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 joined by my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Hi there Ed!
Ed: Hi there Martin. I’m excited but I’m a little bit sad.
Martin: And why are you sad Mr Skilton?
Ed: Because it’s going to be the end of season 4 after today’s episode.
Martin: Isn’t it season 3? (Martin laughs)
Martin: It’s the end of season 3.
Ed: Oh we didn’t tell you about the other season 3.
Martin: Oh I’ve been bumped haven’t I?
Ed: Ahh, we’ll talk about it later.
Martin: Oh dear.
Ed: Sorry, sorry as you were.
Martin: I mean that’s…what a horrible way for me to find out you know. (Martin laughs) Some heavy editing will be required I think. (Ed laughs)
Ed: Let’s just call it season 3.
Martin: Yeah…let’s just call it the Skilton show, do you think? (Ed laughs) Welcome to the Skilton show. (Martin laughs)
Hey we are at episode 4 of I believe season 3. It’s our final episode with Therese Barry from the Business Owners Mind. So for those who have been listening to the previous episodes Therese is a consultant that we work very closely with in our business. She’s a qualified psych and for many years she has worked with business owners and senior corporate executives on all the kind of issues that we deal with in our practice but of course from the human aspects and not the legal or tax aspects. So dealing with things like intergenerational succession, co-ownership of business, thorny issues about management transition, etc etc. So welcome back Therese its wonderful to have you back in the studio.
Therese: Great to be here again. (Martin laughs)
Martin: Thank you. So look this is our final one as I mentioned in the series and in the first three we kind of talked through some kind of general stress and anxiety issues that business owners had and then we moved through to a fairly kind of heavy focus family succession. Speaking firstly about the intergenerational succession process from mum and dad’s perspective and some of the issues that Therese sees in her practice in relation to that. And then flipping it and looking at it from the perspective of the next gen.
This episode we’re going to take a totally different tact and we’re going to talk about co-owned businesses. But before we do that, there’s something I need to do.
Ed: Oh you don’t want me to do it?
Martin: Well, for those who listened last week you might have heard Ed read out our disclaimer and frankly it was underwhelming. I mean Therese would you agree.
Therese: Look I think he did a great job.
Ed: Thanks Therese.
Therese: And it was the first time doing it.
Ed: Thank you, you are my favourite.
Martin: For the first time. So look he’ll be practicing some more kind of off air…ahh but…(Martin laughs)
Ed: Maybe when we come back for season 6 I’ll get another chance. (Martin laughs)
Martin: Who knows this might be my swan song of reading the disclaimer Ed. So you’ve got to give me I guess give me one last chance.
Ed: Ok sorry let’s…just a bit of quiet for Martin to focus.
Martin: Shall I sing it this time?
Ed: Maybe you can rap it?
Martin: Rap it?
Ed: I’ll do the beatbox if you’ll rap it.
Martin: Ok go for it.
Ed: Umm…no I’m not prepared to actually.
Ed: Ok go on. (Ed makes beatbox noises)
Martin: This podcast contains general commentary only. (Ed laughs)
Keep going keep going.
Ed: (Ed makes beatbox noises)
Martin: Its not a substitute for independent professional advise…yo. (Martin laughs)
Martin: Is that legally binding?
Ed: I don’t know but it was gangster.
Martin: Yeah I like that. (Martin and Ed laugh)
Maybe we can pre-record something you know even better for next time.
Ed: Yeah. (Martin laughs)
Therese, you dig? (Therese and Martin laugh)
Therese: Absolutely. (Martin laughs)
Martin: Alright, well let’s put my kind of gangster rapping aspirations on hold for a little while. Maybe after you’ve booted my out I’ve got a, you know, a career there Ed.
Ed: Oh for real. (Martin laughs)
Martin: Word. So let’s get back to the subject, co-owned businesses. Now, in our game as lawyers, we work with a lot of co-owned businesses. We work with them on shareholders agreements, insurance backed buy sell arrangements. We work with them on succession planning and we also work with them when the businesses break up. There’s dispute between co-owners, and I have often lamented the fact, as a non-contentious lawyer, which means that I primarily deal with advisory work, documents, you know I don’t go to court, my colleagues do the court work. I’ve often lamented that our Litigation team at Mills Oakley it bigger than the Private Advisory team and the reason its bigger is that there is more legal work doing disputes than there is setting these up right in the first place, and that is absolutely fact. I mean my guess would be for every one business that we set up right there might be five to ten disputes, you know, dealt with by my colleagues on the other side. Ed do you agree?
Ed: Yep I think that’s right. Its maybe not so much about the number of businesses but certainly the dollar value that attaches to a solution is vastly different. The dollar value or the time that a client is prepared to invest in setting something up right is totally different to the power of 10 at least, of the time, money, other resources, energy, that someone is prepared to invest in dealing with a dispute.
Martin: Oh that’s right. So Therese, you’ve dealt with this situation often, you’ve dealt with it after its gone off the rails and you’ve also dealt with it to kind of steer it on the right course so that it doesn’t go off the rails. What would you say are some of the most common mistakes that the owners of co-owned businesses make?
Therese: Well business owners, co-business owners are at risk divorce, just like we see in the family divorce courts and sadly sometime we do see a business divorce. And one of the reasons for that is that people come to it with different expectations.
Therese: And it’s a bit like the in love phase of a relationship. Everybody’s fairly enthusiastic at the beginning but they’re forgetting about the details, about who owns what, who’s contributed what, how things are going to be shared, how things are going to move forward. And a lot of the agreements around what the co-owners have haven’t actually been established in a way that leads for a good relationship moving forward.
Martin: And that’s a really interesting point Therese because you say the agreements and of course in my mind I’m a lawyer, I like to draft shareholders agreements, that’s immediately what I think. But for many businesses of course they’re often set up on the show string, on the smell of an oily rag, it’s not possible to get the full kind of lawyered situation that we would like to see to best protect them because you know they don’t that they are going to have a business that is going to fly right. So when you say agreement, what do you mean by that?
Therese: I guess it’s about understanding what your expectations are of the other co-owners and sometimes people don’t really get to know that until they get into a relationship with other people. And sometimes its about exiting that business very early on before it…
Therese: …ahh gets to an even more disastrous situation. But I understand that not everybody’s up for a huge legal agreement at the beginning but being able to just event have some time set aside with a professional to talk about what our agreements are, you know, what we’re wanting for this business. What do we do if we have a dispute, a conflict, how do we resolve conflict. Because we’re often looking at conflict resolution strategies for a business where there is co-ownership. And if there’s some, you know, very simple king of agreements then it’s possible to be able to work through the issues but sometimes you establish that in fact people are wanting very very different things.
Martin: I really like the idea of a honeymoon period. We often get clients coming into our office and they want to do something together and we often kind of take the view that it’s too early and there are often ways that you could joint venture for example or work together, maybe one employs the other one. It doesn’t have to immediately jump to equity co-ownership. I guess to use your marriage analysis, you know, that’s like getting married after the first date.
Martin: So I certainly like idea of is there some kind of half-way house that we can workshop, be it an unincorporated joint venture, be it an employment relationship, a sub-contract. Is there something we can do before we’re locked into this co-owned situation.
Therese: Well I think it all gets back to really good discussions…
Therese: …between the co-owners really and being able to be honest with each other and not assuming that someone is bringing something to the business that they actually haven’t detailed that they are.
Therese: And again, you know, it gets into issues like how many people are invested as co-owners. I mean I’ve seen a lot of issues in terms of, you know, crowd funding contributing to all sorts of problems, maybe you’d like to say more about that but…
Ed: Well it’s a good point because it’s a modern point and with your analogy with marriage and I don’t want to go down the road of the polygamous conversation but…(Martin laughs)
Martin: I certainly hope not. (Martin laughs)
Ed: But I think there is a point here about if people going into business together are not prepared to enter into a business prenup then there really must be some time spent investigating the pre-business conversation. Like a pre-marriage, of course ok we’re not going to sign a prenup but we’re going to have a conversation about how to do we resolve conflict, what are our expectations of each other, what are we contributing, what do we expect to receive in return when you’ve got a lot of shareholders that’s extremely difficult. Unless you’re going to dictate to the shareholders the terms, if you invest this is the way it’s going to be, then its extremely difficult to have those conversations with numerous people.
Therese: And sometimes people are a little bit over excited and see something like crowd funding as a way to get people to invest in their business without understanding their responsibility to the investors that it’s my business and you’re investing in it. But actually these people are investing that they see as being part of the business as well and you know, before very long you’ve got a little bit of conflict going on there.
Martin: That’s such an interesting point because yes some people, the founder might kind of see it as they’re just financial investors, but of course if they’re holding equity in your business they are not that, you know, not emotionally, but also not legally thinking about the minority rights they’d have under the Corporations Act. The right not to be oppressed, etc etc. It’s a very different and more complex dynamic and if you’ve 30 shareholders in there, boy, you know, what are the chances of that going wrong.
Therese: Well, it’s high, its actually really high.
Martin: Yeah. Could I ask Therese, one conflict that we see commonly between co-owners, and look we’ve seen a whole range of different issues with co-owned business over the years, but one theme that commonly occurs and re-occurs is about inequality of contribution. So one business owner comes to us and says, you know, we set this up 10 years ago 50/50, we both kicked in $5,000, I work 12 hours a day in the business, I’m the MD, I’m running hard, he drifts in at 10, leaves at 4 and, you know, has a low level executive role. It’s not fair, he owes me half of his equity, we see that quite a lot. We also sometimes see the other side. We see the other person coming in and saying well look we co-invested equally, I brought x, y and z to the business in the early phase, you know, sure I’ve loosened the belt off because I’m older or whatever but unsurprisingly they situation through a very different prism. How do you help in those kind of situations?
Therese: I think when people come to you at that stage they’re in quite a bit of trouble and what you want to know from both those people is whether they want to stay together in business.
Therese: So given that this is a situation you now find yourself in, are you wanting a resolution here with your business partner? Or are you wanting to exit the business? And when it has got to that point it’s at a reasonably serious point that exiting, business divorce is possibly one of the better outcomes.
Therese: Because it’s gone too far down the track to the get the conflict resolution happening. And that’s why your Litigation department is so big.
Martin: Yeah, and when you say it’s one of the better outcomes I would absolutely agree with that but it’s almost, it’s like the best of two bad choices, in that, really for me when we’re at that business divorce stage it is simply about how can we stop the bleeding the best we can. How can we minimise the destruction of value, because value will be destroyed in that situation.
Therese: And look at this stage you’re often dealing with highly emotional views and not necessarily good thinking and not necessarily rational thinking. And people, you know, are very attached to their particular ideas about things.
Therese: You know I will often say to people, it doesn’t matter what I think or what you think is right, we need to understand what are the legal implications at this stage, and we need to find a way to work with this to get a legal solution that maintains intact relationships. We’re not going to go down a path of huge fighting, that doesn’t really benefit anybody, its just costs a lot of money. But we’re really helping to resolve a conflict through separation at this point, which it why we emphasis at the beginning the importance of being able to set up healthy relationships in the first place with business partners, so that you don’t get to this stage.
Ed: Now we’ve spoke about the beginning, and we’ve spoken about the end. In the middle, there’s a lot that happens, and very often we see in the early years there’s a great culture in a business. And of course we’re talking about a very bad scenario where the culture has broken. If a business owner can see this happening, or they suspect that it is about to happen, behaviours are changing, the culture is toxic, what are the one or two things they must immediately do?
Therese: I think it’s really important to have a degree of self-awareness. It’s one of the emotional intelligence that’s a really really helpful one to have in business. So being aware of what’s going on in your environment, what’s going on with yourself, and at that point maybe getting some advice to talk about where you find yourself because we know that successful leaders, you know, often have huge amount of drive there, you know, really wanting to make things work. But over time stress causes problems for people. Different things happens in different peoples lives and so the energy levels can run out. And at the point, you know, there may need to be a change in direction for someone personally, or in their business themselves. I’ve helped, you know, people who’ve been really successful, they’ve built up a huge business, they’ve got, you know, three other partners who are in the business but they’ve become unwell and they’re unable to put in the hours that are expected and so I’ve helped them to really get the conversation happening that they need to have with their partners to be able to exit the business. And sometimes its tricky because they’re someone who’s actually critical to the public face of that business and so they’re in a position of having to look after their own health, as well as look after the health of that business. So being able to transition out of the business because of what they need to do, as well as supporting that business to remain successful. They’re all the complex people issues around co-ownership and businesses in general.
Ed: It’s incredibly complex and I think one of the reasons that I’ve really enjoyed these conversations that we’ve had is because it’s so important and the Business Owners Mind is so crucially important to all of the work we do with private business owners and family business owners. As we come to the end of this fourth episode I wonder Therese are there some points that you just want to make that are maybe not directly linked to the subject headings as we’ve sort of divided these conversations, that you just want to make about the psychology and the stresses of business ownership.
Therese: Well I think the general thing is to enjoy your business as much as you can because it’s actually fun being an owner of a business. With it comes autonomy and you know, the capacity to introduce creative ideas and it’s a real sense of achievement being a business owner. So it’s absolutely positive thing to be involved in. But I guess I’d say don’t be afraid to have conversations with professionals to sort of help you along the way to get even better outcomes. And remember we’re all human, you know, none of us are immune to stress and anxiety, and at times a little bit of depression in our lives, but we can recover. It doesn’t have to be a life long illness or set back in life. It’s about working with lots of people and getting great outcomes and having health lives and healthy businesses.
Ed: Oh that’s fantastic Therese. Thank you so much. Martin.
Martin: Yeah oh look I just echo that Therese, it has been so interesting for us to have these discussions over the last four episodes. Just from a value perspective, if you can get these things right it really is the difference between a very very valuable business and a business that’s worth nothing. If the co-owners are fighting and it’s toxic almost inevitably the profitability it going to suffer and the business is going to suffer and these personal human issues are going to bleed into the financial and business outcomes. So we just think that the work that you do is so important, and we said I think way back in episode one, we also think that many advisers who are technically based professions and I would hold my hands up and I would put the lawyers at the top of that pack. We’re often not the best place and we often don’t have the emotional intelligence to unlock and unblock some of these very very thorny and difficult issues. So, we’ve certainly very much enjoyed this series and yeah, if anybody’s interested to learn more about Therese please check out www.thebusinessownersmind.com.au.