Deana Labriola and Matt Thompson, along with Mark Phillips, managing director of Jacobs Capital, recently participated in the Triangle Business Journal's Family Business Symposium. Reporter Caroline Barnhill provided a recap of the discussion which was published in the September 15 print issue. The below text is used on our website with permission from the TBJ.
Recap: Family Business Symposium
When Matthew Thompson, estate planning and probate law attorney with Ward and Smith, P.A., talks about the importance of planning ahead when it comes to family business, he speaks from personal experience.
Thompson’s great-grandfather purchased a large farm on the Delmarva Peninsula at the beginning of the Great Depression, where he grew corn, wheat and soybeans – along with raising cows, pigs and standard-bred racehorses. All four of his sons played active roles in maintaining the farm. When his great-grandfather passed away unexpectedly during his 70s, no one knew what was supposed to happen to the farm – which led to about 20 years of Thompson’s grandfather and his brothers fighting over the farm.
“When my great-grandmother passed away years later, they still didn’t have a plan. The government got a good chunk in taxes. There was lots of fighting amongst the siblings as this all played out in public through the probate court,” Thompson says. “I got to witness this at a young age. I remember when they had to sell off all my great-grandparents stuff – even the tractor my dad used to drive as a little boy. And that’s a sad way for a family to break up.”
The situation was one of the things that prompted Thompson to go into estate planning law.
“Today I sit down and talk to people about their goals for their family, and then how to structure their businesses in such a way that those goals can be carried out,” Thompson continues. “We want to avoid having to break up families or businesses.”
On August 30, Thompson joined Deana Labriola, business law attorney at Ward and Smith, and Mark Phillips, managing director of Jacobs Capital, at the Triangle Business Journal’s first Family Business Symposium. They discussed and explored real-life situations – along with the challenges and opportunities – faced by family owned business leaders. Here are some of the highlights.
Who sets the vision for a family business?
PHILLIPS: “Typically the founder is the one setting the initial vision for the business, and it’s shepherded by subsequent generations.”
LABRIOLA: “From what I’ve seen, the vision tends to be more fluid, but the set of core values is not. The values stay the same across generations. What will be interesting is that we have a new generation of millennials that will be taking over in the next 10 to 20 years, and they will be the first generation that has been formally educated in entrepreneurship. We don’t know how that will play out, but it will be very interesting to watch.”
If you have multiple generations involved in a family business, how do you treat all family members equally without necessarily having equal ownership?
THOMPSON: “One common misconception I hear is, ‘Well I have to leave everything equally to my children.’ That’s not the case. You have an obligation to your spouse, but after that, you can do whatever you want. Most people want to take care of their children equitably, if not equally. For families that own a business, there is the business and then personal assets. Many times, if one or two children are involved in the business, the business is left to those children and the other assets are given to the children not involved in the business. Or there are ways you can set up the business so equity is separated from control – that way all of the children can share in ownership, whether they are involved in the day-to-day or not. The children who are involved in the company can have control and decision-making powers, but the earnings and profit potential can be spread equally among all.”
LABRIOLA: “As I counsel family businesses, I advise a lot about creating equal opportunities. Instead of focusing on making sure that all the children have equal outcomes, maybe make sure you are giving them equal opportunities to see who rises to the top. You don’t have to divide the business up equally. That’s a personal decision. But create opportunities to let your children earn the right to have equal parts.”
What processes should be established early on with a family business?
LABRIOLA: “It’s important to have some sort of ‘rules of engagement’ or family constitution agreement that addresses issues like, ‘How do we deal with conflict within the family?’ And deciding on those rules when you aren’t in the middle of conflict is really important. You should also have rules like, “How does the family feel about internal promotion and how should that be done?,” or even more practical things like, ‘When do we talk about business? Do we agree on no business talk at the dinner table?’ These plans need to have practical elements of communication. Those issues need to be discussed.”
THOMPSON: “The head of the business needs to sit down and execute basic estate planning documents, including a power of attorney. This is who will be making decisions for you in the event you can’t. If you didn’t decide this ahead of time, your spouse or children don’t automatically get to step in. Someone will be appointed by the court to make decisions. You’d rather decide for yourself ahead of time who you’d trust to make decisions on your behalf.”
When’s the right time to have an advisory team and who should be included?
PHILLIPS: “The biggest missed opportunity in family business is the failure to set up a real board with independent directors. A lot of times people feel that an outsider will change the culture of the business or get involved in family matters, but those things can be managed. You don’t have to take advice of an independent director, and you can replace them any time. But without them at the table, you don’t have the benefit of getting advice from someone with a complementary background and skill set, but with no interest in family politics. They can bring an outside perspective of what is best for the company itself, without regard to personal issues. Bringing in an independent director is probably the first step that will fully professionalize a family business. You’ll want a mix that includes independent advisors and family members who are not active in running the day-to-day business.”
LABRIOLA: “In terms of timing, there’s no magic number. But generally speaking, the $8-10 million revenue range is when I’ve experienced that owners feel the need for some outside influences on business decisions. That’s when a family council and an independent board become very useful.”
Who should serve on a family council?
PHILLIPS: “A family council should be separate from your board of directors. The council shepherds and looks after the family, its health and its wealth, while the board looks at the business and shareholder value. Those should be separate things.”
LABRIOLA: “Usually the need for a council doesn’t arise until the business has been passed down to the second or third generation. I recommend that the council include a mix of family members, including family members who are deeply involved in the business, as well as some that aren’t. Oftentimes trusted family members who are not as invested in the day-to-day of the business can be more objective. But my preference is that there is an outside third-party counseling the family through these dynamics. There are people who specialize in doing just that.”
When is the right time to start succession planning?
THOMPSON: “The earlier the better. You want to have time to set up the company so that new roles can be established from a management and leadership standpoint. You want to leave some time for people to get used to their new role and responsibilities. And from a technical standpoint – when it comes to things like taxes – the earlier we can talk about it, the more efficient we can be.”
LABRIOLA: “It’s never too early to start having these conversations. We always have something we can talk about when it comes to succession planning. And you’ll want to bring in external advisors. They’ll help you ask the right questions and get into the right mindset to make decisions over the next 5 to 10 years.”
PHILLIPS: “There can be an awkwardness with a second generation bringing up succession because it might seem like entitlement, but it has to happen eventually and the downside to waiting is risking the chance that an external event happens that makes you wish you had the conversation earlier. When you begin succession planning, it doesn’t mean you implement changes right then. But starting the conversation so you have a plan ready to go is helpful.”
What are the most difficult decisions that family owned businesses have to make?
PHILLIPS: “Finding the right management position for family members. And deciding on the right time to promote non-family members over family members – and breaking the glass ceiling, so to speak.”
LABRIOLA: “One thing I see come up a lot in family businesses is the issue of spouses. Lots of family owned businesses bring in a spouse of a family member who can bring talent and perspective to a business, but it also adds a whole new layer of complexity. There’s no right or wrong way to do it, and I’ve seen lots of longstanding, well-run businesses that have spouses at the helm or in major leadership positions. It can absolutely work. But you need to think through the role spouses play. Another difficult decision is what happens when you have to remove a family member from a position when it’s just not working. One major cause of bad morale in a family business stems from keeping a family member in a position that’s not working out for too long. You need to keep a check on how people are doing at their job, and have a plan of how to remove them if it’s not being done well. How you handle that process will say a lot to the rest of your employees – family members or not.”
As the company changes hands among generations, how do you combat the “That’s not how we used to do things!” culture?
LABRIOLA: “Company culture is an important part of every business. You need to honor it. With that said, there can be problems when culture impacts people’s abilities to step into their new roles. A challenge I find is when first-generation leaders don’t set up the transition of leadership correctly in a way that’s clearly communicated to all other employers – family members and non-family members – over a long period of time. Most people in family businesses often have a knee-jerk reaction to change and transition. You might find half of the employees really buy into the new vision and the other half are resistant to it. But you’ll often end up with some unusual advocates that you wouldn’t expect.”
THOMPSON: “We need to remember that some people do like change. With change comes opportunity. Fresh ideas can be inspirational and stagnant places often aren’t great places to work.”
What’s the best way to handle when a person running the business now has diminished mental capacity but doesn’t recognize it?
THOMPSON: “That’s one of the reasons you need plans in place earlier than later. You need to be building a team over time who can run the business. If you have a good team in place, that incapacity can be overcome because other people can step in. Make sure you’re involving the next generation of leaders in decision-making. That way one person doesn’t know all the information so when that person is incapacitated, someone else is up to speed. You have to have people invested in how the company operates so that it can work without a single person. If all the company’s value is tied to one person, that company has little value when that person is gone. This is where it’s important to have outside people you trust who can help you have those hard conversations.”
When’s the right time to sell your business and how can you tell how much it’s worth?
PHILLIPS: “That’s a great question, and one your board of directors should be thinking about with the advice from outside advisors. The right time to sell a family business is no different than any other business. It’s a combination of the right time for you personally, the lifecycle of the business and the market conditions.”
LABRIOLA: “I’ll let you know when the wrong time to sell is: when you have to. When that’s the case, the sale price will be impacted as a result. Usually some external event creates a need to sell, but it can be internal. If you find yourself in a situation where you haven’t thought this through, it impacts the price and process. We want you to be proactive so you can maximize your visions for a liquidity event or transitioning to another generation.”