Vince Mastrovito - Causes and Solutions for Family Business Conflicts

Hi everyone, it's Bill Black, the exit coach from the Exit Coach Radio show. You know, one of the biggest questions I get on the show is what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was 5 years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting Exit plan with no spaces to 44222. That's exit plan to 44222. Again, text exit plan to 44222. 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 now here's your host, the exit coach Bill Black. Hello everyone, welcome to the show. Thanks so much for joining me. Uh, if you've listened to this show, this podcast at all in the past, you've probably heard my first guest today, um, many times, and he is Vincent Mastrovito. He's a certified exit planning associate or SEPA, and he's a family business consultant from Prometis Partners in Grand Rapids, Michigan, and Vince has talked to us about a variety of different topics surrounding, especially family businesses, but mainly private businesses in general. And today we're going to talk a little bit about family conflicts, how they happen. A who's usually the source and how to handle them. So that's going to be our topic for today. Vince, once again, thank you so much for joining me today and welcome to the show. Bill, it's a pleasure to be on your show. Great to have your listeners with the show. Thanks so much again for having us here. So hope all is well. Thank you, Vince. You make it easy for me because you, you always come up with great content and our listeners really love it. So let's, let's delve into it a little bit. I think our listeners know who you are by now. Let's talk about what's what's happening with family businesses when it comes to conflict. There, you know, family businesses are always going to have conflict. There's no such thing as a family business that I've seen anyways that doesn't have something going on behind the scenes. Um, let's set the table. What kind of conflicts do you want to talk about today? What are some of the most prevalent things that you see out there? Well, some of the things that we are seeing out here in in some of the people that we are talking to business owners that we're talking to is first and foremost is what are some of the expectations of the family inside of the business and a lot of that is really just Like, what are you really supposed to be doing and in what time frame and to what quality control level are you supposed to be completing the work that you are assigned for it and then a lot of it is also when they're supposed to be showing up for work. Uh, many times, uh, family businesses, um, feel like they just kind of have a kind of a, a free will type of calendar, uh, with, uh, I could show up at this time and I could leave at this time and I still kind of get my paycheck from the same perspective. And so I think this is about building and understanding that every business to your point bill is going to have conflicts. But uh when you take a look at some of the structures of a family business, and we try to understand that we're trying to move this business from one generation to the next so that we can sustain cash flow. And we can allow the founding owners of the business to transition out with the new generation moving back in and feeling like they know where the new direction of the company is going to be going based on this particular time of economic prosperity is understanding what are those expectations and when should we actually be pulling the trigger on all of these processes. And I think that's where we start to see some differences because um. The usually the founder of the business will kind of hold close to the vest many of the objectives that he or she wants to actually accomplish in in the business, and the kids are kind of plugging along, thinking and hoping with a prayer that this is going to inevitably be sold or transferred over to them. They certainly have their own ideas of what they want to do inside the business. And there really is no communication and so now you start to have um discussions that get start to get a little bit more heated in in in hostility and differences in opinion and if those go on for an extended period of time, then you can potentially end up with some really embedded bad conflicts of interest or or really some resolutions that may never be able to be solved. Yeah, you said a mouthful there. There's there's several things that I took from what you just said. One of them is the communication of the expectations and the adherence to that those expectations by the next generation. You know, it occurs to me that one of the things you said too was that the younger generation, the family member, It isn't so they're not living in a world where they think they're ever going to get fired. There are no consequences. There's just basically, hey, I can show up late cause they're not going to fire me. So let's talk about for a second, you know, what really, what, what makes a good employee, not a family member, show up on time? Is it, is it the fear that they're going to lose their job, right? It's the, it's the fear of discipline. Yeah, and I also think it's the just the plain fact of respect to say, listen, this is a family business and this is the this is the cash flow that allows us to to live our lifestyle and I need to, I need to respect the fact that I was given that opportunity. To come into this business and to have an opportunity to move up the ladder, uh, if I can prove myself. I think really we have to make sure that when we look at the foundation of businesses. When you are when you are the 2nd or 3rd or 4th generation wherever you are in that timeline. We have to understand that that that you may not think the same way that the the founding members think of the business, but that doesn't mean that you that you can. Just take things for granted and assume that you're going to be part of the business and just assume that all of this money is going to come down to you and our experiences are just telling us that this is really what is happening. It's just the expectation is, well, I should just get the business and it really shouldn't matter what I do or if I really even have the skill set to take over this business and it really ends up being a kind of a power struggle. With the founding members of the business trying to get it over to the new business altogether. So it's, you know, it, it really becomes a huge challenge and then what happens is family gets into personal life and it carries over into that environment and they really start to build some hostility, um, and in many cases, it just never gets resolved. The We ended up uh part working on a case that we actually ended up having to stop after about a month. It was a 4th generation business and it was just so embedded with um with conflict that they weren't interested in moving the backstabbing, uh, and the stealing from the company was just atrocious, and they actually ended up getting a litigation attorney settling out the money they need to settle and they closed the business. Nobody wants that, of course, you know, nobody wants it to go that far. So when you come into a business situation, Vince and the owner says to you, Hey, I want you to, I want you to vet my next generation leadership that I've picked out my sons, daughters, whoever it might be, and I want you to, we're having problems and I don't want to be the bearer of bad news if they don't have what it takes. Do you find yourself in a situation of, I guess, vetting those individuals to report back to the owner on whether you think they should pursue that insider transaction or look for another buyer? I do, yeah, we use a couple of tools. One, we have our own, uh, kind of like interview process that we go through, not only with the owner but we also go through it with the children and we spend about 2 hours with each one of them separately, uh, just talking about their perception of the business, the challenges they may see with the business, the opportunities, and so we go through a series of discussions with each party. Then we also use a couple of other tools to use some of the behavioral assessments because it's important to understand how people think and at what pace they think and how they make decisions. Uh, and in many cases, you might have an owner that makes really quick decisions, but you have kids that come in that really are looking for more information and clarity and more of a process oriented, and sometimes those two processes are gonna clash. And so what we have to do is we have to explain those two styles to the, to the family so that they better understand how they really should be communicating with each other. How, how does that go over with, I mean, All of this, I call it human engineering, human, the human science, right, of disk and all these other types of things they've been around for a long time, but they using them in this way so you can teach them how to communicate. Do the owners bristle at that and say if they can't, you know, why should I learn how to communicate to them? I'm giving them a business, you know, basically on a silver platter. Yeah, we, we do get some pushback from time to time, not, not, not a whole lot, but we certainly do get some pushback as to, you know, at least an initial question of why is this so important. And to your point, they just say, look at, we're, we're financing this deal for these kids. Why do we need to go through this? And part of our conversation with that bill is to help them understand how to make the transition smoothly. So that both parties understand what the expectations are and how to make sure that that owner that is, is handing over the business to the next generation, that if they're looking to get paid a couple million dollars or whatever that number is out of that business, that that they feel comfortable that this new leadership. Um, has the skill set to handle the responsibilities and the economic challenges that could, that could come at them and still be able to make the payments to them so that their lifestyle is in good shape. And once we go through that and they understand what their process is and what their, their thinking, their think tank speed is, now they understand a little bit more why this is really important. So yeah, to your point, sometimes we'll get some pushback on it, but once they see it, they understand it very clearly. Yeah, yeah, and I've had those experiences where really it's the owner, the current owner who's who's hiring me or you to come in and they're saying I want you to get them to become more disciplined somehow. And so like you said, I mean, well, it's not that easy. If it was that easy, you know, you could do that and so many family businesses wouldn't fail at such alarming rates. Um, what, what are, what are those you have those statistics at the top of your head, the failure rate for family businesses from one generation to the next. Well, from generation one to generation two, you're looking at about a 70% failure rate. When you go generation 2 to generation 3, you're going somewhere around 86 87% and then certainly to fifth or beyond, you're gonna get up into the 90s. I always though Bill try to let business owners know I say look at let's focus on what the 30% of the businesses that are successful in transferring a business do so that we can um understand how to make it easier for you to get that money out of your company and the the solution to that obviously is you have to put some planning in ahead of time. And you're going to have to sometimes make some tough decisions, and in some cases have some very difficult conversations. Um, it's, it's not, it's not a secret that there are a lot of baby boomer business owners. That just have a problem communicating what their objectives are to their children. What we have to remember is that that business owner started that business probably with nothing, worked 100 hours a week, sacrificed and leveraged probably everything that they have in their life to get them to where they are. So in, in essence, that business could be perceived by the founding owner as their baby, their spouse. Or however you want to position it, they have a tremendous amount of what I always call sweat equity, sleepless nights, building that to that, and the next generation needs to at least have an understanding, respected, and a conversation as to how do we work together collectively so that we can move to the next level. And I think that in itself is a huge step. In trying to keep businesses moving forward. Yeah, and to build on what you said, when you think about the employees at that business, many of those employees may have been there just about as long as the owner, and the owner has spent more time with those employees, way more time than they got to spend with the children. You know, they're more of a family member. The employees are more of a family, and when, when somebody comes in, when somebody that that is to represent that owner as their future owner, the child comes in and disrespects the organization by not showing up on time by maybe a Maybe lashing out at the owner, the founder, and they do not get the respect of those individuals, and that's what they, that's what the future hinges on more than anything is especially the key employees of that organization who are really going to be running it and have been there, you know, going to help the, the youngster coming along to get through maybe some tough times ahead. And to help the owner realize what they want, which is the economics out of the transaction and the satisfaction of knowing that their business. Has been passed on as a legacy. Yeah, I would agree. Uh, I think that, I think that is a very true statement. Um, I, I think also to, to kind of ward off some of these issues because like you said at the beginning of our conversation today, Bill. Every family business is going to have disagreements constantly. And I think what we have to have is there needs to be a almost like a written procedure as to how do we handle that conflict and how are we going to address these issues. And I think when you start to do that and in both generations and if there's more than 2 generations. You, you have to have that respect to go through the process and not just feel like it's about you, and you're trying to get everything that you can at the price of everybody else. Great point. And so it that's a, so a starting point so let's leave our listeners with uh in the last couple of minutes with a couple action items that they can, they can do or or start thinking about Vince and then we'll tell them how to get in touch with you for for some of that. OK, so I think, uh, 22 action items is one, I think that if you have not had a conversation with your children in the business about really what their expectations are for the, the position that they hold, I think you should really sit down and make sure that they have a clear understanding of what those expectations are and put it in writing. Number 2, I think you should have a separate conversation with them about what are your expectations as the founding of the business owner, what are your expectations to transition yourself out of the business and what do you expect from the business financially, if anything. And I think once you start having that dialogue with your, with the family members, then I start, then I think you're gonna really start to see a much closer relationship between the founding member and the next generation coming up. Wonderful. That's those are great action steps. I couldn't agree more. I think becoming very clear about your goals, both for the transfer of what's on the balance sheet, the assets of the business financially, and the leadership. are great first steps, and I know one thing, the person I'm talking with right now is a great person for you to talk to, listener, if you're if you're concerned about that and you want to get started on that. Vince, what's the best way for our listeners to get in touch with you? I think the best way is uh once you go to our website, it is www.prop ROIS partners.com. There is a just a endless amount of educational material on there and uh if they want to um call us at our office, the phone number is 616-622-3070. Terrific. Vince, once again, thank you so much for coming on and and tackling what's a, what can be a very difficult topic and making it very simple and I think interesting for our listeners. Thank you so much. Look forward to the next time we get to talk. Thanks Bill I appreciate the time have a great day. Thank you for listening to Exit Coach Radio.