Over time, as the family grows in size, member interests, goals and values become increasingly different,” Craig E. Aronoff told an audience of family-owned and operated agencies during day-long presentations on “The Family Challenge” and “Ownership and Financial Challenges,” at American Association of Managing General Agents University Sessions in Orlando, Fla.
Aronoff, co-founder and principal of the Family Business Consulting Group Inc., said that in such situations “each family member prefers to go his or her own independent way.”
The educator showed statistics indicating that having no common interests was mentioned by 62 percent of respondents to his surveys as a major cause of family business concern.
“Values, attitudes and goals cannot be shared through osmosis,” Aronoff explained. He said communication is the key to family success, whether personally or in business.
Aronoff emphasized the following keys to enhanced communication: Parents and children must talk; actions and decisions should be explained; questions, feedback and input should be encouraged; and communication should start early and proceed through estate planning and beyond the grave.
Aronoff said one of the family’s greatest contributions to a family business can be its values and that in a family business values must be communicated across generations. Operational values, he explained, are often what distinguish a family business with distinct competitive advantages.
Values at the heart of culture
Aronoff described businesses with weak cultures have unclear goals, divided loyalties, and limited motivation (“I work for money”).
Businesses with strong cultures have clear, meaningful, widely-shared goals; focused loyalties and strong motivation.
He emphasized that strong cultures are build by institutions infused with values.
“It’s hard work putting values to work,” Aronoff explained. “It’s necessary to discover and articulate values, translate values into goals and communicate values and goals to appropriate constituencies. These include the board, employees, shareholders, customers/suppliers, family and next generations.”
Aronoff’s PowerPoint presentation illustrated a design for strategic stewardship, showing the conventional four-part business school strategic planning model and compared it with a five-part family business strategic planning model integrating core values.
The business school model, illustrated in a pyramid from the base up, included: strategy, revenues and productivity, which lead to increased shareholder value.
The family business model, illustrated in a larger pyramid from the base up, included: Core values, strategy/vision, return on investment and productivity, which lead to successful stewardship and remaining private growth.
Family business advantages
Aronoff cited statistics indicating family businesses with values have a strategic advantage and outperform and outlast others. He said this is because of stewardship, commitment, a willingness to sacrifice, taking a long-term view, building rather than taking value, and accumulated wisdom.
He said a common focus strengthens relationships within the family so that it can deal with the traumas and conflicts related to money, power and other issues that inevitably arise.
“Don’t wait for conflict,” Aronoff advised. “Prepare in times of relative harmony.”
He said the first step is to focus on common ground including setting goals for yourself, the business and the family. He showed a chart showing that 95 percent of the goals are shared and 5 percent are conflicts.
Aronoff said that a majority of the conflicts result from clashes between the shared “We want …” mentality and the conflicting “I want …” mentality.
Prepare a mission statement
According to Aronoff, the first step is to write out a family mission statement. It should outline explicit values, goals and priorities. He suggested that individuals should prepare the statement and read it aloud. The next steps were to focus on common ground, apply family priorities and achieve a consensus.
Aronoff displayed several examples of family mission and family value statements taken from his book, Family Business Succession: The Final Test of Greatness. The agreements went from a very simple one-page document stating a legacy of values to a more precise, two-page statement formally listing the goals and roles of each family member.
Family business policies
Aronoff said that family business policies are a necessity to provide a guide for each and every member of the family to adhere to. He said such policies:
According to Aronoff, family business conflicts are to be expected. He said such businesses are usually run with two or sometimes more generations involved who have totally conflicting outlooks on how they should operate. For example, he compared a father-son relationship in which the parent is conservative and the offspring is aggressive.
The parent relies on risk-averse/security, while the offspring is risk-taking; the parent is controlling and fears losing control, while the offspring wants control; the parent does things in a familiar, comfortable way, while the offspring is growth-oriented, change-oriented and uncomfortable with business as usual; the parent manages the past, while the offspring manages the future.
“We need to show compassion for family members and often use the family-owned company to do so,” Aronoff said. “Many accountants would agree.”
He said that the older generation often uses pay incentives to resolve issues, which is not a long-term solution. In other instances, he said, family businesses are willing to pay their offspring more, simply as a way to keep an eye on what they are doing.
Age becomes a factor
“The older you are, the more conservative you are financially,” Aronoff explained. “The company owner who is 58, 59 or 60 asks, why work hard and take risks?
“I’m worth more, there is greater liquidity for estate taxes,” he says. “So at that stage family-owned company growth slows or even declines.”
Aronoff explained that there are other occasional, family and financial factors that tend to increase family business shareholder demands for liquidity.
Occasional factors include:
Family factors include:
Financial factors include:
Aronoff said there is a big difference between active and passive shareholders. He cautioned family business owners not to provide shares, and particularly not voting shares to anyone who is not directly involved in the business.
Active shareholders, Aronoff explained, focus on business needs; growth and innovation; reducing profits to reduce taxes; and having a meaningful legacy.
Passive shareholders, he said add unnecessary conflict and advised anyone who owns a family business to buy out inactive shareholders as soon as possible. The main interests of passive shareholders are, personal needs, avoiding risk, increasing profits, having dividends and liquidity.
Must keep abreast of new technology
Aronoff conceded that in many instances the younger generation, despite resistance from company founders, can make a big difference between a company’s profit or loss. He said the older generation usually resists change and that when it comes to technology, it is foolish to do so.
He said that the “If it ain’t broke, don’t fix it,” mentality doesn’t work any more.
The younger generation learns in college, “If it ain’t broke, break it.”
“It comes down to managing the past or managing the future, and who’s right?” he asked.
When it comes to using modern technology in a family business it comes down to, “If you don’t use it, someone else will, and perhaps put you out of business in the process,” Aronoff explained.
He said the older generation often realizes that the business is declining and just hopes that they will decline faster than it does. When that owner dies, he leaves a wreck for the next generation and it takes them years to build the business back up.
Financial transition necessary
Aronoff advised succession planning in which there are financial transitions.
“Generational conflict in family business is often financial, even when it seems related to other things,” Aronoff explained.
He said lifestyles between generations are often out of sync, pitting conservatism with next generation entrepreneurship. The older generation is afraid of losing control and becoming dependent, so it is essential to provide security and meet the financial needs of the parental generation.
“There is often conflict between parental security and successors’ ambitions,” he said.
Aronoff described one business in which a son took over the reigns from the father as president 10 years before, but the former president wouldn’t let his son do anything on his own.
“The only thing I don’t want him doing is making a decision without asking me,” said the father.
Aronoff said it is essential for the older generation and the younger generation to open up lines of communication and to attempt to understand what motivates each other. In concluding, Aronoff said the key to managing a family business is to build trust.
“The trust factor has two components,” he said. “Low trust means high risk and high cost of capital. High trust means lower risk and a lower cost of capital.”
He said it’s a no-brainer that if family business owners communicate and build trust they will have a prosperous and long-term business.