Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts, I am here with my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Hello everybody and welcome Ed!
Ed: Good morning, how are you?
Martin: I am good. So we are in the second of a four part series with Therese Barry and welcome back Therese.
Therese: Thank you Martin. Great to be back again!
Martin: Well we were delighted that you were happy to come back. Particularly about all of that talk last week about Gorillas and our friends and a whole bunch of interesting issues. (Martin laughs)
Therese: Well I hope you were able to have a good chat to your friends in the meantime.
Martin: Look my friend did report back and said that he felt that your advice was very very good about helping with his anxiety. So, on his behalf I’d like to say thank you.
Ed: My friend said she’d like to keep it private.
Therese: Fair enough.
Martin: Yeah I see. So for all of our listeners out there this is the second of a four part series with Therese Barry. So Therese has a business called the Business Owners Mind and she specialises in helping business owners with the human aspects of their most important business decisions. So be it decisions around transitioning, around selling the business, around management control, etc etc. Therese can provide some wonderful insights in relation to those areas, which are quite different to the insights that we can provide as lawyers or that other professionals can provide. So for us she is an absolutely pivotal part of that multi-disciplinary advisory team.
So, in terms of today, we are going to have a more specific discussion around what I would call “baby boomer business owners” and certainly a lot of our clients would fall into that category. Mum and dad business owners, they might have a small business or they might have a very large business and they would typically be in their 60s or 70s and they’re thinking about doing something. That might be selling the business, that might be transitioning to children or that management team or it might just be taking a step back, you know, moving into semi-retirement and putting in a competent manager.
And Ed, we often get a bit stuck with those conversation don’t we?
Ed: We do. We do. I think that most business owners accept that its inevitable at some stage they’re exiting. Whether its going to be voluntary or involuntary they are exiting. However, we find sometimes that we go quite a long way down the path towards having everything ready and then something comes ups. And to be blunt I think sometimes that something is deliberate. That the current owners, the matriarch, patriarch, actually don’t want to exit, and there will be a lot of reasons that they come up but that actually don’t want to exit.
Martin: Yeah, yeah, and I’ll be so interested to hear your thoughts on this in a minute Therese but just to follow on from that and I guess give a little bit more colour and context around that, they all know that intellectually they’ve got to exit. We’re all going to exit our businesses one way or the other. Be it through death or what have you. And we all know intellectually that the way to maximise value on that exit is to prepare really well, have a plan, execute that plan, do it, have something wonderful to move on to and keep that plan rolling. And I first saw what you are talking about, this kind of self-sabotaging of the plan. I first saw that in the GFC because it was a perfect excuse wasn’t it. A business owner, they might be 65 years of age at that time, planning to sell, planning to transition. Suddenly the GFC happens and its “oh well that’s put my plan back 5 or 10 years” because it kind of seems logical, it seems rational, of course they‘ve got to carry on and earn more money, get back what they’ve lost. But then when the GFC finishes there’s another excuse, “its not the right time because my new manager has only just started” or whatever it may be and on it rolls. But look I’ve probably waffled on enough. Therese, give us your perspective on those issues.
Therese: Well Martin I think this is a really interesting topic you are raising here because essentially what we are dealing with is the cycle of change.
Therese: And the cycle of change is a well-known cycle within my field. And it really relates to human behaviour in response to change. And the first stage of change is pre-contemplation where people are sort of thinking about changing. There’s no real intention to change but there is a bit of thought going into it. And then we become a little bit more aware that there’s a problem here. There’s a business to be sold but we’ve got no real commitment to selling that business. But we’re contemplating it. And from there we move on to making a call to Mills Oakley. And we decided we’re going to take some action to address the selling of the business. But unbeknownst to you you’re in a psychological process of change and when people come in to get preparation around the selling of their business you think that that’s what you are doing. But you actually involved with the human element of this as well. And so a lot of work goes into this and then we get what we call relapse. Where we fall back to wanting to sell and but not wanting to sell. And its about the process of change and letting go and its hard to make changes in our lives and if you think about a change that you’ve wanted to make yourself in your life you can realise how hard that might be sometimes. And so these are really important discussions that you can have with people. For example, I often say to people tell me three good reasons why you would sell this business. What would be the advantages if we sold this business. What would be unhelpful about selling this business because sometimes people need help to get through that process of change to get motivated into absolute action. And I think what happens is you get caught up in this human side of the change process and it doesn’t make sense to you because you’re lawyers and you are just ready to go with the paper work.
Martin: That’s absolutely right isn’t it. And we’ve seen countless processes like this and this happens and none of the advisers really know what to do. We find it hard to kind of compute.
Therese: And look I think that it’s a time of patience. And a time of reflection and being able to just stay with where your client is at and what they need to do. And it can be frustrating for you, its can be frustrating for them. And it can be very frustrating for those around them and creating tensions within family structures and systems but its about understanding what’s going on with the change process here.
Martin: Yeah. Could I ask you about one that I find particularly interesting and its something that we reflected upon a lot in the work that we do. And its particularly in relation to the family business aspect. So we often talk with business owners about succession and not always, but sometimes what they would very much like to do is give or sell the business, transition it to their children. And maybe they’ve had a conversation with the children and the children have said the right things about that, made the right noises. But again it all kind of gets blocked and a colleague of our Geoff Green, who we interviewed on the previous series he’s got a pretty kind of robust view on this. He says look, the kids don’t want it. Why are you just assuming that the kids want it. Whereas you might get a better outcome for you, the kids and financially just by doing a trade sale. But how is it that families, and I guess particularly Mum and Dads, how do they kind of stuck on this transition to the kids aspect?
Therese: Well I think you are getting back to the basic things around parental expectation of their children. And children’s desire to either please or rebel against their parents. And I think this is an area where families often need some help. And its really helpful to ask Mum and Dad what they want for their family, what they think works well in their family, what they think doesn’t work so well in their family, to get an overall impression of their family business and their ideas around that. And equally its important then to cross-reference and check that with the similar from the children.
Martin: Yeah, yeah. And we’ll talk next episode about the children’s perspective. So I wouldn’t mind kind of leaving that one to one side for the moment. But in the business owner kind of family space that you work in, what would you say are kind of the top three mistakes that Mums and Dads make when undertaking these processes?
Therese: Well there’s a range of issues around fairness and equality that they want to address in the family system. Families sometimes assume one member is the next leader of the family and they make mistakes about elevating that person into a position of leadership without regard to the impact of that on the rest of the family members. So without understanding the impact of a decision to elevate one person into a position that impacts everybody else you can have the next couple of generations not talking to each other because Mum and Dad have assumed that a particular child is going to do the right thing because they have. But they have more invested in it because they are the original owners they are their children and they have an idea and a sense of what their children will do but its different when it comes to what they might do.
I think some of the other mistakes that sometimes occur are around financial reward for family members and how that is done. And how you work out structures that actually allow for valuing the different roles that family members might do within a business and structuring that in a way that, you know, you get fair reward financially for the job that you do and I might be paid less in our organisation for what I do than what you do because that’s the market value associated with it. But there are ways of creating fairness and equity in terms of, you know, shares that people get. But its about creating fairness and equity in a way that is balanced not just giving everyone the same amount.
Martin: That’s fascinating to me Therese because we see this tension all the time and I think a mistake that I sometimes make as an adviser is that I just see it through a commercial prism. I’m like, well you know, of course you should sell it to your kids and not give it them, they’ve got to buy it, its commercial and of course they should have a commercial salary and you know, it doesn’t matter that one is the cleaner in the business and the other one is the COO, you know, you’ve got to pay them differently in accordance with those roles. Any sometimes business owners are in absolute agreement with that but sometimes they’re not. Or maybe Dad agrees but Mum doesn’t, you know.
Therese: I often use the analogy of making a chocolate cake. A chocolate cake is not made up of equal ingredients, you know. You’ve got a cup flour, three quarters of a cup of sugar, two tablespoons of coco powder and it makes a magnificent cake. It is a blend of what works to make a great cake, and every family situation is unique. And with really good discussion you can work out what are the unique blends that need to be put together to get a great outcome for this particular family. And that’s why a one fit all solution doesn’t work for everybody, because every family is different.
Ed: And I think on that Therese, one of the things we pick up on, speaking to families is that even if you distil down what the ingredients are for that cake and everybody agrees to make a great cake these are the ingredients we need. You’ll often find there are people in the family that don’t know why the cake was made in the first place. And that’s a really difficult point for us to deal with but I think that often when there’s a succession conversation, what’s lacking is understanding why we’re baking in the first place. And for the next generation, we’ll talk about this more in the next episode, but this disconnect. Why we do what we do. Yes it could be successful or not successful when there’s a transition. Why are we doing this in the first place and often that’s really skipped and people find it very hard to be honest with each other as to why we’re even going to do this.
Therese: Well I think that’s right. And I think that this process of selling a business if often the first time that Mum and Dad themselves have had to be reflective on what it is that they’ve created and what it is that they want pass on. And sometimes it is the first time that they’re actually really getting a sense of it for themselves. And it’s a process and it takes time and discussion and reflection.
Martin: What do you think about this paradigm between give or sell to your children, because we have that a lot with our clients. My default view is that you have got to sell for market value, that will test if they really want it. And if they haven’t got the dough they can borrow, give them Vendor terms, whatever. But often clients take a different view. Talk to us about that.
Therese: I think that that’s a really complex area and I think there’s probably a bit of grey in it and with certain families it probably is the right solution to sell and deal with it at commercial value level. But there are other families and they would come to mind to you where you know that moving down the generations they’ve got the people in the family and the family works well that it will actually be able to carry itself on. And that’s where the family members might need some help in terms of it being gifted rather than actually a sale. And some families it has to be sold because there simply aren’t able bodied people in the family to move this business to the next step. And in essence the family is liquidating the business at this stage and you know, diversing all the assets to the family members. But it really depends on the family and I think you’ve got to keep any open mind as to who is this family that we’re dealing with and introduce the human element and not just stick to a very strict commercial outcome.
Martin: And hearing you speak like that Therese, about the complex dynamics of these processes, isn’t it interesting and we can contrast that to most professional advisory processes, in lawyer’s offices all over the country. You’ve got Mum and Dad coming in and saying “well I’ve decided to transition to my son, please draft a shareholders agreement” and we say yep, we’ll give you a quote for that and we’ll draft the agreement and on they go along their merry way. I mean, that might be what they say they want but that is absolutely not what they need. I mean how long is the outworking of these kinds of discussions in your experience?
Therese: Well they can take months in some situations or the can take a matter of weeks. But they certainly take more than a day.
Therese: And I think that, you know, from your point of view as a lawyer operating in this field, you have to decide on your own business model. And I think Martin and Ed you both know from your experience that you wouldn’t be comfortable just drafting that shareholders agreement because you know that its probably not best practice in this day and age. And it really it a decision about how you practice and maybe if that’s what a client wants and you’re not comfortable to do you’ll refer them off because you really are not committed to that form of business model yourself.
Ed: And this is why we are advocates of the Family Constitution conversation and a family council and actually interrogating these points in detail, in frankly a non-legal advice setting often, before we progress to actually start giving legal advice because we need to know so much more before we can really assist with the preparation of documents and harder technical advice. But its interesting Martin that you have this view that you lean towards a sale because I must say I do sort of respond to what each family is saying but I often get the sense that if not everybody is on board at the next generation it must be a sale because otherwise there’s this favouritism and I’ve never heard any parents say that they deliberately want to favour certain people to the exclusion, in a holistic sense, of other people. Now maybe those who work hard in the business should benefit from the fruits of the business but not excluding and cherry picking people overall from benefiting from what the family is about.
Therese: I think that is absolutely correct. And I think not taking those issues into account leads to the breakdown of families and then we have a family law matter.
Martin: Boy that’s right, and you know, there aren’t too many events where you can lose half of your wealth or more than half overnight and that’s one of them. So hey we’re coming to the end of this episode Therese but there’s one final thing I did want to ask. For those Mums and Dads out there who own a business and they want to have the conversation with their son or their daughter, any advice for them as to how they might best go about that?
Therese: Look I think you can keep it very very simple and they can ask their son or daughter, what is it that you want? That doesn’t necessarily mean that they have to give them what they want. But what is it that you want? How do you see the future? What do you see is important moving forward for the family business and your own life? Very simple questions! But of course you’ve got to be in a position that you’re able to hear what you might not want to hear.
Martin: Yeah. (Martin laughs).
And is it one on one, like say if you had four kids, I don’t know one in the business, three not or whatever, I’m just saying that off the top of my head. Do you talk to them in a group? Do you do them one on one? Talk to us about those kinds of strategies.
Therese: I think there’s an absolute place for individual conversation with family members and then group conversations. And I think that its probably important to have individual conversations with family members to start with and it may or may not be appropriate to then have a group conversation because we really want to be able to keep the family intact, and maintain healthy and constructive and good relationships with each other. And if we start with a group approach we might have family members saying things that are offensive to others or we might have them withholding because they don’t want to offend others. And so we are left not knowing the whole truth. So I would recommend individual conversations to begin with.
Martin: That’s great Therese. So hey next episode we’re going to be looking at the same conundrum but very specifically from the perspective of the children. And somebody once said to me that family business succession is really about two things. Its about the Mum and Dad being prepared to let go and its about the children being prepared to show that they are ready, willing and able to step up. And its that aspect that we’re going to be focusing on next time.
Before we do though, I’ve had one of our associates kind of waving at me and suggesting that we need to shut down this podcast right now because I made a dreadful mistake at the beginning. Ed.
Ed: Well you didn’t give the disclaimer did you.
Martin: I know I haven’t disclaimed. And now I find myself in a legal conundrum.
Ed: It’s the sort of lazy, forgetfulness that my friend was talking about last week. (Martin and Therese laugh)
Martin: Well you know when you get the doddery old, you know, kind of partner, just forgets things and tries to bluff his way out of it. But this is my legal conundrum, and maybe the younger sharper lawyer can help me with this. If I disclaim at the end of the podcast, does that cover me, you know, kind of retrospectively for what we’ve just discussed. I’m worried about that.
Ed: Yeah it does because of the editing.
Martin: Oh you’re saying we can do a very cunning edit.
Ed: Yeah. I’ll leave it to you but I’ll assume that you’re going to edit this later and put that right at the front.
Martin: Oh I see. Well I’m sure that will give me a lot of piece of mind and might bring my own anxiety levels down a bit. So well I should say it I suppose.
Ed: Yeah why not. (Ed laughs)
Martin: The podcast that you’re about to hear (Martin laughs) contains general commentary only and it not a substitute for independent professional advice. Always seek specific advice related to your circumstances before looking to implement any of the strategies that we are about to refer to in this podcast.
Martin: Thanks Therese. Thanks Ed. We’ll see you next time.
Ed: Thank you Martin.