Today we’re going to talk with Matt Wesley of The Wesley Group. Matt specializes in working with successful families and the businesses they’ve developed.
This episode of the Sustainable Business will deal with how you integrate the family into the family business.
Although there are less junior family members joining a family business, we still have privately held businesses where integrating the family and the business is a very big deal. This is a very complicated area of family dynamics and you’ll find that Matt’s comments and suggestions are ones that you should consider in your own family and business.
I enjoyed this conversation and hope you do too.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Good afternoon. Today’s podcast features Matt Wesley of the Wesley Group. Matt specializes in helping successful people create thriving families. I’ve known Matt for a few years and I have been really impressed with his mind and the way he goes about and thinks about family systems.
Today, were going to talk a bit about how to integrate the family in the family business. Although there are less and less family businesses being transferred between generations, there still is a big interest in how it can be done well. I personally came from a family business and for the most part, the transition we made was one that had its ups and downs. Working with Matt would have given us some systems that we could’ve used and made the whole process a lot easier. I’m really anxious to get started and see what Matt suggests is best practices in this very complicated area of family life.
Hello Matt, how are you today?
Matt: I’m doing really well and it’s good to be with you and with the listeners.
Josh: Well, I’m looking forward to our conversation. In fact, I’ve been looking for this conversation for several weeks since we decided to start doing it. Let’s just start off with, what do you think are core challenges for people who are trying to pass their business to their kids?
Matt: Well, obviously, there are a number of different challenges that families face as they engage in this. One of the things that I think is most challenging is the fact that oftentimes there are two very different systems in play. The business owner has typically been spending a great deal of his/her adult life building this business. The operating system of that business is premised on excellence, so you have to have a business that performs well, that engages the market effectively, that understands its supply chain, that works well with employees, that has go-to market strategy that’s effective and so on and so forth. If anything is broken in that process, then the entire business is put in jeopardy. And so, the entire operating system, the business is premised on excellence.
When you look at the family side, typically it’s often another parent who’s been primarily in charge of developing that. Or if it’s the same parent who built the business, they will be wearing very different hats when they go home. The family has an entirely different operating system. They operate on the basis of love and inclusion – the big events in a family’s life are marriages, deaths, divorces and raising children, all of those kinds of things which requires this kind of operating system of inclusion, care and concern.
So oftentimes, when businesses are looking to move from generation to generation, those two operating systems which have grown up entirely independently and separately from one another are all of a sudden brought together and the two operating systems often collide in ways that create a great deal of difficulty for both the family and the business as they try to navigate what this new creature looks like that they’re trying to bring together.
Josh: Now, let’s talk about the two parents in the family system and the one parent in the business system.
Josh: It seems to me that the one parent in the business system – in the family system and then the other parent who’s just in the family system often have some major conflicts – it gets really in the way when children decide they want to join the business or parents decide they want their children to join the business.
Matt: Yup, absolutely. Those two systems are obviously operative in the marriage itself. Oftentimes, the spouse that is primarily responsible for the family doesn’t understand really what’s going on within the business system and the importance of driving excellence within that system and really is wanting to keep peace, make sure that all children are included in the business process and so on and so forth. Those impulses are oftentimes shared by the parent who is in the business as well. They oftentimes, for example, want a son or a daughter to succeed them in the business, if it’s a family business that’s moving from generation to generation. They’ll oftentimes overlook questions of qualification, capacity and capability in their child simply because they have a desire to see the family own this business and operate this business from generation to generation. That’s a problem with inclusion. We want to include this child in the business even though it won’t necessarily promote the kind of excellence that we want in the business going forward and the business needs to survive. And so, those questions of the parental negotiation of those two operating systems becomes critical potential break point in the succession of the business from one generation to the next.
Josh: How would you avoid having that breakpoint?
Matt: I’m not sure that you actually can avoid having the break point. I think what happens is that you have to figure out a new way of operating in the next generation and that takes some time. It’s not an easy process but it helps to understand what the road map for that process should look like and how you bring it about.
I think it starts with, first of all, recognizing that in a first‑generation business there are several roles that the business owner is playing in that business. Oftentimes, there are the operator of the business. They’re the ones who go into the office everyday and make sure that the trains are running on time. They’re the CEO and oftentimes the COO of their organization. They are also the owners of the business. They have 100% stake in the economic fortunes of the business and they have all of the control over the business decisions so they are, for all intents and purposes, the owners of the business. They’re also the governors of the business. So, very few family businesses that I see in the first generation develop meaningful boards of directors until they reach a certain level. And almost all of the governing decisions, the strategic decisions, the hiring and firing decisions of the Chief Executive and all of those kinds of decisions rest with the owner. So, all of those functions are tied up in one person.
A big chunk of the success of moving a business to the next generation is understanding what the roles of each of those key components of a business are. What does an owner do and how does an owner function? Who are the people who are actually running the business – the management of the business? And then finally, the governance of the business. So, early education around those things and helping families begin to become educated as to what those roles are can oftentimes help head off some of the problems of bringing these two systems together. It’s kind of a structural approach to it but it opens up an avenue for creating some good boundaries and some good fences that help that transition go more smoothly.
So, for example, to ground this a little bit, oftentimes you’ll have one child in the business and working in the business. They’re actually in that operations piece of it but some other child may not be in the business and working in the business and they may end up with some sort of an ownership stake in the business. It’s very important that the person who is the owner understands what the role and responsibilities of the owners who are in a business and that the person who’s operating the business understands what their fiduciary obligations are to the owners of the business. And so, those kinds of things can help ease some of the stress, tension and anxiety that get created in the transition of a business from one generation to the next.
Josh: Let’s just take a look at that piece because that’s, in my opinion, a huge big deal in big family businesses and even small family businesses. When I see a family business where there’s operating members who own stock and non-operating remembers who own stock. It’s almost a guarantee we’re going to have a conflict at some point, especially after mom and dad pass on.
Matt: Yup, absolutely.
Josh: Which is, the people in the business want to grow it and the people outside the business want the cash.
Matt: Right. Oftentimes, that’s the case. But I would argue that that’s a product of having ill-educated owners and ill-educated operators, in part. It may be that the situation runs more deeply than that but if the capital is properly deployed – and that’s a big if, but if the capital is properly deployed, then the owners should value some re-investment within the company and how that should play out. And the operators of the business should be—their tenure as operators – as part of a fiduciary stewardship for the benefit of the shareholders.
It’s a mindset shift and sometimes that is a bridge too far for families. And often times, what you see in those families is a consolidation of ownership under the operator piece so that they might buy out their siblings or there might be something done in the estate plan to cash out the children who are not part of the business. It can sort itself out that way but there are plenty of families that I know of where the operators of the business are family members and there are other family members who are shareholders, who continue to function well together and where that functioning can be really effective.
Josh: So, you mentioned education as being an important piece to get both sides of this equation understand each other. What specific types of education would you recommend?
Matt: Again, if you view these three roles, you’ve got the owners, you have the operators and you have the governors – the trustees. Each one of those has its own educational agenda.
So, for operators in the business, you want people who are highly qualified to be able to run that business. And oftentimes, what I’ve seen is that the next generation coming into a business is partially equipped to run the business but not fully equipped to run the business.
The owners, the people who are outside of the business – looking on, are saying to themselves, “Well I don’t really trust this guy to run the business as effectively as, say, dad did”. And so, the question is, “How do you close that gap and have that succeeding generation meet certain criteria and standards that will give comfort to the owners of the business that they’ve got the right person in the chair of the CEO?” So, that may involve formal education, say, getting an MBA or doing on-going certification programs. It may involve some coaching and mentoring. It may involve bringing in outside business consultants to help improve the operations of the business. Those kinds of things may be in play in the operating seat.
In the ownership seat, you really want people to understand how to read balance sheets, how to read income statements so that they can be smart owners of the business. You want them to understand the business itself. What are the markets that it’s serving? Is it delivering on its brand promise? How is it moving? You just want smart shareholders for the business who are owners of membership interests or whatever legal form it has. But you want those people to really understand what it means to be a good owner and how to fulfill those responsibilities. And so, a curriculum needs to be developed for them.
And then, for the governance piece, the owners and the operators need to understand the role of governance and how governance should play in that, and the value of such things as outside directors and people within the family who can make good decisions, good process in place. What does a board do? How does it function? What are its obligations?
Josh: Let’s talk a little bit about culture. How does that play out in the success or failure of a business succession?
Matt: You know, everything I’ve said so far is pretty structural. It’s all about understanding their roles and understanding the structure of the business – how it operates almost on an orchard basis. What will kill that every time is family culture, how family culture operates, and what goes on within family culture.
One of the common sayings that Peter Drucker, the great business consultant, had was that “Culture eats strategy for breakfast”. And what he meant by that was the C-sweep may have a great plan for the company but driving that down, into the company, and getting everybody aligned behind that strategy is not easy. And the culture will often times undo great strategic work.
In family business, I would change that to say that “Culture eats structure for breakfast”. So you can have the best estate planning, you can have the best education programs, you can have all sorts of great things going on – on a structural level but the culture will decimate that if it isn’t healthy. And so, what makes for healthy culture? Part of what I see going on within a family is that there’s oftentimes two drives that are in play. There’s the drive to control your own destiny. As an individual, you want self-determination and you want to be able to lead your own life, to lead a fulfilling life as you see it. And then the other drive is for connection. So, we might say that there’s this drive for autonomy and there’s this drive for connection which we could translate as a drive for power and a drive for love. And so, these dynamics of power and love are in play in every family and those create a tremendous amount of anxiety for families.
Anybody who’s had a teenager recognizes this immediately. Though what ends up happening is that the teenager wants to differentiate, the adult wants to remain connected while at the same time wanting them to differentiate. At the same time, the teenager wants to be connected. And their drives for individuation and their ambivalence about that individuation and connection creates tremendous amount of family anxiety. And so parents become extraordinarily anxious as children hit their teenage years. And that anxiety ripples out to the kids who are also anxious. And their responses to anxiety are typical. It’s fight, flight – so we’re familiar with those two. Another one is freeze – we just freeze in the face of it. Sometimes they just go into denial over the anxiety that they’re facing. Fourth one is flocking which is basically wanting to talk about things and process things. And so, oftentimes you’ll see families fracture into groups where they’re all flocking together to deal with the anxiety. And then the final one is knee-jerk reactions to fix it without really kind of thinking the problem through. So, people get anxious and they just get into activity immediately.
So, those are the [inaudible 00:14:02] that a family culture is fractured – fighting, fleeing the problem, freezing in the face of it, a lot of flocking behavior going on, or just attempts to fix a lot of activity without a lot of productivity. And so, those things indicate that there’s a problem in the family culture. Then the question becomes “How do you fix it? How do you come in and begin to mold the family culture and allow it to grow and develop?” I personally believe that the key to that has to do with the development of what I would call moral imagination. What I mean by that is actually pretty simple, it’s a big couple of words but it really involves a shift to viewing the good of the whole system as being something critical and it allows people to begin to see that there’s something about the way that they’re operating together that allows them to all be better off for being together.
So, oftentimes what you see in first generation owners is that there’s a tremendous amount of independence, tremendous amount of drive, willfulness. They’ve created something great. And if you had to say the motto of that first generation, it would be something like “Stand on your own two feet. Do it yourself” that sort of thing. For families to succeed in business at the second generation, it requires an entirely different skill set. It requires collaboration. It requires engagement, the ability to focus on multiple things. Second generation owners tend to be a little bit more risk averse than first generation owners. So, if the motto of the first generation is “Stand on your two feet.” The motto of the second generation is “One for all and all for one.” And so, what will allow a family to get to that point is the creation of a purpose that is larger than the dynamics of power and love. If you can create a purpose for the family that they see is worth pursuing, then those dynamics of power and love can end up becoming contained within that purpose.
Josh: It seems to me that there’s a whole suite of best practices that one could work on when it comes to doing family business transfer which really kind of moves out of the ultra-high net worth families and we can actually apply an awful lot of this stuff to what we call lower middle market or main street businesses.
Matt, you’ve done a lot of thinking and a lot of writing in this area. So, if somebody wanted to contact you, how would they go about doing that?
Josh: Okay, cool. Let’s say we have another minute or so, what would you say are the two or three traps that you see on a regular basis that you would really like people to stay away from?
Matt: I would say that the biggest trap is failure to communicate. What I often see business owners do is get with their lawyers and their advisors behind closed doors and develop plans that don’t involve the family as a whole and they think that they know what is going to work within their family. I’ve found that often times they’re wrong.
The three A’s of estate planning that I’ve run into are anxiety which we’ve talked about. Assumptions about what’s going to work and what’s not going to work. Oftentimes, the people who creating these plans really are guessing at how well it will work and they haven’t checked in with the family. And then the final piece is arrogance which is really thinking and oftentimes that comes from the advisor. The advisor who thinks they know best and will impose a plan that the family can’t make work. I would say the biggest trap that families face is in that planning stage and the failure to involve every one of the stakeholders in that decision process and get very good honest and candid feedback. Oftentimes that requires some degree of outside facilitation either by a trusted advisor or a professional consultant.
Josh: Great. Matt, thanks so much for your time today. This is really good stuff.
For those of you who are listening, if you own a business and you want to transfer it to your family, you really need to spend some time looking at best practices. I can tell you from my own personal experience, I’ve had to go to some parents and tell them their kids are incompetent and they need to be fired, and that’s something you want to do, and there are ways to doing this right and having it done easily so you won’t have the same issues I did when I went to war with my father which seemed to go forever.
So Matt, again, thanks so much your time today. It was really great speaking with you
Josh: You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at email@example.com.
This is Josh Patrick and thanks for listening. I hope to see you soon for another edition of The Sustainable Business.