Give us an example of some situations where you’ve found an owner who is particularly focused on one of those.
RL: I’ll give you an example of all three and talk about the trade-offs. One of our family business clients has more than $1 billion in revenues, has never paid a dividend, and only one person in the family works in the business. This is a growth-oriented business – no family employment, no liquidity. Their strategy is focused solely on growth.
This is different from a liquidity strategy. We have a client where conflict and issues have gone unresolved over the years, resulting in a lot of hurt. They made an explicit decision to take more profits from the family business and distributed more than the cash flow. They’re starving what is a terrific business of funds for growth. Why? The owners want to have diversification – some call it emotional diversification – from a business where there’s a lot of emotional conflict.
Then, there’s control. We have a client where there are seven siblings who all work on the executive team. They’re not all equally talented as business executives. But they chose to have 100% of the equity so they don’t have to face someone coming in and saying, “You have to fire your brother.” They want to get together every Sunday for brunch and talk about their life and business. They could probably grow faster if they wanted to, but that’s not what they want.
What do you learn from these examples? Owners can want what they want. Family businesses are owned by people, and these people have different motivations and wants – and it doesn’t have to be profit all of the time.
Ben, what is often driving someone to prioritize one of those goals over another?
Ben Persofsky: People’s decision to pick growth, liquidity or control as what they gravitate toward is often driven by fear or desire. Take control, for example. If you ask someone, “What’s your opinion of how important control is to you?” you may hear a response like, “I don’t want anyone else meddling in how I run my business. I don’t want to have to ask permission.” That’s an extreme position of control where they worry about what happens when they don’t have it.
With liquidity, fear can come into play where someone wants money outside of the business because they don’t have control over what happens to it while the money is in the business. Or, they may be worried that they are taking too much risk having their wealth so concentrated in one position.
Then there’s growth, where desire may show up in feelings of wanting to invest everything back into the business to increase its value and, indirectly, wealth.
If you start to think about where people are gravitating, they often have a desire there, or something they are afraid of is “pushing” them there.
RL: When we meet new owners, we ask them, “As an owner, what do you want?” Often, they haven’t thought about that. They’re too busy running the business and dealing with the family. The follow-up question to that is, “Why do you want what you want as an owner?” It gets a deeper level of conversation going among owners. Knowing what you and your co-owners want, and armed with the Owner Strategy Triangle, you can frame those conversations a bit more clearly.
Do you have to choose one, or can you have all three?
RL: It’s typically a “pick two” situation – you can’t have it all. You can’t take all of your profits out of the company, invest them back into growth and retain 100% equity control. Most owners give on one of those angles. We have a client who owns an oil processing business. They want to grow fast, and at the same time, they wanted to take some money off the table. After many conversations, they decided to sell a 20% stake to an outside firm. This gave them some expertise to expand, and they got some liquidity. They couldn’t have taken that liquidity and grown the business while retaining all the control.
Strategy is about choices. What you choose not to do is as important as what you choose to do.
We often find that someone comes to us with a succession or governance issue, and it’s really an owner alignment issue. Ben, talk a little bit about that dynamic and how having a framework can be helpful here.
BP: There is a consistent pattern we see when we encounter people who don’t have a well-organized process for discussing what they want. The first is that they don’t have a common language when speaking, so they end up talking past each other, and there’s not a lot of productive dialogue. The second is that there’s a lot of presumption made both about what the other person wants and the strength of that interest. For example, let’s say Rob is my co-owner, and I work in the business and he doesn’t. Once he expresses some interest in liquidity, I may presume he just wants to use the company as his piggy bank, and he wants to go buy a big boat. Rob may say that I just want to grow the business at all costs and don’t care about anyone else since I’ve got a job and generous compensation from the business. Neither is correct.
When you have a common language to talk about these things and a framework that allows you to discuss the relative priority of these choices around growth, liquidity and control, you start to get more color around what people want and figure out that the interests aren’t necessarily always as far apart as they seem. It’s a conversation around how you solve for the varying interests of the owners.
Very few owners have identical views on what they want, so if your expectation as an owner is that everyone is going to think like you, you’re setting yourself up for failure. There is great value in having friendly shareholders – often family – working together as common investors in a business. Finding ways to solve for variations in owner interests can in turn make the business a powerful, long-lasting enterprise.
Can you elaborate about how this works when you have multiple owners and their interests differ?
BP: The first step is to look inward and understand what it is about those three key interests that you each want as individuals. For example, if you want some control and growth, that means you may not be able to distribute or diversify as much away from the business. Are you OK with this? Another way of looking at it is, you want to grow faster, but you don’t make enough money to grow at the rate that you want, and there’s no liquidity available. That means you potentially may need to sacrifice some control by raising capital for the ability to grow faster. Again, is this OK with you? Having those discussions with yourself is important.
After having that “discussion” with yourself, you then need to have the same conversations with the other shareholders to understand what they want. Where do they find the value? To the extent that there’s a next generation, it’s the same identification exercise that must occur with them too.
Rob, tell us more about engaging the next generation in these situations where there are multiple stakeholders.
RL: Letting the next generation come together and figure out what they want individually and collectively as a generation is important. We have a client where the older generation told the next generation to develop what they thought the owner strategy should be because eventually it was going to be their business. The older generation still had the vote, so they could override anything, but they were willing to let that next generation come together and find their voice.
It’s a rule in family businesses that your owner strategy will change across generations. With the first generation, there’s an expectation that you’re going to grow and control the company, and then when you reach retirement, you’re going to figure out what to do. With a third generation that has several branches of cousins, their whole life experience is different relative to the family business, and they’re going to make different trade-offs as far as what they want.
There’s also value in engaging the next generation in these strategy discussions because they may have a different understanding of the family dynamics and how to best approach conversations.
What happens when you have a large group of people who are on such different ends of the spectrum that they don’t know how they’re going to come together in aligning with objectives?
BP: This situation occurs with larger businesses that have transitioned multiple generations. Sometimes it’s because the decision-making process in the past allowed for each shareholder’s individual interests to be considered in developing owner strategy. Unfortunately, that approach gets increasingly harder as an ownership group grows. Successful larger owner groups therefore evolve and adopt a “representative governance” model. Not unlike democracies, it requires more compromise to work. If common ground can be found in the principles Rob just described, then there’s likely a footing to develop a good strategy that helps everyone remain aligned as an owner group.
RL: Process and structure are your friends here. A lot of times, minority owners or owners who are out of the center of the business become frustrated because they don’t feel as if they have a voice in shaping the owner strategy. If you set up a process that includes a representational body with people from various branches and generations in and out of the business, and they come up with a point of view, they can then go out on a listening tour, paying special attention to those people who have not had a voice in the past, and get their opinion.
The opinions are gathered and synthesized into a document, and that information is typically expressed in an owner strategy statement, which is a written document that talks about why you own the assets together. Something about the family narrative is usually an important part of that. You outline your owner goals, and then you also include guardrails, which are both financial and nonfinancial numeric statements of what you’re expecting as owners. Before that goes to the board or anybody else, the full ownership group usually takes a vote about whether or not they support the document. It’s an effective way to bring disparate groups of people with a complex set of interests together.
The generation that is presently in control has the primary responsibility for owner strategy. Talk through how the current owner strategy impacts the next generation.
BP: Business-owning families can get a little stuck here. To be clear, it’s not about legal authority over strategy – in many cases, that clearly rests with the generation in control. It’s more about the question of when and how to invite the voices of the next generation or contemplate their interests in the strategy conversation. There are some decisions that owners in control may make where their interests may not align with the next generation. Dividends are an example. Current generation owners may decide to make distributions to fund lifestyle priorities. From a pure stewardship point of view, that decision reduces capital that would be reinvested in the business, which is a priority of the next generation. Alternatively, a next generation member may want some support for educational expenses, but the controlling generation decides no liquidity will be made available, as the current priority is to reinvest and grow the business. There’s no right answer for how to respond to these issues other than to be cognizant of where these differences may exist and to start thinking about how these needs and desires can be incorporated into the discussion.
We’ve encountered a number of families who choose not to engage the next generation in owner strategy. What are some of the issues that happen if they aren’t involved in the discussion?
RL: Giving a gift is a difficult skill. If the person who’s the giver doesn’t understand the receiver, it can lead to confusion. It’s OK to hand the company to the next generation, but it’s also OK for the next generation to say, “It’s not for us.” They need to feel prepared.
There’s a lot of work on generational transition, and most of the work has to do with preparing the next generation. However, the hardest thing in generational transition, including on strategy issues, is often for the current generation to let go. It’s a sign of mortality, and many family businesses have a lot of identity tied up in the company and can’t let go. The saddest stories are when there’s no preparation before the current owner passes away, because you’re putting two things that you built, your business and your family, at odds when you’re no longer there to guide them.
BP: The mortality issue is a real concern for a lot of people, and they often don’t even know that’s their issue.
In a situation where there is an owner who is ready to let go and wants to keep the company under family control for the long term, but the next generation is not showing any interest, how do you think about family governance?
RL: Two things come to mind. One relates to the roles that the next generation can play. There’s this presumption of the need for a family member CEO, and it might be that none of the next generation members want to be CEO. That’s actually quite different from whether they want to be directors or owners. We talk about these three levels of engagement of family members as operators, governors or investors. In the situation you asked about, I would urge the current owner to think through whether the next generation is not interested in operating but wants to stay involved at another level. Many family businesses have no family member employees, and the family engages at the board level or at the owner level.
The other thing is, I’m amazed by the family businesses that successfully transition across generations. One family business we work with owns a sugar cane processing company. There’s a powerful story of the woman who eventually became the head of their family council being taken to the fields with her grandfather, and the grandfather got some sugar cane, opened it and said, “Smell this. Taste this. This is in your blood.” She still tells that story. The grandfather was showing the beauty of the business – the beauty of that sugar and how it’s processed, the beauty of the employment opportunities they provide, the beauty of the factory and the products that come out. What he didn’t do is talk about the financials. That doesn’t work at first, especially when speaking to young children. You have to capture their hearts, and then later you can capture their mind.
You have to understand your own emotional connection to what you do and why you love it, and that’s what you share first.
BP: That emotional element – the family story of what the business means to the owners – is often described as the glue that brings the family together. One of the other interesting things that we always talk about is respecting the differences in how people see their relationship to the business given their ownership role. For example, you have owners who are nonemployees of the business, and you have owners who are executives. The way that they see that business is different based upon the chair they sit in. The executive owners are fulfilled by their jobs. They show up to work, immerse themselves in that business, receive a paycheck and have many other benefits, so that bond is strong – it’s reinforced every day. It’s different for a nonemployed owner. The emotional tie allows for some connection, but typically, there is more of a connection that’s created through the financial benefit. This is why dividends can be such a popular topic.
Let’s talk more about the role of dividends in owner strategy. Why are they important?
RL: Dividends are one way to build liquidity, and we strongly recommend that owners set a long-term dividend strategy and policy as part of their owner strategy. We believe that you own an equity, not a bond, so that owners experience the ups and downs of the business. It locks in your engagement. Then, a lot of it comes down to what you’re trying to do with the asset. If you’re trying to grow the business, you issue small dividends. If you’re trying to provide liquidity because you want some emotional diversification, that’s fine, as long as you’re able to translate that to a board who understands what you want through your guardrails.
BP: To expand on that, when we think about why people want dividends, it comes down to three big reasons. The first is diversification – not wanting the risk of having all of your wealth concentrated in one location. The second is liberty or freedom – wanting choices. In many cases, the people who decide whether dividends are to come are not the same people who want them, so they have no choice but to live by the decision of those in charge. The third is lifestyle or enjoyment. It’s OK to reap some benefit that brings joy to your life in what you get from the business through those payments.
Let’s talk about control dynamics within how owner strategy is developed. Certain people have a voice in what happens with owner strategy, and there are other owners who don’t. How should people act if they’re in the seat of control? And then, if you have a voice but no vote, what are your expectations?
BP: For those who have control over decisions, it can seem thankless to go through the effort of finding consensus. So why try? Because a collaborative approach sets the tone for how owners relate to each other. Owners whose views are considered – regardless of control rights – typically find themselves more interested in the activities of the enterprise. For leaders, having other aligned family owners to collaborate with can allow for deeper, more thoughtful discussions about strategy. This kind of support can be particularly beneficial when unexpected events in the future challenge the family enterprise.
In the case of an owner who has a voice (or input) but no vote, the key is finding a seat at the table and maintaining the privilege of staying there. As a first step, can you find a place to gain more exposure to the discussions and the process? Once you “find your voice,” are you raising issues from the standpoint of seeking to understand rather than advocacy for certain positions? Depending upon the governance structure, this seat can be fragile. Navigating varying interests can be difficult. How best to strike the balance differs from family to family.
RL: You need to get some structure around how the owners are going to communicate. You can create that structure with what we call “rooms,” and there are four of them. There’s a management room with a CEO, where business decisions are made. Sometimes, often in big family businesses, there’s a board room overseeing the business. If you go across generations, you would want to build out a family room, where you work on family unity and next generation development. Finally, there is the room that’s most often missing for family businesses when we first meet them: the owner room. How do you bring these owners together? It’s not as simple as having a vote and being able to do whatever you want. You should be thinking about doing significant work together in the owner room. Owner strategy is one example where getting the voice of those that are minority players is important. Even if they don’t have the final vote, they appreciate being asked and heard. Shareholder agreements and dividend policies have to be crafted in the owner room, and you elect your board members there.