Tag: succession planning

By Kathy J. Marshack, Ph.D., P.S.

Cathy and her older brother Charles have worked in her family’s restaurant business for 25 years. Cathy’s parents, the founders are nearing retirement and want the business to carry on under the care of their children. Cathy and Charles are ready and well trained for succession. So, where’s the problem?

The problem is the youngest son, Brian. Brian has never worked in the family firm, preferring to try other ventures. Unfortunately everything Brian has tried has failed. Cathy’s parents have “bailed” Brian out of one jam after another. Now as they face retirement, the parents want Cathy and Charles to share ownership and management of the business with Brian.

Cathy and Charles are beside themselves with frustration. They don’t want to offend their parents. However, Brian’s inexperience and lack of maturity may cause considerable problems in the business. Neither Cathy nor Charles relish the idea of taking care of their brother indefinitely as their parents have done.

This type of problem is all too common in family-owned firms. Most of us cherish the responsibility of parenting and are reluctant to give it up when the children leave home. In family firms where children may never leave home, the parenting role may continue indefinitely.

A parent’s job is to nurture and protect children so that they can grow up healthy and capable of independent adult life. But parents don’t teach independence directly. Independence is a state of mind that children must conquer for themselves.

Sometimes Mom and Dad fight because one doesn’t want the child hurt and the other wants the child to face their mistakes. Alternatively the child may be making a bid for independence but the parents thwart it. The parents complain that their grown child is not very strong or capable of leadership. Then they complain when the child speaks up for himself.

There are a variety of strategies for ensuring that the second generation in family firms really grow up. The strategy that fits for you depends upon the business, the parent’s skills and personality and the skills and personalities of the children.

The child needs an environment where they must prove themselves capable of leadership in the family business. For some this means leaving the business for awhile and working elsewhere. For others, it means getting an education before returning to the family business. Another child may benefit by working their way up from the “mailroom” with no preferential treatment from the parents. Finally, some children will be better family members and more capable adults if they never return to the family business.

There are two goals in family firms. One is to develop a thriving business. The second is to develop healthy independent adults who can contribute to society.

Keep in mind that the business can be successful without the child and the child can be successful without the business. That is, set your sights on accomplishing both goals independent of each other, and you may be surprised how they come together in the long run.

By Kathy J. Marshack, Ph.D., P.S.

To many, managing your money evokes the image of penny pinching and squirreling enough out of a meager small business budget to save for retirement of send the kids to college. Preparing yourself for sudden wealth probably isn’t the first thing on your mind.

But, in so many cases, the average millionaire started out an ordinary working person and acquired wealth through building their small business. To avoid, or at least be prepared for, some of the problems that come with sudden wealth, it is necessary to plan. Hear are just a few real life examples:

Nancy had been a social worker for most of her adult life. Her standard of living was modest but she made a good salary for a single woman. She even qualified to buy a house. At age 32, she met Mark, a software designer who made a million overnight.

Frank was a poor kid who grew up in an inner city neighborhood. After a stint in the Navy, Frank decided to try his hand at mining, then real estate, then almost any other business opportunity that turned a profit. By age 40 he was a multi-millionaire.

Really, the only thing these people have in common is that they have wealth. Most people would not consider that a problem, nor even worthy of a column in this newspaper. However, another thing these people have in common is that they have to learn to manage their wealth. Like any other lesson in life, if you have no previous experience, there may be bumps in the road.

Frank never really thought he experienced any setbacks as a result of his wealth. As he puts it, he “loves making money!” On the other hand, he is estranged from his grown children and is divorcing his third wife.

Again, if you do not think any of this applies to you, think again. The average millionaire started out an ordinary working person and acquired wealth through building their small business. To avoid or at least be prepared for some of the problems that plague Frank and Nancy, it is necessary to plan ahead for the day when you may have wealth. If you are in business, that is probably one of your goals anyway, so why not think positively?

The New York Times published some data on the “average American millionaire.” Surprisingly, most millionaires do not lead glamorous lives. They own bowling alleys, funeral homes and small manufacturing plants.

In fact, the average millionaire is a 57-year-old man, married with three children. He is self-employed in a practical business such as farming, pest control or paving contracting. He works between 45-55 hours a week. He has a median household income of $131,000 and lives in a house valued at $320,000. He drives an older model car. Although he attended public school he is likely to send his children to private school. Finally, he is first generation affluent.

It sounds to me like the American Dream is alive and well. However, many of these millionaires are not doing that well in the areas of personal relationships, health and emotional well-being. Some, like Frank, neglected their marital partners and their children because they were so focused on the thrill of making money. At mid-life now, Frank is trying desperately to re-establish these relationships, but his children feel that his addiction to money is greater than his love for them. Frank waited too long to strike the balance between love and work.

Nancy’s problem is more common than you think. Ordinarily, this type of mindset prevents the acquisition of wealth altogether. But Nancy was faced with the painful situation of having to re-evaluate her social values. This pain nearly put her in the hospital with a severe depression. She felt “dirty” having money, yet she felt guilty for wanting to keep it. Nancy had to do a lot of soul searching to realize that she was just as important as those disenfranchised folk she had helped as a social worker. When she began to view the money as a gift, as love, as energy from the universe, she started using it not only to help others, but to benefit herself and those she loved.

What Frank and Nancy have in common is the awareness that wealth brings with it responsibility. Planning for this new responsibility will put you ahead of the game when the time arrives.

Stewardship is another name for this responsibility. Once all of the bills are paid, once the new house is purchased, once you have exhausted all of your fantasies for travel, jewelry, cars and horses, the “average millionaire” still has to ask himself or herself, “What am I contributing to my community?” This is the bump in the road that takes the most maneuvering.

As long as you barely make enough money to pay the rent, or you work night and day to get your start-up business off the ground, or your days are filled with managing small children, there is precious little time to ask yourself “what will I be remembered for?” But the acquisition of wealth puts people in this spot, sometimes overnight.

Charlene took care of her basic needs after she and her husband struck it rich with their manufacturing business. She built a new house, decorated it, bought a condo at the beach, traveled to Europe, and sent her children to private schools. Then one day she woke up deeply depressed because her life had no meaning. She tried therapy. She volunteered for worthy causes. She joined social clubs. She took up sculpting. Nothing worked, however, until she read about foundations. This idea took hold of Charlene and she began the process of funding a foundation that would sponsor young women interested in entrepreneurship.

If you want to be prepared for wealth start thinking now about what you really want to do with that money. Ask yourself, what is really important to me in my life? If I could change the world to make it a better place what would I do? If you can answer questions such as these, you will have principles to guide you as you acquire wealth.

By Kathy J. Marshack, Ph.D.

For years Arnie looked forward to having his son and daughter join him in his publishing business.

Arnie and his wife, Ilsa, had rebuilt the business after Arnie’s father lost everything due to some poor planning and miscalculating the marketplace. Even though the business went under when Arnie was in college, he could see the potential. He had a degree in marketing and knew the publishing business from the inside out. With Ilsa’s accounting background, they systematically restored the business to a healthy functioning.

About the time that Arnie’s and Ilsa’s two children were off to college the business was in expansion mode and Arnie was counting on his son and daughter to help take the company into the twenty-first century.

The children were eager to help out too. They were getting relevant degrees in college, had acquired internships at publishing houses back East, and upon graduation were ready to come home and learn the family business under Mom’s and Dad’s tutelage.

Arnie and Ilsa had laid the groundwork well for inviting their children into the family business. The kids had seen how hard their parents worked, but they weren’t ignored. The family always came first. Also Arnie and Ilsa involved the children in the business from the start. Even as toddlers, they played in the office. As older children, they helped out with odd projects and straightening up. They were familiar with all of the employees, who felt like one big extended family to them.

In high school, the children tried their hands out with some of the professional work. Frequently the family business was a subject for a high school project. It was common knowledge and often discussed that both son and daughter were welcome to work in the family business after they completed college.

All seemed to be going as planned until the day came to discuss the employment agreement with each child. Never before had the family had to consider real business when dealing with each other. As teenagers, the kids had been paid minimum wage or a bit better. There were no benefits or perks because their parents took care of those things. Now the children were adults, responsible for their own lives, which meant that negotiating compensation had to be strictly business. The children couldn’t be expected to work for minimum wage anymore and they expected to be compensated for contributions they made to the company.

Arnie and Ilsa had some work cut out for them. The question was, How to compensate their children, as if they were regular employees, but with the added benefit of having trusted family members to help run the business?

Compensating relatives is a sticky business. Not all people are really created equal. It is sometimes very difficult to assess and compare the talents of family members who are also employees. Nor do all family members contribute equally to the business. As a result of the stress that this causes, many family business owners ignore the problem and let compensation become a breeding ground for dissension in the family.

For example, many wives in family businesses do not earn a salary at all. The reason given by the CEO for this is that it saves on taxes. The justification is that she is an owner of the business, so she is growing an investment. However, the research also shows that family business wives are invisible when it comes to decision making and that they feel isolated and unappreciated. Lack of a salary or a nominal salary may account for this.

A recent survey by Mass Mutual Insurance Company reports a wide discrepancy between the salaries of sons and the salaries of daughters in family businesses across America. On average the typical son in a family business earns $115,000, while his sister earns only $19,000. These salaries also reflect the tendency of family firms to view the contributions of women as of less value and the strength of primogeniture in succession planning. In other words sons are groomed for leadership while daughters are groomed for supportive roles and paid less than their brothers.

In other situations, CEOs of family firms attempt to avoid the problem of compensation for family member/employees by paying everyone the same, even themselves. Or they hire a family member simply because they are family, regardless of their abilities.

The problem with this method is that the talented and creative employees are not rewarded for their work and may become resentful of the family members they must “carry.” And the employees who are overpaid are not getting accurate feedback for their work performance, which makes it hard to improve. Likewise the CEO is not really viewed as sacrificing when he or she takes a low salary. Rather he or she is viewed as a weak leader.

Although it is not easy to put aside the anxiety caused by developing a fair compensation plan for your family members/employees, it is absolutely necessary if business is to thrive. Family relationships built upon honesty are far superior to the games required by compensation plans designed to avoid friction. So if you follow the advice of experts you will design your compensation plan according to these five steps:

1. Write up accurate job descriptions for each employee. Include responsibilities, level of authority, technical skills, level of experience and education required for each job.

2. Identify what your compensation philosophy is. Do you want to pay about average, or higher? Do you want to attract talent from other companies? Do you want to offset the typical male/female wage differential? Are you a training ground for young, inexperienced people?

3. Gather information on the salaries of similar positions in your industry. Size up companies that are similar to yours in number of employees, revenue, product, geographic location, etc. What salaries and other benefits do these similar organizations pay their employees?

4. Develop a succession plan. How will a successor to the leadership be identified among family member/employees? How will they be prepared for leadership? How will this choice affect the morale of the family/business? How will this successor be compensated?

5. Design an affordable plan. Obviously you want to do the best you can with the dollars you have. What can you afford to compensate each family member/employee relative to their contribution?

After you have a compensation plan that reflects the family’s values as well as sound business practices, you are in position to negotiate an employment contract with a family member. It is important that everything is spelled out up front so that when you have an annual review, there is a way to compare employee performance with outlined expectations in the job description. Salary increases can then be based upon the employee’s true accomplishments.

It will be hard for Ilsa and Arnie to totally separate their love for their children from this matter-of-fact compensation plan. There is room in any business for discretion in awarding raises and other forms of compensation. However, when the money decisions are made strictly from emotion or avoidance of emotion, there is bound to be trouble. As the CEO of a family business, make the best decision you can for the business. As a parent or a spouse, encourage your family member/employee to achieve their greatest potential within or outside the business. In this way both business and family wins.

By Kathy J. Marshack, Ph.D., P.S.

For years Arnie looked forward to having his son and daughter join him in his publishing business. Arnie and his wife, Ilsa, had rebuilt the business after Arnie’s father lost everything due to some poor planning and miscalculating the marketplace. Even though the business went under when Arnie was in college, he could see the potential. He had a degree in marketing and knew the publishing business from the inside out. With Ilsa’s accounting background, they systematically restored the business to a healthy functioning. About the time that Arnie’s and Ilsa’s two children were off to college the business was in expansion mode and Arnie was counting on his son and daughter to help take the company into the twenty-first century. The children were eager to help out too. They were getting relevant degrees in college, had acquired internships at publishing houses back East, and upon graduation were ready to come home and learn the family business under Mom’s and Dad’s tutelage.

Arnie and Ilsa had laid the groundwork well for inviting their children into the family business. The kids had seen how hard their parents worked, but they weren’t ignored. The family always came first. Also Arnie and Ilsa involved the children in the business from the start. Even as toddlers, they played in the office. As older children, they helped out with odd projects and straightening up. They were familiar with all of the employees, who felt like one big extended family to them. In high school, the children tried their hands out with some of the professional work. Frequently the family business was a subject for a high school project. It was common knowledge and often discussed that both son and daughter were welcome to work in the family business after they completed college.

All seemed to be going as planned until the day came to discuss the employment agreement with each child. Never before had the family had to consider real business when dealing with each other. As teenagers, the kids had been paid minimum wage or a bit better. There were no benefits or perks because their parents took care of those things. Now the children were adults, responsible for their own lives, which meant that negotiating compensation had to be strictly business. The children couldn’t be expected to work for minimum wage anymore and they expected to be compensated for contributions they made to the company. Arnie and Ilsa had some work cut out for them.

The question was, How to compensate their children, as if they were regular employees, but with the added benefit of having trusted family members to help run the business? Compensating relatives is a sticky business. Not all people are really created equal. It is sometimes very difficult to assess and compare the talents of family members who are also employees. Nor do all family members contribute equally to the business. As a result of the stress that this causes, many family business owners ignore the problem and let compensation become a breeding ground for dissension in the family. For example, many wives in family businesses do not earn a salary at all. The reason given by the CEO for this is that it saves on taxes. The justification is that she is an owner of the business, so she is growing an investment. However, the research also shows that family business wives are invisible when it comes to decision making and that they feel isolated and unappreciated. Lack of a salary or a nominal salary may account for this.

A recent survey by Mass Mutual Insurance Company reports a wide discrepancy between the salaries of sons and the salaries of daughters in family businesses across America. On average the typical son in a family business earns $115,000, while his sister earns only $19,000. These salaries also reflect the tendency of family firms to view the contributions of women as of less value and the strength of primogeniture in succession planning. In other words sons are groomed for leadership while daughters are groomed for supportive roles and paid less than their brothers.

In other situations, CEOs of family firms attempt to avoid the problem of compensation for family member/employees by paying everyone the same, even themselves. Or they hire a family member simply because they are family, regardless of their abilities. The problem with this method is that the talented and creative employees are not rewarded for their work and may become resentful of the family members they must “carry.” And the employees who are overpaid are not getting accurate feedback for their work performance, which makes it hard to improve. Likewise the CEO is not really viewed as sacrificing when he or she takes a low salary. Rather he or she is viewed as a weak leader.

Although it is not easy to put aside the anxiety caused by developing a fair compensation plan for your family members/employees, it is absolutely necessary if business is to thrive. Family relationships built upon honesty are far superior to the games required by compensation plans designed to avoid friction. So if you follow the advice of experts you will design your compensation plan according to these five steps:

1. Write up accurate job descriptions for each employee. Include responsibilities, level of authority, technical skills, level of experience and education required for each job.
2. Identify what your compensation philosophy is. Do you want to pay about average, or higher? Do you want to attract talent from other companies? Do you want to offset the typical male/female wage differential? Are you a training ground for young, inexperienced people?
3. Gather information on the salaries of similar positions in your industry. Size up companies that are similar to yours in number of employees, revenue, product, geographic location, etc. What salaries and other benefits do these similar organizations pay their employees?
4. Develop a succession plan. How will a successor to the leadership be identified among family member/employees? How will they be prepared for leadership? How will this choice affect the morale of the family/business? How will this successor be compensated?
5. Design an affordable plan. Obviously you want to do the best you can with the dollars you have. What can you afford to compensate each family member/employee relative to their contribution?

After you have a compensation plan that reflects the family’s values as well as sound business practices, you are in position to negotiate an employment contract with a family member. It is important that everything is spelled out up front so that when you have an annual review, there is a way to compare employee performance with outlined expectations in the job description. Salary increases can then be based upon the employee’s true accomplishments.

It will be hard for Ilsa and Arnie to totally separate their love for their children from this matter-of-fact compensation plan. There is room in any business for discretion in awarding raises and other forms of compensation. However, when the money decisions are made strictly from emotion or avoidance of emotion, there is bound to be trouble. As the CEO of a family business, make the best decision you can for the business. As a parent or a spouse, encourage your family member/employee to achieve their greatest potential within or outside the business. In this way both business and family wins.

By Kathy J. Marshack, Ph.D., P.S.

Have you ever experienced that chilling feeling that creeps up your spine when your car starts acting up? It’s bad enough to be inconvenienced by having your car in “the shop,” but what’s even more frightening is having to face the mechanic, a person you don’t trust, yet need.

Mechanics lie to you. They make unnecessary repairs and over-charge you. It’s not just a feeling. There have been “undercover” stories on television where the mechanics are caught “red-handed.” Mechanics can’t be trusted. That’s a fact! At least, this is what I believed until a couple of years ago when I met our current “family auto mechanic.” This guy is like a breath of fresh air. He and his wife run the shop with a couple of employees. He’s honest, hardworking, RELIABLE. His prices are fair. The work gets done in a timely manner. And to cap it off, my car is always better after he’s fixed it. Is it any wonder that his business has grown steadily over the years, so that he had to move from his quaint little storefront to larger more professional space? I hope the growth doesn’t change his values. With this issue of the Vancouver Business Journal , I began to wonder what is it that makes our “family auto mechanic” so exceptional. There are the basics. He’s timely. He’s knowledgeable. He’s personable but not terribly out-going.He remembers my name. He charges what the work is worth, not what the traffic will bear. I always get answers; no double-talk. He rarely tells me he has no time for me. If he can’t fix it, he tells me where I can get the car fixed.

He does little extras; he’s willing to pull leaves out of rain drains so that the interior of my car stays dry.A major appliance company conducted a study a few years ago to learn how to improve the quality of the repairs on customer’s appliances. The technicians were given tests to determine their personality style; then divided into one of two types, introvert and extravert. Introverts are people who quietly within themselves figure out the problem. Whereas, extraverts are more noisy about their problem solving, needing to talk aloud and get feedback from others. The appliance company then asked their customers two questions: (1) How satisfied are you with the repair?; and (2) How satisfied are you with the technician? While the customers found the extraverted technicians more personable, there were fewer complaints about the repairs done by the introverts. In other words, the guy who quietly goes about his business of getting the job done, but doesn’t interact much with the customer does a better job. Our “family auto mechanic” fits this picture. But there’s more. There’s something deeper that makes my mechanic special. He really seems to love his work. He works hard, often late into the night. And his wife is working right beside him. It must be that he enjoys solving the mystery behind my car problems. He probably wants to earn money too, but money is a byproduct of doing what you love.

Obviously our “family auto mechanic” is being paid well for doing what he loves. I know that I am not alone in this desire to have a mechanic I can trust and who does quality work. Recently on National Public Radio I was listening to “Car Talk,” a lively program dedicated to answering tough car repair problems called in by listeners. On this particular night I was amused to have an astronaut call in from his space shuttle orbiting the Earth. Although the reception was compromised by a little static, I learned about the problems astronauts have with their vehicles.But what was even more fascinating about the program is that the hosts were offering to set up a free locator service for mechanics. They asked listeners to send in the names of mechanics that they felt were RELIABLE and trustworthy. If you want to find a mechanic you can trust, you need to get to know the person. Just as with your physician or hair dresser, the relationship with your mechanic should be more than passing. In our frenzied world, many of us have lost tract of the community spirit, but that community spirit is what helps build trust. If I know my mechanic and his family and he knows me and mine, we can build a relationship of trust over the years. He knows just how I like things done. I know that I can trust him to have my best interests at heart. Most importantly, I want to work with someone who cares about me, not just my car; and I want to work with someone I care about too.

By Kathy J. Marshack, Ph.D., P.S.

Forty year old Cathy has worked in her family’s restaurant business for 25 years. Her older brother Charles has done the same. Both have matured with the family business and seen it grow from one restaurant to five. Cathy’s parents, the founders are nearing retirement and want the business to carry on under the care of their children. Cathy and Charles are ready and well trained (both on-the-job and college degrees) for succession. They work well as a team so there is no competition for leadership. Where’s the problem? The problem is the youngest son, Brian. At 35, Brian has never worked in the family firm, preferring to try his hand in other ventures. Unfortunately everything Brian has tried has failed. Always there to help, Cathy’s parents have “bailed” Brian out of one jam after another. Now as they face retirement, the parents want Cathy and Charles to hire Brian and to share ownership and management of the family business with him! Needless to say Cathy and Charles are beside themselves with frustration and fear. They don’t want to offend their parents. After all, without their parents neither Cathy nor Charles would be in the fortunate position of owning a thriving business. However, Brian’s inexperience, lack of maturity and questionable work ethic may cause considerable problems in the business. Neither Cathy nor Charles relish the idea of taking care of their brother indefinitely as their parents have done. This type of problem is all to common in family-owned firms. Being a parent is the single most important job in anyone’s life. Most of us cherish this responsibility and we are very reluctant to give it up when the children leave home. In family firms where children may never leave home, the parenting role may continue indefinitely. In Brian’s case, this appears to be true. A parent’s job is to nurture and protect children so that they can grow up healthy and capable of independent adult life. But parent’s don’t teach independence directly. Independence is a state of mind that children must conquer for themselves. All cultures have growing-up rituals which affirm that the child has reached a stage of maturity wherein they must accept adult responsibility for their actions. The Bar Mitzvah is a religious ritual acknowledging that the young Jewish boy is now responsible for his own spiritual development.

Most American sixteen-year-olds get their driver’s license, which is a type of ritual acknowledging that the teenager is fully responsible for their driving behavior. But just because a child has gone through the ritual doesn’t mean they have made the cognitive leap to mature thinking. In a way, the Bar Mitzvah or the driver’s license is really a license to begin learning to be an adult. To be responsible for all the mistakes one makes on the way to adulthood is the real test of maturity. Parents in family firms sometimes interfere with the growing-up process by being just a little to ready to rescue their progeny. Sometimes Mom and Dad fight over the child because one doesn’t want the child hurt and the other wants the child to face their mistakes. Alternatively the child may be making a bid for independence but the parents thwart it. On the one hand parents complain that their grown child is not very strong or capable of leadership. Then on the other hand, they complain when the child speaks up for himself. One grown son complained that his father would “micro-manage me.” The son carried the title of manager of one department in the family firm, but his father really never let him run the show. And to add insult to injury the father would stop by his son’s house almost daily to advise him how to take care of the son’s family and home. The father’s complaint was that the son “never listens to me.” In a fit of frustration the son quit the company, moved out of state and went to work for a competitor. But within a year he left the job and returned to his father’s company. His bid for independence had been crushed by father’s lack of support. Yet in other situations siblings give each other a hard time. If one child makes a bid for independence by leaving the family business, a sibling who is staying behind may become resentful if the parents are just as helpful to the departing child as to the one left behind. Also family members can feel as if the child who is leaving is breaking family ties and therefore not very loving. In order to acquire that state of mind that makes us an independent adult, a child has to prove him- or herself in the world.

This proof often comes by leaving the parental home and conquering one’s fears about being self supporting. Many CEOs of family firms had no one helping them getting the business off of the ground, so they had ample opportunity to prove their adulthood. But what of their children, who have never had to look for a job? Some children can acquire maturity while working for their parents, perhaps by going off to college. But for most children they will have a very difficult time developing the strength of character required to run a business if they have not had preparation through the “School of Hard Knocks.” If this sounds cruel, think for a moment about where your greatest lessons in life came from. Chances are you grew the most and gained the greatest confidence from conquering the impossible tasks that no one else could do for you. There are a variety of strategies for ensuring that the second and third generations in family firms really grow up. The strategy that fits for your business depends upon the business, the parent’s skills and personality and the skills and personalities of the children. In any case the child needs an environment where they must prove themselves capable of leadership in the family business. For some this means leaving the business for awhile and working elsewhere. For others, it means getting a graduate education before returning to the family business. Another child may benefit by working their way up from the “mailroom” with no preferential treatment from the parents. Finally, some children will be better family members and more capable adults if they never return to the family business. There are two goals in family firms. One is to develop a thriving and competitive business. The second is to develop healthy independent mature adults who can contribute to society. It would be very efficient to accomplish both goals within the framework of a family business, but this isn’t always possible. And these two goals are not mutually dependent. Keep in mind that the business can be successful without the child and the child can be successful without the business. That is, set your sights on accomplishing both goals independent of each other, and you may be surprised how they come together in the long run.