I need some help in setting up our company with new owners (four siblings) since my dad’s passing. I don’t know where to start. Can you counsel me on the changes that need to happen after a transfer of shares to the next generation?
Advisers’ Replies:
First, so sorry about your dad. It sounds as if you and your siblings are focused on the meaning of a transfer of shares, but you also must attend to the transfer of leadership of your business, whether to one of you or to a non-family executive. Systematically getting to know the business together as new owners can create a fresh connectedness to it and each other, if you and your siblings commit to an open, exploratory series of conversations. The relationships among the four of you will evolve now, and that’s usually a good thing.
What does it mean to systematically get to know the business? You can start with these topics:
• Our purpose. Why are we in this together, now, beyond what our dad intended? For example, do you and your siblings have enough in common to even be in business together? What purpose does the business serve for each of you: Does it need to provide an occupation and livelihood for one or more of you, does it need to generate investment income, does it support your community stature, does it enable you to continue what your father started, does it provide some other glue that should be cultivated? Finding a way to talk about your common ground will enable you to make choices about the business, some of which are likely to be hard. And if you discover you have no common ground, then you still own this business together and must work together to exit.
• Division of labor. Once you’ve done real work around your purpose, which ideally fosters trust among you, then you can address who will do what. It’s important to know whether you have confidence in each other to take up different roles, set expectations of each other and come back together with results from which you can make decisions and move forward.
The work to be divided includes researching a variety of issues:
• Legal: What legal agreements exist, what do they mean, do we want to keep our father’s law firm or find our own new adviser(s)?
• Financial: What are the economics of our business—how does it make money?
• Strategic: Why do customers buy from us and not a competitor? Do we know how to make money doing what our customers value? Are there enough customers to grow the business, or should we rethink how and what we do to attract more customers?
• Cultural: Especially if none of you works in the business, you rely on your employees to keep the business going while you sort things out. You want to understand if employees generally do a good job and know what it means to do a good job. How is their morale? Are people paid for the work they do, at market rates? Do you attract the best people for the jobs, or is loyalty the most important thing?
Ultimately, these steps are a beginning, providing hints about how you will continue together in this economic enterprise. Making your assumptions explicit really does help, as long as you recognize they are just assumptions, not facts. Building this open-minded give-and-take is an essential ingredient for the collaboration that owning a business together demands.
— Nancy Drozdow
Drozdow is a founder of CFAR, a private management consulting firm that works with families sharing an economic enterprise (www.cfar.com).
Questions: Is the share ownership equal among the four siblings? If unequal, how is stock held, and what were the reasons for the decisions? Are all four siblings working in the business? What kind of business is this? Our assumptions will be that there is equal ownership, all four are working in the business, no succession plan is in place and this is a manufacturing business. We recommend that three steps be taken: (a) definition of roles for each of the siblings; (b) establishment of a business plan; and (c) adoption of structures.
Roles. The four siblings should meet to discuss, and agree upon, who will perform which function: sales/marketing, finance, operations and administration. Identify what is required to fulfill each function and the boundaries between the roles. Who is best suited for what role, and what does each person see as his/her future? What does each like to do? What are their individual strengths and weaknesses? What is the commitment of each person to the business? How will decisions be made? Who will be president?
Business plan. If a business plan is in place, the four should review the plan and make necessary changes. If there is no business plan, accomplish that immediately. The business plan should focus on: (1) how this company can continue to manufacture and sell its product at a profit and (2) how to deal with the unique issues of family business—transfer of ownership, leadership and management.
We recommend that the four siblings plan by (i) using a “SWOT” analysis (Strengths, Weaknesses, Opportunities, Threats); (ii) agreeing on their compensation; and (iii) agreeing on how they will communicate.
Structures. We recommend three key structures to keep this family business moving forward successfully: a buy-sell agreement, an advisory board and a family council.
1. The buy-sell agreement should focus on the “four Ds”: death, disability, divorce and dissension. What would happen to the business if one of the siblings were to die or be permanently disabled? What happens if an owner is fired, quits or starts a competing business? We recommend that voting equity be held only by those working in the company in a leadership position.
2. Establish an advisory board consisting of three to five outside advisers, trusted by all four of the siblings. The board should meet three or four times a year to advise on major decisions, review the business plan, help establish sibling compensation, etc.
3. Establish a family council as a forum for all family members to discuss issues that involve the family’s relation to the business. The council should have a mission statement and should meet at least twice a year. Discussion topics should include the family’s commitment to the business, core family values, expectation and responsibilities of family members, rules for family participation in the business and family philanthropy.
If the four siblings cannot agree on their roles and responsibilities, then the first step should be to establish an advisory board. That will help to accomplish the other steps.
— J. Richard Emens
Emens is executive director of the Conway Center for Family Business and a partner in the Emens & Wolper Law Firm, Columbus, Ohio.
The transition from the founding generation to a sibling partnership is among the most challenging successions in family business. As you suggest, there is a lot to do and it is hard to know where to begin. As each family situation is unique, the recommendations I offer here are broad—but hopefully a good starting point.
1. Get clear with each other on why you want to be in business together. Simply because you have inherited the business is not sufficient motivation for the work that is ahead of you! Discuss what ownership of this business means to you individually and collectively. Ensure you understand what “success” looks like for each of you. Do you hope to grow the business and keep reinvesting profits, or do some of you hope to receive regular dividends? Getting clarity on what this sibling partnership is all about will enable you to find your purpose, ensure you are all on the same page and set the stage for many other decisions you will need to make.
2. Set out some key “rules of the road” for your partnership. For example, siblings can work to determine the process for making decisions—who gets a voice, are all matters settled by majority rules, how are disagreements resolved, etc. There are many topics on which it is important for siblings to come to agreement through a policy or “rule” for themselves. Here are a few key ones:
Employment/participation: Who can work in the business, what qualifications or experience are expected, can family report to other family, how do we treat vacation time, etc.
Compensation: Will you use market rates to set pay for family working in the business, who will have a voice on performance reviews and opportunities for promotion, etc.
Shareholders’ agreement: A shareholders’ agreement sets out the rights that come with share ownership. It also specifies who can be a shareholder (e.g., what happens to shares in the event of a death or divorce?) and the terms for sale of any shares.
3. Determine a leadership structure. We often recommend that sibling teams develop leaders for the business and the family. Often the person or persons best suited to take the helm at the business may not be the optimal family leader. Do not neglect the role of family leader! The issues that will confront you on the family side will be at least as complex and important as those related to business. On the business side, the leader of a sibling team must have the technical and management skills needed to lead the business. The business leader ideally has good communication skills, and must be trusted by the family.
Of course there is a lot more to it, but hopefully these ideas will get you started on the right foot. It does take effort to make a sibling partnership work, but we have seen so many examples where both the business and the families have flourished. We wish you nothing but success on this great adventure!
— Stephanie Brun de Pontet, Ph.D.
Brun de Pontet is a senior associate at the Family Business Consulting Group Inc. (www.efamilybusiness.com).
Editor’s Note: Have a family-business-related question or problem? Family Business invites you to submit it to us for feedback from a panel of family business advisers. Just e-mail your query to bspector@familybusinessmagazine.com. Your identity will be kept confidential at your request.
Quotable
“The lesson is to step forward and take responsibility for our significant ownership. That’s all. Not to put it in the hands of lawyers and others.”
— Cristina Stenback, third-generation chairman of Swedish holding company Investment AB Kinnevik, a global business whose holdings include packaging and telecom firms, discussing “the importance of active ownership” (Financial Times, March 12, 2012).
“Actually I was very uncomfortable since I was a little boy with so-called yes-men who were just obedient to what I said…. I am the ultimate person in charge of the company, [but] I found it is very important to ask [a team of five executive VPs] for their views.”
— Akio Toyoda, grandson of the founder and president of Toyota Motor Co. (Fortune, Feb. 27, 2012).
“It’s going to take some time to heal all that, but we’re going to get there.”
— John Pritzker, discussing the decade-long process of dividing the family fortune after the death of his father, Jay Pritzker, in 1999 (Bloomberg Businessweek, Feb. 20-26, 2012).
“It just floors me that so much of our beer industry is owned by foreign concerns. We were not in any race to be the largest domestically owned brewer, but it’s a tremendous honor for us.”
— Dick Yuengling, fifth-generation owner of D.G. Yuenging and Son (Morning Call of Lehigh Valley, Pa., Jan. 12, 2012).
“Discussions in the sandbox.”
— Jacopo Etro of Italian fashion house Etro, describing meetings with his three siblings who work with him in the business (Wall Street Journal, Jan. 26, 2012).
Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.