Carol Ryan – FBCG, Inc.

And the survey “sez….”

According to a 2007 Mass Mutual survey of Family Businesses

The most trusted advisor is their spouse The second most trusted advisor is their

accountant Most trusted business advisor is their

accountant So clearly…you are doing something right

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Why are you here?

So you can stay number one!

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Poll question

Of the following, which issues effect your role as a trusted advisor the most?

A. Family issues

B. Ownership issues

C. Business issues

D. Governance issues (BOD and Advisory)

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Agenda

Cover the unique traits of family business

Scenarios Ways to intervene effectively

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Unique traits of a family business Three overlapping systems Generational stages Financial performance Strategic perspective Succession planning Ownership Values

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Different systems have different goalsFamily goals: love, loyaltyBusiness/management goals: performance,

execution of strategyOwner goals: ROI

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Systems

The Basics: Three Circles*

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Business2

Owners3

Family1

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* Adapted from Gersick, Lansberg, Davis, McCollum (1997)

Manager to manager

Owner to owner

Sibling to sibling

Spouse to spouse

Adapted from: Lundberg, Craig C. Unraveling Communications Among Family Members.

Communications are easiest when all wear the same hat

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Adapted from: Lundberg, Craig C. Unraveling Communications Among Family Members.

© Drew S. Mendoza, Loyola University ChicagoFamily Business Center

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Poll question

Of the family businesses with which you work, are they mostly…?A. First generation

B. Second generation

C. Third generation

D. Fourth and beyond

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Generational Stages

Transition in a family business is seen in generationsFounder to sibSib to cousinsCousin/Dynasty

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Emergent

Roots

Expediency

Control

Business 1stBusiness

Emergent

Expediency

Control

Selective

Roots

Family

Wings

Plan

Patience

Trust

Inclusive

1st Generation

Generational Patterns in Paradox

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Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©

Founder Generation

Financial controls and systems Estate and ownership succession

planning Mentoring successors Transfer to next generation Help developing a banking relationship

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Business

Tradition

Focus

Money

Task

MeritEmergent

Roots

Expediency

Business 1stFamily

Diversify

Heart

Process

Equality

Change

2nd Generation

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Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©

Generational Patterns Continue in G2

Second Generation:“Family Partnership” Reviewing financial reporting and

management systems Tax consequences of various ownership

structures Bonus and incentive plans for managers Coordinating family members’ estate

plans Advice on business expansion and

growth reviewing banking relationships

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Invest

Privacy

Business

Loyalty

Democracy

Family Branch

Freedom

Consensus

One Family

Family

Harvest

Transparency

3rd Generation

Family MembersWorking In the Business

Family MembersNot Working In the Business

Generational Patterns in Paradox

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Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©

Third Generation and Beyond:“Family Dynasty” Estate master plans to perpetuate the

business Transitional de-railers

Shift in thinking to a stewardship way, taking into account size of company, number of owners, and who’s in vs. out

Cash needsValuation

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Family Priorities

Strategic Choice

Mgmt. Philosophy

Decision Making

Ownership Focus

1st Generation 2nd Generation 3rd Generation

Emergent & Plan Focus & Diversify Invest & Harvest

Roots & Wings

Money & Heart

Loyalty & Freedom

Expediency & Patience

Tradition & Change

Privacy & Transparency

Control & Trust Task & Process Democracy & Consensus

Selective & Inclusive Merit & Equality Branch & One Family

Amy Schuman, Stacy Stutz, John L. Ward, FBCG ©

Understanding Paradox Across Generations

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Financial Goals

Stewards Willing to take a risk that may not pay off

for years Willing to forgo immediate profit for long

term non-financial benefit

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Family Firms Outperform the S&P 500

Family Cos.(S & P 500)

Non-Family(S & P 500)

ROE+ 15.6% 11.2%

Average ROA+ 5.4% 4.1%

Revenue Growth (10-yr. avg)+ 23.4% 10.8%

Income Growth (10-yr. avg)+ 21.1% 12.6%

ROE predicted for 2006* 20.7%` 15.1%

EBITDA of companies still controlled by founders +6.65% **

+Business Week, 2003*Morgan Stanley reported by International Herald Tribune,

2006**Anderson and Reeb, 2003 24

Family Firms Are More Profitable

Ward: 26% vs. 21% ROIC (5 years)

Anderson-Reeb++: 5 – 10% S&P 500 (10 years)

Vellalonga & Amit+: +19% Fortune 500 (7 years)

Pitcairn US: 30% Premium MV/BV (20 years)

Morgan Stanley: +16%/yr vs. MSCI &18.5% ROE vs. 14.1% ROE

(5 years)

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Strategic Perspective

Future orientation is on a longer trajectory

“Future” means generation after generation after generation

Paradoxical issue of preserving the past while innovating for the future

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Family Business Strategy and Performance Family controlled businesses have

higher profitability, more perceived quality by marketplace, less investment-intensive strategies and larger increases in R&D and marketing

spending for market share building

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Source: Study of businesses in North America and Europe, John L. Ward

Executive survey on strategic perspective

Non-family firms Family firms

I believe my company under-invests in the future

43% 8%

Our planning horizons are getting shorter

84% 59%

If I see a near-term problem, I shift my focus to it at the detriment of long-term initiatives

74% 47%

The future will be better than the past 68% 90%

There's no doubt in my mind who will control this company in five years

40% 82%

In our company we actively promote the past

21% 75%

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Source: Survey of 300 executives, John L. Ward

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Poll Question

I have attended the family meeting to explain the ownership succession and how the shares are divided.

Yes

No

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Succession Planning

Non-family Business Succession planning focuses on the

next leader(s) of our company Who will be CEO and concern for key

executives It’s about transition of the business

leadership

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Succession Planning

Family Business Ownership changes Ownership expands Estate planning Leadership development Leadership transition Emotional issues of “Letting Go”

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Poll question

When working with family businesses, who do you interface with the most?

A. Owner/founder

B. Key management

C. Board members

D. Family

E. Owner and spouse

F. All of the above

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Poll Question

Who do you think you should be interfacing with the most?

Owner/founder Key management BOD members Family Owner and spouse All of the above

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Public, Non-Family Businesses vs.Thriving Family Controlled Businesses

Popular Practices Family Businesses

Ownership Philosophy:Stakeholders

Owners as traders:Quick profitsLittle loyalty

Owners as stewards:Involved in enterpriseFocused on long haul

Business Philosophy:

Top Managers

Tactically, financially drivenQuarterly numbers are king Core competencies and competitive focus suffer

Strategically, mission drivenLong term is kingProfound investments in business and its people

Social Philosophy:Staff &

Relationships

IndividualismMarket/bureaucratic controlOne-shot transactionsExtrinsic incentives

Collective, shared valuesClan controlLasting relationshipsIntrinsic incentives

Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses

Danny Miller and Isabelle Le Breton-Miller, Harvard Business School Press, 200537

Ownership in Family Business* Owners are related by blood Can be some “family of affinity” owners Ownership is passed down and/or gifted Owners can be disengaged Owners can be Managers, on the BOD,

on the Family council

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* For the most part

Ownership in Family Business – Best Practices Educating owners Focusing on making owners responsible

heirs Owners are part of family meetings and

help build values and value statements Owners have a closer relationship with

the fiduciary board

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Values

Family Businesses have them Non-family Businesses have them How are they different?

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Family vs. Non-family BusinessValues – Research supports Family firms have stronger “people” values

than non-family firms Family firms are more likely to put

customers and employees ahead of profits Research show non-family firms have more

commercially-oriented values Family firms have more community-

oriented values Family firms value statements are more

permanent (there are more traditions and artifacts to reinforce them)

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Scenario One

Pop asks the CPA for a plan to transfer ownership equally to three sons and control to one of the three

What is your first question to Pop?

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Scenario two You are at the family meeting presenting

the ownership structure. No one asks a question. Do you assume?

They are afraid to? They are so confused they can’t

articulate a question? They are bored? All of the above? What do you DO???

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Lessons?

Do not Assume you’ll be successful short term in

the family business market Assume that tax minimization is the only

goal of the planning process Assume that all families have the same

goals Be afraid to talk about values, goals,

aspirations for individual, family and business

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Tensions often originate in predictable spheres Successors preparedness Non-family management preparedness Senior preparedness Customer preparedness Family preparedness Spousal preparedness

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Questions for the family to ask themselves? How are we going to behave toward one another? How are we going to make decisions? How will we handle conflict and disagreement? What do we say about each other to others, especially spouses,

parents and employees? How will we manage our public image? What information do we pass along to each other from our parents

spouses employees and others? If I leave, can I come back? Are we two (three, four) families or one? What steps do we as a family need to take to prepare cousins, our

children for shared responsibilities of family ad business? How can we prepare our children for wealth and its responsibilities? Should we have a family foundation?

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Questions for you to ask the family What is the purpose of the money? Does the family have a shared vision for

the assets’ deployment two generations ahead?

How can the family benefit from owning an asset together?

How can we prepare children for the responsibilities of wealth?

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MORE Questions for you to ask the family

How will you as siblings make decisions together?

How many families are you? How much should we give to the kids? How much should we give away? How will the next generation spouses be

prepared? What is the vision of the next generation? Can I work with them, too?

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Dangerous assumptions made by advisors The spouse is a potential adversary The kids are irresponsible The money will ruin the children Tax minimization and wealth

enhancement are always their #1 and #2 priorities

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One last thought. . .

In order for an advisor to act as a quarterback for a business-owning family client, s/he must be able to read and control the offensive line-up. Equally important, s/he has to read the entire defensive line, not simply the position of a single player.

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