Martin: Welcome to the Business Owners Podcast. Where we throw a side to boot and share strategies for growing, protecting and exiting your business. My name is Martin Checketts I’m here with my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Welcome Ed.
Ed: Thank you very much. I’m looking forward to this episode.
Martin: Yeah this is going to be a ripper. We think its No. 3 in a series of 4 with our resident expert Therese Barry from the Business Owners Mind and welcome Therese.
Therese: Thank you very much Martin. It’s great to be back with you two again today.
Martin: Absolutely and we’re so pleased that you’ve joined us and this episode is going to be very, very interesting. Ed do you want to lead off and tell our listeners what we’re going to be talking about.
Ed: Well today we’re looking at this intergenerational succession question but not from the parents’ perspective instead we’re looking at it from the children’s perspective this week. So we’re looking at what works well, what doesn’t work so well but very much from the perspective of the next generation Therese.
Therese: Sounds fantastic.
Martin: And hey, I’m on the ball this week. Last episode I forgot to do the disclaimer appallingly I’ve been sweating about that ever since. So I’ll just get it out of the way now. In fact Ed as our representative of the next gen you’re running this show, why don’t you, you know, let’s start our own little business transition you could take the disclaimer. Don’t mess it up.
Ed: Well I’ve been waiting for this day. (Martin laughs)
Martin: It’s a big day.
Therese: The transition in the making here.
Ed: Disclaimer hyphen Martin to read.
Martin: And this is why they need to wait awhile before they step up.
Ed: Oh no I see what I’ve done (Martin laughs). Don’t worry we’ll edit that part out. (Martin laughs) This podcast contains general commentary only and is not a substitute for independent professional advice full stop. (Martin laughs) Always seek specific advice relating to your circumstances before looking to implement any of the strategies referred to in this podcast. How did I do?
Martin: Well Therese, I mean c’mon?
Therese: I think that was very, very good.
Martin: Oh please.
Ed: Thank you Therese. And it’s interesting that the two of you have taken very different ways of providing feedback (Martin laughs) because you have both heard and observed the same thing but Therese obviously has a much deeper understanding of what I needed to feel confident about stepping up.
Martin: Oh boy and isn’t this why the old dinosaur sometimes needs a bit of help in these succession processes hey?
Therese: Sometimes he needs a little bit of guidance about how to encourage in a constructive way his younger counterpart.
Ed: Gosh – she’s good.
Martin: Wow!! (Martin laughs)
There we go everybody that’s www.thebusinessownersmind.com.au. You just saw it in action. That was wonderful. (Martin laughs)
Ed: Therese some key points here. Whilst we’re doing that with good humour.
Martin: I’m seething on the inside. (Martin laughs)
Ed: Yeah that’s right. (Ed laughs)
It does speak to an issue in the intergenerational succession which is, does the current generation of owners…does that generation…do they really believe ever that the next generation are truly ready? Or are the next generation always assuming management or equity control ownership at a time where the current generation are sort of giving in rather than agreeing that now is the perfect time?
Therese: Well I think what you’re raising is an important issue around family systems and of course all families are a kind of a system if you like. And by that what I mean is that the members of the families are individuals in their own right but they’re inter-connected independent individuals and none of whom can be understood in isolation from the overall general system. And so each family system if you like, needs to be understood in its own particular way to work out what particular issues are that need to be addressed in this succession and those issues might be with the children, those issues might be with the parents or what they have with each and it’s not about them being in conflict with each other as such, it’s about their concerns and understandings, expectations, desires and what everybody wants.
Ed: Can you give me three examples of things that the next generation might do or say that would a really bad idea?
Therese: It’s time for you to retire Dad.
Martin: Yeah…remember that Edwardo (Martin and Ed laugh)
Therese: Martin’s come out of corner.
Martin: Straight back into it sorry. (Martin and Ed laugh)
Ed: Don’t worry your cup of tea will be here in a minute. Just sit tight. Don’t stress alright just sit tight. Sorry Therese you were saying. (Therese laughs)
Therese: I think the thing is it’s about how the parental level and the child level interact with each other. That is respectful of each other’s needs. And so looking at those three things, it’s about being able to see what might need to happen to help dad to retire if he’s not likely to do that. But being careful about that.
Often in family businesses as well there are tensions around financials and it might be that in the beginnings of a business the family worked for virtually nothing and they really just worked to build up this business and all profits have gone back into the business. But the next generation has become exhausted by that and they need a little bit of help in addressing that with the owners of the business because they’re just not prepared to work you know another 40 years for not a lot of reward and the build-up of the business has been the reward in itself for the first generation. But it’s very difficult to then be the second generation to take it over at a new time and to keep the momentum going. And so we need to be able to address what are the issues that they’ve got and how they have those conversations.
Ed: I think this really is the key point for many, many family businesses that ownership of a business normally comes with a large equity stake for the current generation of owners which is not always very easily transferred to the next generation along with Management. So for example, the management of the company is ready for change and the next generation are ready to step up. However the equity ownership that can’t be transferred easily because of either capital gains tax or asset protection concerns with the next generation or whatever it is there are often real reasons why we cannot simply transfer equity from one generation to the next. But the management must transfer now. And so from the perspective of the next generation it can feel like, I say we, sort of associating with that generation, we are stepping up to take responsibility, we are the ones putting in the hours, we are working really hard and we say to our parents or uncles and aunts, we’re not getting paid well enough to do this, you’re sitting on the equity everything is being reinvested in the business. You need to pay us better. How do we have that conversation?
Therese: Well I think we need to transfer the conversation to a new management structure because essentially what we’re doing is creating a new management structure. And with any restructure of any business, management structures look at roles and responsibilities and who gets paid what for doing what. And it really is a re-organisation of the whole business in terms of roles, responsibilities and financial rewards for that. And the business owners need to see that it’s not just passing on and giving this business to the next generation, we’re actually looking at a restructure from a family perspective and also I guess from a legal perspective you might be as well but it really is a restructure of the business.
Ed: And of course all of these assumptions about what that means for the next generation and we touched in the last episode about giving the business. When someone resigns from a senior role in the management of the family business and another family member is in fact promoted to that role, I picked up many times there is a sense of I’m giving you this job. I’m giving you “son, nephew, niece, grandchild, daughter”, I’m giving you this job. When actually the person on the receiving end of that gift is saying ‘”no, no I’ve earned this and in fact I’m not getting rewarded in the way that I should be getting rewarded”. Sometimes if it was put that obviously to the family a lot of people don’t want that job. But how do people say when it looks like the greatest gift in that business sense, how do people say I don’t want to the job like this, I want the job, I’m committed to the business and I’m committed to the family.
Therese: Look I think that’s where the role of professional services comes in, in terms of giving advice to the family and that is what you might want for your son might not be what he wants and it might not be what the business needs. And being able to look at the business commercially and outside of the family structures and then coming back to the family set up and saying well if this business was to be taken over by a corporate enterprise would it be able to pay its staff . Or would this business lose a lot of money because we have been so dependent on giving labour coming from family members that we actually don’t have a commercially viable operation to sell. Obviously there’s a commercially viable operation to sell but it will need a lot of restructure because you cannot ask for someone to work in a management role for a small amount of money that a family member may have been doing. And family members in the next generation become aware of the fact that hey I’ve been sent off, I’ve been educated and my friends who have got roles here, there and everywhere are earning this kind of money and I can’t earn this money in a family business. I’ve known family members where they’ve operated really well where they’ve sent their kids out to other family businesses for a year or two to get experience outside the family concern and then they come back in and they’re paid at a rate that is appropriate. So being able to sort of blend family issues with commercial issues and get to a stage where you are really running your family business as a commercial operation and not just a family you know system that depends on every member giving without receiving.
Martin: And we see that a lot Therese and you come to the due diligence and the buyer’s accountants are just going to normalise back all of those numbers and you know your business is actually isn’t half as profitable as you think it is. I think a lot of business owners have a bit of a, I mean I wouldn’t say they’re in a fantasy land, but certainly I think what they think is the profitability is, is higher than what it actually is for all of those factors and you know that’s not how a third party buyer is going to look at the business.
Therese: The commercial realities are that a buyer is not going to be prepared to work from 7am until 10pm 7 days a week in a business where family members might have done it. And a business owner thinks that their business is worth a particular amount of money when in fact it’s really not as viable as that because it has got all this free labour associated with it, because payment is not sufficient for hours of work.
Martin: Hey Therese we are focussing on the next gen in this episode. Can I ask about children who don’t work in the business. Like there might be a big family concern and maybe my brother works in it and I don’t and this thing has become more and more valuable, it’s really kind of kicking off and he is the chosen one who is working in the business but I’m creative and I’ve got my own, I don’t know, whatever it is, my own web design business, whatever. How would you help somebody in that position to navigate this process?
Therese: I think it’s a matter of the structure that the family has in place. So if you look at the workers in the business and the salaries that they’re paid that’s totally independent of any family equity that another family member might be entitled to. But there’s a whole range of structures that you might set up in terms of a Board of Advisory around what the business is to do and who gets paid what. And indeed what the shareholdings are and what the profits are that go back into the business versus individual family members. So a family member who is not in the business may well be entitled to receive some kind of financial reward for being you know a part owner of that business, but they’re still getting less because they’re not working in the business and that’s fair and equitable. But again it depends on how the family wants to structure their business and having discussions around all of that to get the best outcome.
Ed: Therese a couple of points I want to make in relation to this and really get your thoughts around. One of them is around a conflict between generations in terms of how much profit to take off the table and how much to reimburse. But the first one I want to talk about was the guilt that the younger generation can suffer if they don’t want to be in the business and how they might feel obliged or they might feel pressured to stay in the business and often feel torn because for example, if they feel guilty about leaving the business because so many people own equity in their family, this isn’t just a commercial decision, it really does impact on the family. But at the same time their passion is somewhere else, or their own family unit would be sort of hoping that they would choose something else. How do you unpack this guilt?
Therese: Well I think it’s really important that people are able to do what they want to do with their own lives and sometimes that might be working in a family business and when it’s not, it’s actually about having some discussions with those people about what they want to do and how they are able to make that decision and talk about it with their family in a way that maintains good relationships. It’s not helpful for any individual or any family to have a family member in the business who really wants to be somewhere else. And often we see this occur with really negative splits. You know it’s not a good split, it’s not a good agreement. It is a lot of heartache and a lot of negativity between family members, sometimes not speaking to each other ever again. And I think it’s important to see that these human issues are so fundamental to a family business that it’s not just about assuming that an entity like a business goes on without taking into account different family members and different family needs. So sometimes you need to have some discussions with that particular individual to talk about what they want and how they are able to achieve that and how they are able to have the conversations in a way that is helpful and meaningful with their parents or siblings, so a good outcome occurs for all, because if the structure of the business is set up correctly the management role should be able to be filled by people other than family members if that is necessary and sometimes that is the solution.
Ed: That’s fantastic. It’s such a big issue being able to talk about these things. The second thing I mentioned was around taking money off the table and business cycles are business cycles and sometimes people’s own retirement plans necessitate taking money off the table. I think this tends to happen more in smaller businesses than a larger family businesses where there is often a culture of everything goes back into the family business. How do you deal with this conflict where one generation is saying we want to take as much off the table as possible and put it into our super funds or whatever, do you risk we need to concern ourselves about our retirement planning and another generation that says we’ll hold on we really need to reinvest in the business and we can’t go to the next level or we can’t even sustain the level that we’re at, at the moment. These can often be very opposing objectives for a business, how do you unpack that, how do you deal with that without everyone squabbling?
Therese: Well I think you deal with it a little bit like a board of management really – don’t you. Because your family is the board of management and to some degree people have voting rights on motions that are put forth. So at some level the family might put forth, or a family member might put forth a motion to get a particular outcome and consideration has to be given to that by all other members of that family. And sometimes it actually means buying in some outside advice. We’ve got a tension that exists around taking out money here and putting it into a super fund, as opposed to utilising that money to put it back into providing more machinery in the business. Sometimes some advice around those issues can be helpful to get a good outcome because often this is where there is good legal solutions that can help with the people’s problems.
Martin: And we thank you for the legal plug Therese we are most grateful for that. But I got to say, and of course I would say this, and it just sounds salesy, but it’s what I truly believe. You must have an independent person to facilitate some of these difficult discussions and in the end it doesn’t have to be your lawyer, it could be your trusted accountant, it could be somebody like Therese who brings the human aspect to this. But in my experience and I’d be interested to hear from you in a second Ed, this never resolves, it’s too hard, everyone is too close, it’s too emotional nothing happens unless you have a structured independently facilitated process.
Ed: You are absolutely right because people can’t just say what they think. And even if they could it can be so damaging. And so when we work with families and when we work one on one with people before these large group feedback sessions we are often playing devil’s advocate. We as a team of professional advisors from different disciplines we are often recommending a course of action that the family can vote on. And sometimes I think that is the easier way and often the only way to get issues out there without a risk of there being some sort of split in the family and people jumping to conclusions and having conversations in corners of the room and not actually being inclusive. So sometimes that is the biggest value we bring, is that we’re able to say the things that the family will find very hard to say to each other.
Therese: In essence it’s providing good governance processes for the family functioning.
Martin: Wow!! Whoop there it is. Isn’t that a theme. You know w look at the public company, we look at the sophisticated governance structures that surround that environment with the Board, the committee’s reporting to the Board etc, etc. Some of our clients are as big as little public companies, you know they really are, some of these private family businesses. But whether they are or not they generally have very, very poor governance structures. You say the word “governance” to mum and dad businesses and they laugh at you, but that is exactly what you need and we see the benefits of that time and time again in our client base.
Ed: And it’s interesting because I think words like “governance” they conjure up images of big…
Martin: Yeah yeah.
Ed: …Big, sophisticated and importantly I think the bolt on words and that the brain sort of picks upon, are words like growth. And I think there are a lot of family owned businesses, one of the reasons they reject this sort of structure is that they don’t want to grow and they don’t want to change. That’s absolutely fine. They’ve built something that they think is fantastic and they want that to continue for another generation but it’s absolutely right just because somebody doesn’t want to grow they don’t want to change drastically, doesn’t mean the governance isn’t required to ensure that the transition to the next generation works.
Therese: Absolutely correct.
Martin: So Therese thank you for joining us again for this episode.
Martin: Before we sign off what advice would you have for a very kind of hungry person in the next gen, maybe they’re in their 30s they’re working hard in the business probably done so on a rubbery promise that one day they’ll inherit the earth but you know the sands keep shifting, they might not be paid a market salary. If there is somebody like that listening to this podcast for example, what advice would you give that person to help them progress the discussion?
Therese: Well I think it’s about understanding what is it that I’m actually working in. What is it that I’m seeing, what is it that this business is offering for me and am I getting too caught up in what I want from it and that it’s not going to give that to me. Do I need to be clear and have some clear discussions to establish where I can go with this. Because sometimes what you see is assumptions, people have assumptions about where they are going to go and they’re not having the discussions about that and they are working on the assumptions and it all ends up in lots of tears and sometimes people need a little bit of help in terms of how do I have that good conversation. Or what is the good conversation that needs to be had, because I’m in my own head about it all and I’m not even really clear about what I’m thinking I want and I’m actually getting frustrated in this process and again it’s about professionalising it a little bit so that good discussions can occur to get good outcomes.
Martin: That’s great advice Therese. Thank you. So next time it will be the fourth in our series with Therese Barry from The Business Owners Minds, our resident expert on the human aspects of business transition. And we are going to take it away from the family scenario and we are going to have a more general discussion about co-owned businesses. There is often a little kind of joke that is made in professional services that you know every partnership is a dysfunctional partnership, it’s just a question of how dysfunctional it is. So we will be very much looking forward to that discussion and thank you Therese and Ed for joining us.