George Smart - Unraveling Family Knots: Preparing Future Roles in Family Businesses (L2317)

This podcast is sponsored by TalkSpace. May is Mental Health Awareness Month. In TalkSpace, the leading virtual therapy provider is telling everyone, let's face it, in therapy, by talking or texting with a supportive licensed therapist at TalkSpace, you can face whatever is holding you back, whether it's mental health symptoms, relationship drama, past trauma, bad habits, or another challenge that you need support to work through. It's easy to sign up. Just go to Talkspace.com and you'll be paired with a provider typically within 48 hours. And because you'll meet your Therapist online, you don't have to take time off work or arrange childcare. You'll meet on your schedule. Plus, TalkSpace is in-network with most major insurers, and most insured members have a $0 co-pay. Make your mental health a priority and start today. If you're not covered by insurance, get $80 off your first month with TalkSpace when you go to Talkspace.com and enter promo code S 80. That's SPA CE 80. To match with a licensed therapist today, go to Talkspace.com and enter promo code S80. Welcome to the Exit Coach radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for. Their best tips, strategies, and precautions so you can be well planned. And don't miss our one minute exit coach tip of the day on exitcoachradio.com. And now here's your host, the exit coach, Bill Black. Welcome everyone. Thanks for joining us today. I'm very pleased to introduce my next guest. He is George Smart, and George is joining us from Strategic Development Inc. in Durham, North Carolina, and we're going to talk about a subject that's very near and dear to our hearts here at Exit Coach Radio, and that is unraveling family knots. You know, we talk about, we talk about family businesses a lot, and the real goal of family business planning is to have happy Thanksgivings forever. George is going to help us to talk about that in preparing future roles in family businesses. So George, thanks for joining us. Welcome to the show. Thank you, Bill. I appreciate it. Georgia, uh, how's everything going today? You're doing well? Yes, I'm really glad to be on the show. I think this is an area that a lot of people are experiencing now. The baby boomer demographic is getting to that age where they're thinking about the next stage of their lives. Absolutely right, yeah, that's, it's a big, big push. The statistics are over 77 million baby boomers, but there's over 12 million business owners between baby boomers and traditionalists about, you know, older than them. And yeah, they're all getting to that point, how where they're starting to say, OK, uh, maybe it's time to pass the baton a little or or at least start to think about that. So tell us a little bit about you and your background and and uh what you do at MG Partner. So at strategic Development I work as a strategic planning expert with family owned businesses and other companies helping them get from one phase of their growth to another, and a very common thing that comes up is a successful family business probably has been around 20 to 30 years. And is trying to figure out where the next 20 to 30 years are going to come from. It starts at that Thanksgiving dinner table, and people use that model as a way of trying to guide their strategy for the transition conversation, and it does not work well at all. Why does it not work? Well, the thing with most families and especially in the South where I'm from, is that nobody wants to make anybody else uncomfortable, and everybody wants to be treated fairly and to treat other people fairly. So if you make those two ground rules the basis for any adult discussion, you've pretty much limited any reasonable course of action that could take place. You have to be. willing to be uncomfortable to have the discussions about possible futures. Otherwise you're going to default to what is the least resistant path, and that usually means a bad thing for the business. It usually means putting the business in the hands of somebody who is not the right person. Now this is complicated by the fact that in most family businesses, because they start out small, one or two people, and can be very. Large by the time they're through, um, often in the range of between about 100 and 200 people, uh, folks want to have others like them. They don't want to rock the boat. Uh, if there's family members involved, they want to overlook certain deficiencies they may have as managers because they're my son or my daughter or my nephew, and the biggest mistake that people make is they try. To adjust the roles to fit the people that they have rather than what professionals do in corporations is adjust the people to fit the roles they have. OK, that makes a lot of sense. You've got problematic situations where you have other relationships that extend beyond the business, and in a lot of cases it affects more than the people that are working in the business. There's also issues with people or children working outside of the. as well, and they may have jealousy or they may have, they may wonder how they're going to make out in this kind of a situation. So you have your hands full with a lot of different issues, huh? You do. And that's why most families find it initially uncomfortable but later incredibly beneficial to bring in a third party who doesn't have the history with the family and doesn't have some of the baggage, to be honest, that the family has about having certain conversations. It's very tough for families to have certain conversations. We all know this from our Thanksgiving dinners. In family businesses, we don't want to talk about the fact that one person says they want to work in the company forever but doesn't act like it. We don't want to call them out on that. We don't want to break away from this fairness doctrine. For example, in some companies you might have 3 siblings working together all getting the same pay. Nobody wants to be unfair to them, and yet the jobs they're doing are markedly different and carry greatly differing responsibilities, so their pay is not matching their responsibilities. We would never do that with a regular employee, but it happens with companies all the time. Absolutely right, yes. So overall you'd think that it would be really easy to pass a business to a son or a daughter. There's no interview, you know, it's, it's a simple transaction. But again, as you're pointing out, it's not that easy, and I think you've given us some good reasons. What are some of the first steps to make this easier and clear away some of the strong emotions that people have about their children and vice versa? Well, one thing is for the parents to understand that to make a decision really requires that some people get treated better than others, but that's OK if what they're getting is appropriately leveled to what's going on. For instance, if you're going to reduce somebody's salary in a company because they're not really responsible for much, that's OK because their responsibilities match their pay. However, you'd be amazed how many companies can't even consider this because that's my daughter Helen, and I don't want to treat Helen any differently than I do. Brian, who may be running the whole western division of the company or vice versa. I mean, the point is that you have to start looking at this not in terms of fair or unfair, but in terms of appropriate to the future or not. You would never put an employee in place that didn't have the criteria and the experience and the background to be able to fully do the job, and that's what a lot of companies. Do with family. One of the things that can be done to prepare family for that is to fire the family member, which can be one of the best things you can do for them. This doesn't have to be a permanent firing. It can be a firing like for 2 years. I have helped clients do this, and it's always very tough in the beginning, but the idea is let's say that you have a son that is doing OK in your company. But they're certainly not capable of taking it over, and you want to exit the company in 5 years. Well, you can do a couple of different things. A, you can do nothing and just make hope your business plan, which I don't advise. B, you can try to give that person some training. You can send them to a few classes. You can maybe send them to a course at a university, and maybe, maybe not, they'll learn something. And then you'll sort of see how it goes. A better alternative is to find someone in your industry. So let's say that you're a custom shoe distributor in Michigan. You find one of your buddies or industry pals in California who is running their company that doesn't really compete with you and see if you can place your son in their company. It's like giving them an internship. And they go to a different company where they're not the family and they don't get the same access and privilege and they either prove themselves or they don't. So at the end of their time at the other company, that person, that that child either realizes that they don't have what it takes to fully run a company or that they do and now they are seasoned and prepared to come back and take over the reins. I like that. So you're, you're basically hopefully finding something within your industry, so they're learning something about your industry, but they're also learning discipline and they're learning what it takes from without favoritism to be part of a growing and and well the problem. Be in that 2 years they may not work themselves up to management, of course, but at least you'll have a good, a clear picture, a clearer picture of of how valuable they are, and then they'll have a better understanding of of what they have to do without favoritism. And what parents often forget is that while there certainly is greed among children, most of the emotions that children feel feel is obligation. They don't want to disappoint their parents. They don't want to be the one that says, no dad, no mom, I'm not going to be part of this business. I want to be an architect. I want to be an engineer. I want to be making movies or doing art. I don't want to work in the business that I've grown up in just cause it it's not my thing. Children don't really want to say that or find it uncomfortable to say that. So as part of the facilitated process of getting families to communicate with each other, it's related to general family counseling and giving people some ways they can express themselves in a safe manner. Yeah, and you know, a lot of people have dealt with that, George, over the years, as I'm sure you have many times, the fair versus equal treatment. They feel like they want to, you know, there's nothing worse than going into a situation and finding out that there's 3 children, 2 of them don't work in the business. One of them does, and Dad has willed the business to all 3 children equally because they figure they're all my children. I love them all the same, but that's not the best, that's just not fair for anybody, is there's conflicts all around. Well, it's not fair unless the three children are really equally participating and equally invested in the company. There needs to be some predetermined exit strategies for the children. So for instance, there needs to be options for non-manageial children, non-employee children to be bought out at the option of the ones who are still in. Company and this is easy to arrange if the parents are still alive. It usually becomes a lawsuit if the parents have passed away. Good point. Good point. Now George, let me ask you a question because I see a lot of situations out there where the owner's children aren't quite old enough to the jury's still out, but they still want to have a plan in place. If for instance dad passes away, they don't want to close the door on the child ever running the business, but they really need that key employee to continue running it. Um, what are some ideas or tips you can give people with situations like that where the jury is still out as to whether the child will be a potential owner of the business if anything happens or down the road, but yet they have that key employee who needs to be locked in. Well, I try to get the, the parents, the owners to think of a non-family employee they've had that they've really loved, and they think about it in a minute and they usually come up with somebody. Let's call her Julie. So Julie comes to the company when she's 24 years old and everybody loves Julie, and she does a great job and she's very dedicated and she advances a little bit in the company and Julie gets married and has a family and everybody loves Julie's husband and her kids. I mean, you've seen this thing before, Bill, and eventually everybody loves Julie, but they recognize she doesn't quite have what it takes to really become, say, a vice president. So I asked the parents, OK, what's the difference between a situation where we're talking about Julie and a situation where we're talking about your real daughter? and then they start to start to get into it and they start to talk about why they would give their daughter special treatment when really the things they would do for Julie is what they should do for the daughter. So for instance, there needs to be a succession plan in place to where if something does happen to the owners, it's identified in advance who would take over and for how long and what sort of succession plan would be followed. Most small companies don't have this. It's just assumed. That Ben, who's been there for 10 years and is the chief financial officer, is going to run things if something goes wrong, but that's usually never written down and certainly never discussed because people don't want to talk about their own death and they don't want to talk about somebody else passing away. It seems very morbid. But it's one of those necessary uncomfortable discussions that has to take place. Again, why it's usually better to have a third party there. Good point. And then the next piece of it is, OK, well, what do we do with Julie or a daughter in terms of advancing them up when they're not ready? Well, you would look at the same things that you would do with an employee when they were not ready. You would look at. The person that needs skills, is this the person that needs education? Is this a person that really needs to leave the company for a certain amount of time and work somewhere else like we mentioned earlier? That can be an opportunity for that employee just as well as someone in the family. And in fact, certain industries kind of thrive on that informally. They are such that certain Types of companies will kind of steal from each other and so it's become standard practice that, you know, once somebody reaches the VP level, they're probably going to get poached for a couple of years. They go away, they learn a lot, and then maybe they get recruited back to become president of the company later. On a smaller scale that can be done for most anybody in the company. If it's an important enough position, it's something that should be considered. Really good points and, and I think it also boils down to, you know, making sure that there are options available because the situation might be such that if the business has to be sold to the key employee. To because the wife doesn't, for instance, the husband died, the wife doesn't want to be at risk anymore in this business. The key employee wants to buy it, but the, say the son is too young to really get in and manage it. You have to think about what's best for the wife at this point, what's best for her situation. You don't want to offer the employee 20% ownership, and then they walk. You don't want an employee to walk away at that point. There's very delicate issues and there's a lot of ways to go, and it's important to Give the spouse at that point options as much as possible. So what are some of the components that you always look for in a succession plan? So the first thing to look at is what are the roles that we're going to need this year, next year, the year after, the year after. And by roles I mean what are the positions in the company that we can see we have to fulfill. We're not saying at this point who fills them. We're just saying what the roles are. That by itself is. Like throws organizations light years ahead because they don't often talk about it that way. They talk about Julie and what are we going to do with Julie and what are we going to do with our son? They try to fit the people to the roles instead of the roles to the to the people and and one of the things that really becomes important is laying out these roles over time and saying, OK, we're growing in this market, we're going to need to add two sales people there in about 2 years and we're decreasing over here and we can see that role going away. And then once that's all laid out, you can see what the baseline trajectory is for the company given everything else is equal, which of course it always isn't, but that's a starting point. And the next thing is to do some scenario planning, uh, some scenario planning, which is to say, OK, given our baseline of roles over time, let's throw some events at it. Let's throw the owner's retirement here in year 3. Let's throw the owner's death in year 1. Let's throw the child changing their mind about being in the company in year 4. How does this affect our timeline? And what begins to emerge is how you need to shore up the timeline in order to accommodate the most different scenarios for the future. So it becomes obvious that if a son or daughter does not have the skills they need, the company is not going to benefit under any scenario that's going to be going forth in the future. So it helps pave the way for that uncomfortable conversation. It says, hey, you know, we need to have you either get out of the company and work somewhere else for a while. Or go back and get your MBA or figure out something else to do, of course you wouldn't say it that way, but that's the gist of the conversation that needs to occur. And the best circumstances where you can get the child to see it themselves, to see the writing on the wall, and then know that the best outcome for everybody is for them to pursue the necessary gap in their abilities. I think that's brilliant, Georgia. You've taken the names out of the planning upfront. You've taken the personality conflicts of family relationships out of it. And just said what's best for the business and then and then reinsert those individuals back in and say now what happens if if your situation changes I think that's brilliant that's exactly what business owners should be how they should approach this how do our listeners get in touch with you to learn more about how you approach this and where do they find you, George? I'm based in the Research Triangle area of North Carolina. The website is www.strategicdevelopment.com, and they can reach me personally at 919-740-8407 or Gsmart at strategicdevelopment.com. And what will they find at your website? Uh, they will find information on the two primary services we offer for small business, family business like we're discussing here. I work as a business coach coming in and working with the owners, the management, the management team. And then we also for large corporations like Microsoft, Department of Transportation, things like that, we do leadership development simulations for leadership development programs inside companies. Well, you've given us some very, very insightful information, George, but unfortunately we only scratched the surface today, so I hope that we can talk again in the near future and go deeper on this topic because there's a lot more I'm sure that we can do to help our listeners get prepared for this. I hope they'll get in touch with you and I look forward to the next time we speak. Thank you very much, Bill. I appreciate it. We're gonna take a short break, we'll be right back after this. So please stay tuned. Just thinking about what will happen to your business if you're gone keep you awake at night? Will you get the price you need from your business to carry you through retirement? The BEI Network of Exit Planning Professions is the world's leading advisor network with the power to help business owners transition out of business on their own timeline and terms. Ask your most trusted advisor to create a BEI plan for you, or visit us at exitlannning.com. That's exitlannning.com. You're listening to Exit Coachradio.com, the information station for age 50 plus business owners, where we're interviewing top advisors for their best tips, ideas, and precautions so you can be well planned. We upload new one minute tips every day. Exitcoachradio.com. Come listen for a minute. Thank you for listening to Exit Coach Radio. Hey friend, I know how it feels, waking up exhausted after multiple trips to the bathroom and feeling embarrassed by sudden leaks. I used to be constantly on edge, searching for a restroom whenever I was out. Then I discovered better woman. I was skeptical at first, but two months in. Everything changed. I experienced improved bladder control. No more heart-stopping moments when I laugh or sneeze, less urge to go, deeper and more restful sleep. I finally felt like myself again, confident and in control. Better Woman is natural, effective, and trusted by women for over 25 years. Ready to take back your control? Head over to Bebetternow.com to order your supply today. That's Bebetternow.com. These statements have not been evaluated by the FDA. This product is not intended to diagnose, treat, cure or prevent any disease. Users directed individual results may vary.