One of the most difficult political situations arises when a non-family employee has a genuine grievance against a family member who receives de facto protection because of the lack of any formal (or informal) channels for redressing the situation. Imagine for a moment what happens when a non-family employee with a complaint turns to the head of the business, who just happens to be head of the family and the father of the son who committed some egregious offense. This occurred at one client family where the son was making inappropriate sexual comments to several female employees. In this case, the power of the non-family executive to put an end to the situation was very limited; it took an outside advisor to step in, expose, and stop the harassment.

 

Know your genetic limits. Finally, to be successful in a family business, you must have a realistic sense of the destinations on your career path. Even the most masterful player of office politics is not going to get the top job if there is a family member in the leadership pipeline who is destined to assume the mantle of CEO. Don't take it personally; it's not about you. You are biologically disadvantaged and have to be savvy enough to recognize this fact. Always be thinking about the family tree and family dynamics when considering your own path up the career ladder.

In a family business, playing office politics successfully means having the humility — and the political shrewdness — to put the family first.

 

 

Source:

https://hbr.org/2015/01/surviving-in-a-family-business-when-youre-not-part-of-the-family

 

 
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