Good lawyers get up close and personal with family businesses

David Simpson knows all too well the tough battles that need to be fought to successfully transition a family business. He has worked with many of Canada’s leading family businesses and he has worked in one himself, with his brother. He now teaches the next generation of entrepreneurs at the Richard Ivey School of Business MBA program in London, Ont.

He also knows the important role played by lawyers.

“When talking about transition success, your long-time lawyer may not let you in on a little secret,” says the founder of the Ivey Business Families Centre. “The lawyer may not ask if you realize that the legal documentation of your transition or success strategy is the easiest part of the succession process.”

Is Mr. Simpson implying that family business lawyers have it easy? Not at all.

A family firm lawyer will know the law, but a good lawyer will also get to know the family very intimately and how the members interact. This close and frequently personal relationship brings its own set of challenges, often requiring a lawyer to step outside of the legal box. The lawyer is like a ring master, advising the owner on when to call in experts to deal with various non-legal family issues encountered when running a business and balancing the long-term succession planning.

“The toughest part of transition is asking three key questions, which have nothing to do with the law or the business itself, but they will challenge every family business,” Mr. Simpson says.

His questions are as follows:

• Does your family speak the same language? A successful transition requires a common frame of reference, and even the simplest everyday terms such as “soon” – as in we’ll meet soon on that – or “long term” can mean different things to each family member. A daughter might ask to run a philanthropy event, but when the founder says ‘we can do it later,’ it means next year. Meanwhile, the daughter thinks her father means next month and conflict arises. It is critically important to meet together as a family to work out common frames of reference to avoid misinterpretations within the family, which can then spill over and confuse staff, customers and other stakeholders.  
• Are the children dependent on the business? While children are growing up, they are dependent on their parents. When the business relationship is added to the family dynamic, it can be emotionally difficult for adult children. They have to be at peace with working for a parent while competing with their parents’ legacy goals for the other “baby” in the family: the family business. Children need to realize that their livelihood may not come from the family business if their skills are not a good fit with the requirements of the industry. Author and family business adviser David Bork said it best: “The purpose of family is to raise responsible adults, who have high self-esteem and can function independently in the world – acceptance is unconditional.” Now compare that unconditional love with Mr. Bork’s description of the uncompromising world of business: “The purpose of business is to generate profits! Acceptance is based on skills, competence, the ability to produce and perform.”
• Have you discussed personal goals within the family? It is critical for the leader who is passing the torch to not snare the next generation in a trap. There can often be a conflict between the founder and his vision of how the legacy will continue and the next generation’s goals. For example, the younger generation might want to move marketing efforts online and use Google Adwords, Facebook and Twitter. The founder says, “What’s this Facebook – it’s for teenagers?” or “I don’t want to tweet,” and puts a kibosh on the plan. To pass the torch to a new generation, a founder needs to grant full freedom. Great families honour the founding entrepreneurs and understand stewardship of family assets, but they are also mindful that success lies in allowing the next generation to remain entrepreneurs. This means providing the new leadership with the fullest autonomy to take the business in new directions.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

Three ways for family businesses to stay entrepreneurial

Jacoline Loewen

Special to The Globe and Mail

The owners of Book City, one of Toronto's independent book chains, announced recently that they would be closing the doors to their flagship store after 40 years. As a final salute, CBC Metro Morning interviewed the store’s third generation owner, who shared the heaviness of that heart wrenching decision.

The reporter reminisced about how stores serve as land marks in our neighbourhoods and Book City was no exception: its iconic yellow logo brand was appreciated by Torontonians.

While in recent years customers have migrated to online book stores, the question remains: is there anything the family business could have done differently? Could succession planning have helped preserve the company’s legacy?

“For the most part it is easier, and generally more fulfilling to work ‘in’ your business than ‘on’ your business, so entrepreneurial families continue to dwell on the day-to-day tasks that come from operating a business,” says David Simpson, founder of the Ivey Business Families Centre. “Planning for future transitions, while always somewhere on the planning horizon, never seem to get done."

Many first generation - let alone third generation (3G) - business owners have gone the same route. They stick to a dated business model that served them well in the past; after all, change is risky.

Those who step into the family business, may become trapped by a significant and public brand created and developed by generation one and two. They put grandpa on a pedestal, his oil painting is in the boardroom and refuse to refresh the model.

Mr. Simpson agrees: "There may also be a tendency for second generation (or third) to have guilty feelings if the challenging questions that come with considering transitions – including potentially selling a business. This comes in conflict with the feelings of protecting a legacy that was provided by an earlier generation."

Yet, the entrepreneurial first generation would probably be the first to say "sell the business."

"I tend to remind this generation that the greatest legacy is to remain as entrepreneurial as the founders, and ensure a strong family tradition that includes knowing when a business doesn’t fit the times,” adds Mr. Simpson.

To help business families remain entrepreneurial, he offers the following advice:

1. Once a year, ask the hard question: “If we were starting out today, would this be the business our family chooses to be in?” This forces a family to remind themselves that a business takes time, energy, talent, capital and most of all relevance. Take out the emotional attachment.

If your family was in the buggy whip business as cars were arriving on roads, there would be little point in continuing as is. This question provides the nudge to reinvent the business, perhaps into a travel accessories and suitcase retailer.

2. If we conclude that this is a good business to be in, ask yourself this: “Are we the right ones to manage or steward the business further?” To survive in the global market, growth is vitally necessary. Expansion capital is available for companies over a revenue size threshold, and a family business can bring on board a professional CEO capable of managing a larger enterprise. There is no need to remain stagnant. The skill-fit question forces families to think like owners, and be less concerned about viewing the business as a source of family jobs. The best leadership of a business will change over time as requirements change, and families need to look to what serves the business best.

3. Let outsiders inside your tent. Mr. Simpson says outside eyes are critical: “Overall, remember that families often view their businesses as their babies, and human parents tend to be ill-equipped to value their babies. We either overestimate the ‘uniqueness’ of our child or are often too hard on our kids and overlook their hidden value as a result.”

(took out sentence and moved up as these are David’s words). Yet, so few family businesses take on an advisory board because they believe no one will understand their business as well as they do. Ensure that the business has an outside advisory board, or an active fiduciary board or at least a mentor with skills in the particular field. Engaging an advisory firm early and sharing your hopes and dreams will also ensure that a competent firm with transition experience can give you the hard reality of the day which helps families make decisions.

Jacoline Loewen is a director at Crosbie & Company, which focuses on succession advice for medium-sized enterprises, family businesses and closely held private companies. Crosbie develops customized strategies, particularly in relation to sale of companies, M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen and @crosbiecompany.

How to make your business more attractive for sale

The dismal financial results for 2009 no longer need to be included in a company’s books. For any business looking to sell, this significant milestone allows for a marked improvement when potential buyers look at the performance of the past three years. The conversation doesn’t have to start with: “We looked at your financial statements. What happened in ’09? Want to talk about that first?” That said, there is still a noticeable gap in valuation expectations between buyers and sellers. “The market downturn stripped out the profits for private companies and the survivors reduced and reinvented their businesses to add to their top line,” says Bob Gorrie, owner of Gorrie Marketing Services. “These owners have put a great deal of sweat equity into their businesses, and unfortunately that extra hard work and planning is not reflected in their financial results.”

But as the markets improve, profits are returning and owners interested in selling are watching their industry cycles like hawks for the upswing, waiting to get the timing right. A more relevant question for these owners is “where is my own business in its life cycle?”

For any business owner contemplating a sale in the next few years, here are a few ways to add to the valuation:

Does your business have solid management?

The owner may be leaving but buyers want to know whether there’s a team in place with big goals to drive the business forward with equal determination.

Having a succession plan is critical, but when Crosbie & Co. recently conducted an owners’ survey, it revealed that fewer than 5 per cent have a written document with a strong operator or family member ready to take over. Owner-operators have built their lives around running their businesses and they do not want to let that go. This reluctance may prevent them from seeing the importance of planning for their own exit and they will get dinged on their company sale price for this omission.

Are your key processes institutionalized?

“There is the risk that the company incurs a fatal loss of knowledge and connections upon the exit of the owner,” the president of a manufacturing business told me. “The earn-out helps, but two to three years does not make up for 30 years experience in a company. One way to mitigate this risk is to bring in a guy like me.” Paying a high-quality CEO for a few years will help the owner of a windows manufacturer convert “in the head” knowledge to written processes. “We preserved the knowledge and demonstrated the existence of a reliable management team to a potential buyer,” the president added.

Do you know good buyers?

The sale price of a business is what buyers offer and when a company is in the growth part of its business cycle, there will be multiple offers and phone calls from all sorts of interested parties. “I know the ‘I’m comfortable with my business’ owners where the offers to buy have made great sense,” says succession planning coach Janice Lahiti. “The owners don’t do it because they think their ability to influence a variety of broader agendas will diminish.” As the business hits the mature stage of its life cycle, which often occurs in tandem with the owner’s life cycle, suddenly the pool of multiple bidders dries up and as Janice says: “The owner can no longer command the multiples they want.”

The owner may also miss the opportunity to sell to a buyer who will structure the sale so that the majority of the company is purchased but the owner can keep 20 per cent to 30 per cent with a fixed medium-term buyout schedule. They can also have limited management or board involvement. This structure keeps the owner involved mentally and financially in his or her ‘baby’ while taking some money off the table to free up time to pursue other interests.

What is your opportunity cost, really?

Melanie Kau exited her successful family business, Mobilia, to take on the challenge of running Le Naturiste. “The ‘what next’ after you have worked for 15 to 20 years in a business prevents people from asking themselves the cost of staying where they are because they are comfortable. I know what that feels like because I have just been through it. Therein lies a great deal of value with the experience the entrepreneur has built up: sometimes the business is more like a cage than a platform.”

Jacoline Loewen is a director at  Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business.