1. Family Business Workshop Presented by Marcus Thompson: Contract Marketers Scotland, [email_address] Paul Dodman: Goose Island Consulting, [email_address]

2. Workshop Aims

• A workshop for 6-8 family businesses to help them learn from each other about growing a family business.

3. Themes for the Workshop

• Vision -

• • Reviewing the validity of the original vision and business model as the next generation comes in.

• Re-energising Business Processes -

• • Motivation and suitability of potential successors.

• Values -

• • Succession planning within or outwith the family, and other options.

• Continuity

• • Founders planning for his or her partial retirement or exit.

• Governance -

• • Strategies for resolving family conflicts related to the development of the business.

• Resources

• • The help and resources required to ensure the continuation of the business

4. Family Businesses Whats Special

• Integrity based on vision and values of founder

• • Results in special characteristics and quality of products and service

• • Makes the company different from its competitors

• Long term perspective in business dealings

• • Immediate profit may not be the main concern

• • Results in loyalty of suppliers, employees and customers

• Business is personal

• • So customers feel valued

• Employees may be treated as extended family

• • or they may be treated as second class!

• Continuity

• • Family businesses have been trading for an average of 22 years...... non-family businesses an average of just over 15 years. (A Family Affair (Barclays 2002))

5. Whats not so Special!

• Business style and strategy may no longer fit business environment.

• Management may be by decree

• Planning and decisions may be taken within the family a mystery to employees

• Family members may be preferred for best jobs and perks

• Managers may lack professional training and processes

• Discipline of family members may be weak

• • Demoralises non-family employees

• Disagreements within the family may paralyse operations, critical decisions or development.

• Finance may be restricted to family sources

6. Family Business Washing Machine Training and development Management and governance New business ideas Who should take over Availability of finance Ownership and control Family preferences Timing Delegation and letting go

7. Theme 1. Vision

• Vision is one of the distinguishing characteristics of small growth firms.

• The initial vision of the founder defines the scope and direction of the venture.

• If they are to succeed and grow, family businesses need a vision that transcends the generations and remains relevant to trading conditions.

• Decision-making relies on having a vision and on the ability to communicate it.

• A founder needs the support of others, both inside and outside the family, to buy into the vision.

8. Vision Questions

• Is the founders vision still appropriate in terms of market trends, customer mix and competition?

• Fundamentals of what and why may need review

• • Personal motivation, real nature of business, market positioning

• • Opportunity for review as succession approaches

• What is the essence of that vision.

• • How is the vision communicated to other family members and employees?

• • What objectives, business & commercial do each of the involved family members have?

• • What do non-involved family members take or expect from the business?

• • Do all family members identify with the company vision and business methods?

• • Who are the other stakeholders and how are they involved or communicated with?

• • How are non-family managers (if any) rewarded and how do they see their position?

9. Your Vision Issues?

10. 2. Re-energising Business Processes

• What is the best management structure for the future, especially in terms of outside advisers and non- family managers.

• • Is there a formal or informal plan for expansion?

• • Which areas of the business show the greatest prospects for future growth?

11. Progressions Time Owner-manager plus employees Plus family trainee Planned handover to 2 nd generation Owner-manager plus employees Plus professional manager(s) Managers take minority stake Managers take control Family gets dividend A B Family retains control

12. Re-energising Questions

• Is the business still growing, or has it plateaued?

• Is it still innovative?

• • Is there a current Business Plan?

• • How and when was it put together, and for what purpose?

• • Is the companys market share growing, stagnant or shrinking?

• • What has competition been doing in the past 3 years?

• • How are customers buying patterns and expectations changing?

• • How have these been addressed by the company?

• • How do non-family managers view the performance of the company and its control systems?

• • What is likely to happen in the next 3 years?

• • Does the company have a competitive advantage (e.g. by being a family business, brand identity, etc.) and will this continue to be relevant in the future market?

• • Will the company have adequate cash to do what is necessary?

13. Your Re-energising Issues?

14. 4. Company Values Theme

• Does the company have a way of doing things that makes it better than others?

• Whose way is that?

15. Value Questions

• Who makes the decisions, and how? Does this reflect the management structure?

• Do the values, skills and ambitions of the next generation in the family match their wishes, abilities and views?

16. Your Value Issues

17. 4. Continuity Theme

• What is the company ethos, family involvement and how are decisions delegated?

18. Continuity Themes

• Owners wish for downscaling/retirement/exit

• Candidates within or outwith the family, obligations, other options

• Characteristics of potential successors

• Obsolescence of vision and business model

• Family conflicts related to the development of the business

19. Continuity Issues

• Owners wish for withdrawal slow or quick

• Candidates within or outwith the family

• • family obligations, real or felt

• • other options

• Characteristics of potential successors

• • the right man/woman for the job

• Training

• Inappropriate vision or business model

• Family disagreements about succession and the development of the business

20. Stepping aside

• Letting go is the final test of greatness for the outgoing generation. If more of them could do the necessary planning for this critical transition and honour the established process, the inherent fragility of family companies would be transformed into increased robustness and health - to the advantage of both the family and its enterprise. Lank (1997)

• The following are some archetypes, (originally formulated by Sommerfeld and Spence, Family Business Review, Vol. 2, No. 4, Winter 1989):

• Monarch : refuses to depart voluntarily and typically dies on the job

• General : agrees to depart but spends his time plotting to return to power.

• Ambassador: gives up the CEO post, may stay on the board, represents the enterprise externally in industry associations and so on

• Reborn entrepreneur: keeps contact with the company but starts a new, noncompetitive venture

• Hedonist: cuts ties with the company and spends time doing things he or she never had time to do earlier - sports, hobbies and so on.

• Do you recognise any of these?

21. Selecting the Next Generation

• The following are suggestions by Lank (2003), questions directed at the incoming (successor) generations

• What are your reasons for joining the family company?

• • Is it because it is the only job available?

• • Is it only because that is what the parents expect?

• • Is it because, as a manager, the person fears they will be disinherited if they work elsewhere?

• • Is it because the working hours would give you more time to play golf?

• If the answer is yes to any of these questions, it may be wiser for all concerned if the potential successor looks elsewhere.

• Other questions might include:

• Have you the required education for entering the business?

• Have you had experience outside the family enterprise?

• There are at least three good reasons for working elsewhere before joining the family's enterprise.

• It gives the individual an indication of true market worth.

• If the individual succeeds, they will be able to enter the family enterprise, should they so desire, with a proven track record.

• If they fail, there will be less negative fall-out and the family if it happens in someone else's company.

• The final choice must be made on the basis of who has shown the most competence to lead the family's enterprise into the future.

• This may mean that the sentimental favourite, based on kinship, may have to give way to a non-family successor.

• A full version of the article is available in Birley, Mastering Entrepreneurship, Financial Times, 2003 p 197

22. Continuity Issues

• Has any succession planning been openly discussed ?

• In view of the opportunities and threats facing the company, what skills will be required?

• Are these skills possessed by family members or other existing management?

• What other options would be considered for obtaining skills? Is it time for fresh blood? What constraints would be placed on a new CEO?

• Does the family still wish actively to control the company, or would it be content to take a back seat but retain ownership?

• What structural alternatives would be considered? MBO, sale, partial divestment or downscaling, acquisition of complementary business, etc.?

• What effect would this have on important networks and supplier relationships?

• What effect would this have on family values business ethos, local employment, etc.?

• Are children expected to take over the business or not?

• What do they really want to do?

• What are their current roles?

• How would they respond to greater responsibility, autonomy and reward?

• Have they worked outside the company?

• Are they getting any formal business training?

23. Non-Succession Exit

• The most favoured option for family businesses is for the next generation to take the helm, with the second preferred option being a trade sale. Flotation, management buy-out and sale to employees are the least likely to be considered.

• most family businesses do not succeed beyond the first generation.

• • less than 10% of businesses succeed in passing to the third generation

• family may not have a ready, willing and able successor

• • Or controlling members of the family may not want further involvement from other family members.

• founders may choose to dispose of their businesses on retirement to best protect family interests.

• • The business may now be too demanding (skills, time, cash)

• • Or it may have become less challenging

• • Inheritance tax concerns

• Alternatively founders may introduce professional managers with a shareholding in the enterprise.

• • Advantages: fresh capital and skills, business can continue to grow, family may still receive dividend.

24. 5. Governance Themes

• What strategies can be adopted by the family to avoid and resolve conflicts.

• • Conflict Prevention

• • Conflict Resolution

25. Conflict resolution Too little conflict can be just as destructive as too much conflict. Constructive criticism and debate is essential for growth.

• Conflict is a normal part of any family relationship

• • The more open a family is about handling conflict, the more likely it is that the business will succeed because of disagreements rather than in spite of them.

• Hold regular family meetings to discuss business issues and to settle disagreements.

• • Include all family members who own stock or who play a substantial role in the business, along with spouses, in-laws and other members who may have decision-making influence.

• • Don't assume that informal meetings can do the job or that discussions will "trickle down" to other family members. They won't, although they will breed miscommunication and mistrust.

• Create a formal, written policy that governs family participation in the business.

• • Specify a decision-making process, succession rules, salary and equity guidelines, dispute resolution and other vital points.

• Don't rely entirely on lawyers or other outsiders to set a family policy

• • the process of creating such a document within the family is just as important as the end result. This is not meant to be a legal document, but rather a reflection of the family's shared ethics and business culture.

• Performance evaluations are essential. But they're also a major source of hurt feelings and family conflict.

• • Develop a formal, structured evaluation process that everyone understands and accepts. Focus on improving family members' work performance rather than simply pointing out their flaws and weaknesses.

• Compensation is another source of conflict in family businesses.

• • Instead of completely shutting out some family members, consider issuing both voting and non-voting stock. This gives everyone a stake in the business while limiting decision making to a core group. And it can also help to keep power from being spread too thinly as succeeding generations come into the business.

• See http://www.allbusiness.com/articles/content/21629.asp

26. Governance Questions

• What is the role (job Description) of the leading family member?

• What sort of family business is it i.e. what proportion is owned by the family and how many family members are involved?

• Is there a formal management structure and what is it?

• What are the roles of non-family members in management?

• Involvement of other stakeholders?

• Relationship and respective roles of Family Council and Board

• Are they involved in board meetings?

• Rules to be agreed

• Concerning the issue on the CEOs mind, can it be delegated? is it crucial (consideration of succession may have to wait) or strategic (succession may well be a related issue)?

27. Your Governance Issues

28. 6. Resources Theme

• What actions, support and resources are required to maintain the business into the future.

• • Professional Management

• • Finance & Funding

29. Professional Management Issue

• The need to maintain family control can result in the exclusion of professional managers and advisers.

• Family firms appear to eschew specialist managers to a greater degree than their non-family counterparts perhaps as a result of employing relatives who are generalists or not feeling the need for them.

• Only 15% of family businesses employ a specialist manager of any kind, compared to 21% of non-family firms, with around half as many family businesses employing specialist IT, finance and sales managers. (Barclays 2002 p12)

• Family businesses may be pressured at times to employ, promote or end employment for family members, but it can be difficult for a CEO to deal objectively with children, parents, siblings, cousins, nephews or nieces.

• If discrimination is in favour of family members at the expense of better-qualified non-family workers then the long-run profitability of the business may be reduced.

• The decision regarding who will run the firm can result in conflict

30. Finance & Funding Issues

• Add information

31. Resource Question

• Has any public sector support been utilised?

• What has the family agreed to do as a result of the programme?

• What progress has been made?

• What obstacles have been encountered?

32. Issues Summary

• Vision - Is the original vision still appropriate in terms of market trends, opportunities and threats?

• Re-energising - What is the best management structure for the future, especially in terms of outside advisers and non family managers .

• Values - Do the values, skills and ambitions of the next generation in the family match , their wishes, abilities and views?

• Continuity - What is the company ethos, family involvement and how are decisions delegated?

• Governance - What strategies can be adopted by which the family can resolve conflicts.

• Resources - What actions, support and resources are required to maintain the business into the future.

33. Company Action Points

• What issues require action?

• Which issues have the greatest priority?

• • Rate 1 5 (one being highest)

• What barriers are in your way?

• What resourses or extra assistance do you require to fulfill your vision.

34. Brainstorm

• Issue

• Strategy

35. Future Family Business programme

• Familiarisation and building trust

• Company ethos, family involvement, decision making process

• Trends, opportunities, threats

• Is the old vision still right?

• The next generation, wishes, abilities and views

• The best management structure for the future

• Strategies to prevent & resolve conflicts

• Following up

36. Contact

• Marcus Thompson

• [email_address]

• Marcus Thompson works with a number of Scottish Universities including Stirling, Edinburgh and Aberdeen where he teaches on the post graduate business course. He describes himself as an academic practioner, interested in matching the theory to the practice when it comes to growing a business through good marketing practices

• This presentation was jointly prepared with Paul Dodman

• [email_address]