ATLANTA BARCELONA CHICAGO FONTAINEBLEAU LAUSANNE LOS ANGELES MILAN

NETHERLANDS PARIS PITTSBURGH SAO PAULO SINGAPORE TEL AVIV TORONTO

"Someday This Will All Be Yours" Requires a Plan

Dr. Otis Baskin, ConsultantFBCG

ATLANTA BARCELONA CHICAGO FONTAINEBLEAU LAUSANNE LOS ANGELES MILAN

NETHERLANDS PARIS PITTSBURGH SAO PAULO SINGAPORE TEL AVIV TORONTO

“Someday This Will All Be Yours” Requires a Plan

Presented by:

Otis Baskin, PhDFamily Business Consulting GroupProfessor, Pepperdine University

Today’s Agenda

• Family Business – the secrets to Success• Success in Family Business requires Parallel Planning

– Family and Business Continuity are too important to leave to chance.

• Succession: How to prevent the crises that plague too many.– Succession as a Process – Not an Event

• The Critical Role of Non-family Key Executives

The Family Business Advantage

Performance

Competitive Advantage

The Role of Trust

Family Business Performance

BusinessWeek – 2003“Family, Inc.” – “Surprise! One third of S&P

500 have founding families involved…and they are usually the better performers”

• Industry studies show Family Business– Perform Better– Pursue Different Strategies

Benefits of family ownership hold around the world

• Long-term view on behalf of an aligned group of shareholders with shared values and goals

• Life long preparation of the next generation

• Opportunity to pursue long-term strategies

• Strength to weather long economic cycles

The Challenges of Family Business Also Hold World-wide

(Wealth doesn’t go beyond the third generation)

ความม��งค��งร่ำ�าร่ำวยจะไม�อย��ไปถึ�งลู�กหลูานร่ำ� �นที่��สาม“富不过三代““富不過三代”

“La richesse ne va pas au-delà de la 3ème génération”

The Family Business Paradox

BusinessDominance

Sustainable Competitive Advantageor

Destructive Constraining Behavior

ExplosiveConflict

The Challenge of Generational Transitions

• From Entrepreneur to Group Ownership– Less than 35% Survive to 2nd Generation

• From Sibling Group to Family Branches– Less than 15% Survive to 3rd Generation

Generational Challenges in Transition Planning

1st Generation 2nd Generation 3rd Generation

Owner/Managed Sibling Owned Cousin Owned

•Entrepreneurship

•Unity of decision-making

•Small group of owners

•Leadership conflict

•Family branches

•Multiple owners

•Return on investment?

Lessons from Multi-Generation European

Family Businesses

Sample: 7th to 14th Generation Family Businesses• Common Factors:

– Well Defined Processes– Transparency in Planning– Consistency in Application

• Perceptions of “Fair Processes”• Mindset of “Ours” vs. “Mine”• Concept of Stewardship for Future Generations

The Global Foundation of Competitive Advantage for

Family Business

T R U S T

The Relationship Capital Model

Ownership Management

Family

T R U S T

Achieving Family & BusinessContinuity

A Parallel Planning Process

Parallel PlanningParallel PlanningProcessesProcesses

Core Core valuesvalues

FamilyFamilycommitmentcommitment

FamilyFamilyvisionvision

FamilyFamilyEnterpriseEnterprise

planplan

ManagementManagementphilosophyphilosophy

StrategicStrategiccommitmentcommitment

BusinessBusinessvisionvision

Business Business strategystrategy

planplan

ValuesValues

Strategic thinkingStrategic thinking

Shared future visionShared future vision

Formulating plansFormulating plans

FamilyFamily BusinessBusiness

FamilyFamily BusinessBusiness

Three Systems in HarmonyThree Systems in Harmony

OwnershipOwnership

F.B. Protocol/Policies (Rules)

Shareholder’s Agreement (Laws)

Family StatementValues, Mission, Vision(Values)

Voluntary vs. Inherited Ownership

• Voluntary owners

Create or purchase ownership• Inherited owners

Given/provided with ownership • Heirs can become “voluntary” owners through their

actions

How?Aronoff and Ward, Family Business Ownership: How to be an Effective Shareholder, 2002

Four Generations of Ownership

Owner-Managed

Family Partnership

Sibling Partnership

Cousins’

Collaboration

Family SyndicateAdapted from John Ward

Different Types Of Owners

• Operating Owner– Owner/manager involved in day–to-day operations of the business.

• Governing Owner– Full-time overseer but not involved in operations – like a Chairman of the

Board.• Active Owner

– Not employed in the business but takes a genuine interest, attentive to all its issues.

• Passive Owner– Collects dividends. Makes no conscious decision to stay an owner.

• Investor Owner– Like a passive owner, but if satisfied with returns, makes a conscious

decision to retain ownership.Aronoff and Ward, Family Business Ownership: How to be an Effective Shareholder, 2002

Functions of Active OwnershipFunctions of Active Ownership

StrategyStrategy• Understand RisksUnderstand Risks• Offer Meaningful Support to Offer Meaningful Support to

ManagementManagement• Monitor Vision and GoalsMonitor Vision and Goals

CultureCulture• Serve as AmbassadorsServe as Ambassadors• Monitor ValuesMonitor Values• Help TeachHelp Teach

GovernanceGovernance

• Maximize Advantages of Maximize Advantages of Private ControlPrivate Control

• Provide Checks and Balances Provide Checks and Balances of Powerof Power

• Assure Continuity of Assure Continuity of LeadershipLeadership

• Provide Clarity of Provide Clarity of ExpectationsExpectations

Ideally, all owners. . .

• Understand and respect the challenges of management including the competition for funds in a family business.

• Make themselves financially independent of the business (except those employed there)

• Find ways to get involved and be an asset to the business

• Are trustworthy

Ownership Requisites

• Ability to read a financial statement

• Basic knowledge of the family’s business and industry

• Understand the family’s goals and how to evaluate the company’s progress toward them

• Be aware of company culture and how to contribute

Ownership Requisites

• Know your legal rights and responsibilities

• Understand compensation in your industry

• Awareness of appropriate policies

• Knowledge on choosing and using advisors

• Understand and appreciate the difference in wielding voting power vs. building economic value

What Family Business Owners Deserve

• A financial return

• Appropriate corporate leadership

• Information

• Psychic income

• Accountability

• Appropriate corporate governance

• Business protection

Steps to fulfill owner responsibilities

• Address issues that define their relationship with the business and develop policies around them.

• Assure excellent governance and respect the chain of command

• Serve as a partner in strategy• Let managers do their job – express

appreciation

Steps to Next Generation Preparation

• Develop good values, morals and ethics in children and point out connection to the business.

• Instill the value of stewardship

• It’s not about power or control

• Understand the power of the dinner table

• Family meetings

Family Assessment

• Why does this family own this business?– Vision for family in business?– Vision for business in the family?

• What is the level of family commitment to the business?

• What does the family expect as owners of the business?– ROI– Legacy

Family Business GovernanceFamily Business Governance:Management, Directors, Family Shareholder RolesManagement, Directors, Family Shareholder Roles

OwnersOwners• Define Vision & Values for OwnershipDefine Vision & Values for Ownership

• Clarify Stakeholder PrioritiesClarify Stakeholder Priorities

• Set Shareholder GoalsSet Shareholder Goals

• Establish Family Business PoliciesEstablish Family Business Policies

• Select Directors Select Directors

• Affirm CEO ChoicesAffirm CEO Choices

DirectorsDirectors

• Assure Objective Decisions and Fair ProcessAssure Objective Decisions and Fair Process

• Monitor Results to Meet Shareholder GoalsMonitor Results to Meet Shareholder Goals

• Guide Officer Succession, Evaluation and CompensationGuide Officer Succession, Evaluation and Compensation

• Provide Business CounselProvide Business Counsel

ManagemenManagementt• Define MissionDefine Mission

• Lead and Establish CultureLead and Establish Culture

• Develop and Implement StrategyDevelop and Implement Strategy

• Perform to ExpectationsPerform to Expectations

FamilyCouncil

Shareholders

Board ofDirectors

Family education Committee

Next Generation

CommitteeFamily Gathering Planning Committee

Management

Family

Family Foundation Committee

Family Employment

Policy Committee

Business of the Business

Business of the Family

Strength from balance of three

Dimensions of

Family Governance

Succession

Crisis Prevention for Business Owning Families

“The final test of greatness in a CEO is how well he chooses a successor

and whether he can step aside and let his successor run the company”

Peter Drucker

FIRST STEPS IN TRANSITION PLANNING

• Business Strategic Plan

• Founder’s Personal Financial Plan

• Family’s Mission Statement

• Owner’s Estate Plan

PRINCIPLES OF EFFECTIVE GENERATIONAL TRANSITIONS

• Traditions that automatically handed the business to the eldest son have faded.

• An early designation reduces the risk that unexpected death or disability will leave the business drifting.

• Openly consider all potential candidates with a set of known criteria.

The Goal of Successful Transition:

a Non-Event

Consensus of Family, Board & Executives

Expected, Anticipated and Understood

THE KEYS TO LETTING GO

• A deep commitment to family succession.

• A secure retirement for myself and my spouse.

• A chosen successor and a target date.

• A belief that there is “life after retirement”.

• An ability to delegate decisions and authority.

• A willingness to let others take new business risks.

• An ability to trust key people with financials.

Clear Goals and Expectations

Growth

Profitability

Risk

Liquidity

Vision

Values

How to turn Family Values into Family Agreement:

"a set "a set

of written principles and/or rules of written principles and/or rules

that regulate that regulate

the relationship of a family with its business"the relationship of a family with its business"

Family Agreements = Basic Family Agreements = Basic UnderstandingUnderstanding

• Parties Involved (Who is covered?)Parties Involved (Who is covered?)

• Statement of Family Values and Beliefs (Why?)Statement of Family Values and Beliefs (Why?)

• Outline of Family Business Principles (What?)Outline of Family Business Principles (What?)

• Policies that Govern Family and Business Relations Policies that Govern Family and Business Relations (How?)(How?)

• Methods to Amend (When?)Methods to Amend (When?)

Family Agreements Define Boundaries

Ownership unity and

commitment

Familystrength

Companydevelopment

Family Family Constitution Constitution

or Protcolor Protcol

Family Family Enterprise Enterprise

PlanPlan

Shareholders AgreementShareholders Agreement

FamilyFamily BusinessBusiness

Three Systems in HarmonyThree Systems in Harmony

OwnershipOwnership

Success depends upon more than family

Key Non-Family Executives

• Provide abilities and knowledge that may not exist in the family

• Often are the stable “bridge” between generations

• Can be effective mentors for the next generation

• Provide credibility to family management

Key Non-Family ExecutivesPlay an Important Role When:

•They understand the goals and interests of all owners

•They can be objective and non-judgmental of family

•They are respected for their knowledge and contributions

•They have clear guidelines to follow from a functioning board

•They are held accountable for reasonable performance goals

•They are compensated at industry standards for performance

•They are not brought into family disputes

Board

Ownership

Competence

CommunicationConsistency

Caring

Management

Family

EnterprisePlan

Strategic Plan

Operating Plans

Family Constitutionor Protocol