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Recap: Andy Nations Visits Family Business Radio

On Thursday, June 28, 2012, B&D Industrial CEO Andy Nations joined Family Business Radio host Meredith Moore to discuss his third-generation family business. Based in Macon, Ga., B&D Industrial is the Southeast’s largest independently owned distributor of industrial bearings and power transmission equipment, including motors, gearing and automation equipment. The firm acquires the parts from 30 primary suppliers, though they work with several hundred in all. While many suppliers are located in other countries, Nations says he is seeing a shift back to the U.S. He speculates that freight costs and instability in other countries may be behind the movement. B&D Industrial’s customers include industrial plants across the Southeastern U.S. And in some international locations. He says they range from mom-and-pop operations doing machine work to Fortune 500 manufacturers. While the original core business was providing off the shelf parts, the company has transitioned into building systems and providing solutions for clients as well. As the distributor between the parts manufacturer and the end user, B&D Industrial’s role is to keep a supply of products in inventory so clients have good access and to offer clients expertise regarding the products and their applications. They have more than 30 branches around the Southeast. At some of these locations, called Mega Branches, multiple company divisions are located under one roof. Synergy occurs when the different groups and different types of professionals, ranging from electrical engineers, programmers and sales staff, are under the same roof. The Mega Branches also help B&D build business because they can easily showcase all of their services to potential clients. Move to Macon Spurs Growth In 1947, Andy’s father bought a Griffin, Ga., distribution business, renaming it Bearings and Drives. His original investment was $9,000. The company remained stable until Mr. Nations moved it to Macon in 1950. Located in the center of the state, Macon provided a better location and better highways. One employee who was part of the move is still working with the company. Once Bearings and Drives moved to Macon, the company grew rapidly. In their first month there, they did almost as much business as they had done in previous years. In 1955 they moved from their leased location to their current headquarters. All human resources and accounting functions are handled from the Macon offices, and the Bearings and Drives and B&D Service divisions are housed there as well. A large warehouse houses parts for customers within a 50-60 mile radius. The branch offices service other territories around the Southeast. From 1960′s Minimum Wage to CEO Andy himself started working for B&D industrial as a 16-year-old in 1965. For $1.25/hour, he worked in the warehouse and made deliveries. He continued working in the summers through high school and his years at the University of Georgia, where he pursued a business administration degree with a major in finance. Andy says his parents did not push him to join the company. However, in one conversation, Andy says he showed the typical college-age idealism and told his dad that he really wanted to have a job that helped people. He recalls his father’s telling him that’s exactly what they did at Bearings and Drives. They gave people jobs so they could support their families and provided opportunities for employees to grow in their careers. Still, Andy thought he might pursue a master’s degree in business administration. His college advisers, however, told him he could learn more in two years of working in the family business than he would by studying business in school. Then he thought he might pursue a career in banking, which would allow him to use his finance degree and, as a bonus, pay very well. In the end, he decided the family business offered more opportunities for growth. After he graduated in 1971, he joined the company full time. Andy’s first position was in inside sales and customer service, where he primarily helped customers over the phone. He says it was a good role for building relationships and learning the company’s products. For the first two years or so, however, he says he still questioned his decision to join the family business. The other employees accepted him, but he felt he needed to prove himself and perform better than his coworkers. He believes his father probably held him to a higher standard, too. Soon, he moved into accounting. He took more advanced accounting courses than he had taken in college, and he could now see how to apply the concepts. In the early 1970s, he says it became apparent that the company needed a computer system. In 1974-75, they invested in an IBM System 3. Andy enjoyed the challenge of going through IBM schools and becoming a programmer. Using a system with punch cards and large floppy discs, he eventually transferred their accounting and bookkeeping functions to the computer. The technology increased their productivity. They were more efficient and accurate. They used the data to analyze the cost effectiveness of business activities, to manage inventory, and to evaluate and reward people more accurately. Continued Growth of B&D When Andy joined B&D full time in 1971, the company was about to add its seventh branch office. The company continued to grow out from Macon through the 1970s and 1980s. They made a few acquisitions, but most of their growth was organic. As a salesperson traveled around an area and saw potential growth there, B&D came in with a branch office. Andy says many manufacturers were moving from the North to the Southeast during those years, so it was a time of rapid growth. In the mid 1970s, Andy became secretary-treasurer of the company. He moved from the back offices to working more directly with people in the different locations. The increased exposure helped him learn all aspects of the business. Andy says his father was gradually decreasing his own role in the company while he increased Andy’s. In 1983, when his father turned 65 and Andy was 34, Andy was named company president, and his father became CEO. Ten years later, Andy took on the CEO role, while his dad became chairman of the board of directors. Andy says his dad had never been one to look over the shoulders of his employees; he gave them a job and held them accountable for it. In 1993, he became even less involved in the day-to-day business, focusing only on the financial and strategic aspects of B&D. Involving the 3rd Generation Andy had married in 1975. His wife pursued her career in nursing, never working with B&D. When their three daughters were old enough, however, they performed clerical duties in the offices during the summers. The older daughters discovered they did not like working with the business. They eventually earned degrees in speech and journalism from the University of Georgia, and they are now both full-time moms. The youngest daughter, Lauren, also attended the University of Georgia and earned a business degree. She initially worked for a private equity firm in Atlanta. She came to work for B&D in 2008, where she has been exposed to different areas of the business. When B&D adopted a new software system three or four years ago, she was instrumental in assisting employees in adopting the changes. She also helps with evaluation of the financials and measuring efficiencies. Two of Andy’s nephews, a niece and a son-in-law have also joined the business. Each has taken a different path inside the business, gaining exposure to different areas. The nephews, Ben and Brian, came to B&D straight from college and initially worked in inside sales. His son-in-law, Tim, graduated from Auburn University, worked for IBM for 8-10 years, then joined B&D about five years ago. Andy says he heavily recruited his niece, Courtney, before she joined the company in 1999. She had worked for a Charlotte importing company, and B&D was starting the international side of its business. Courtney started the international division, which has since moved to Tampa. She now works part-time. Business Structure B&D has an Executive Council comprised of family members and members of senior management. They meet regularly to discuss issues and opportunities, offering a good blend of perspectives from family and non-family members. The company’s shareholders include Andy and his two siblings. His brother, an Atlanta attorney, and his sister, a retired school teacher, are not involved in the day-to-day business, but each has at least one child working for B&D. All three siblings serve as corporate directors, along with two outside directors. They meet quarterly to discuss the “big picture” part of the business. Family Time and Generation 4 Andy says that some business discussions will inevitably occur when the family gathers, but they try to keep it to a minimum. He says the family enjoys spending time with each other and doing things together. It’s too early to predict Generation 4′s future involvement at B&D. Andy has four grandsons, aged 2 to 5 years. He hopes, however, the business will continue into the next generation. What’s Next for B&D? Currently, B&D has more than 30 locations, but there’s still potential for expansion. He says the automation and technical sides of the business offer opportunities for growth. Because they have thousands of customers, they can use those relationships as they offer new services. Also, many of those customers have multiple locations around the country and the world. As B&D provides a solution in one location, the client will also ask B&D to provide the same service in its other plants. There’s also opportunity for international growth. The company currently works with suppliers in India, for example, and they have customers in Brazil. Andy sees great potential in Asia as well. Andy Nations’ Three Tips for Family Business Be honest, open and fair. Andy says this rule applies to any business. He says you cannot over communicate. Develop relationships with others in the family business community. Review their best practices; learn from their mistakes. Take advantage of the resources at the Cox Family Enterprise Center at Kennesaw State University. Establish a Board of Directors or Advisory Board, and get outsiders involved. They should be people who are not part of the family and do not report to the family. They should be able to offer objective opinions and to speak up on issues where others might not. Contact Our Guest: Andy Nations B&D Industrial P.O. Box 4325 Macon, GA 31208-4325 Phone: 478.746.7623 Email: anations@bdindustrial.com Website: www.bdindustrial.com

B&D Industrial CEO Andy Nations to Visit Family Business Radio

Andy Nations, CEO of B&D Industrial, leads the Southeast’s largest independently owned distributor of industrial bearings and power transmission equipment. Nations will join Family Business Radio host Meredith Moore at 1 p.m. on Thursday, June 28, 2012, to discuss the origins and growth of his family’s 65-year-old firm. Started by his father, John Nations, B&D Industrial has grown into a multi-state corporation, consistently ranking among the largest of its kind in the U.S. Andy Nations joined B&D after earning his BBA from the University of Georgia in 1971. Over the years, he worked in inside sales, purchasing and accounting, and he even programmed the company’s first computer. He was elected Secretary-Treasurer of B&D, the oldest and original B&D Industrial company, in 1979 and became its President and Chief Operating Officer in 1983. Ten years later, he was also named CEO of B&D Industrial. Andy has served as president of two international industry trade associations, the Bearings Specialists Association and the Power Transmission Distributors Association. In Macon, Ga., where his company is headquartered, he serves on the Board of Directors of The Georgia Employers’ Association, and he is active in his church and the Macon Rotary Club. He has served on the Board of Trustees at Wesleyan College in Macon for the last four years. He is married to Carolyn, and the couple has three adult daughters, three sons-in-law and four grandsons. Contact Our Guest: Andy Nations B&D Industrial P.O. Box 4325 Macon, GA 31208-4325 Phone: 478.746.7623 Email: anations@bdindustrial.com Website: www.bdindustrial.com

Recap: Family Business Expert Joe Astrachan Offers Resources and Tips

Joe Astrachan

Cox Family Enterprise Center Executive Director Joe Astrachan, recognized around the world for his expertise in family business, visited with Family Business Radio host Meredith Moore on Thursday, June 21, 2012, to talk about the Cox Family Business Enterprise Center programs and offer tips for family businesses.


Dr. Joe Astrachan Cox Family Enterprise Center
Emergence of Cox Family Enterprise Center

Faculty at Kennesaw State University (KSU) began working in the field of entrepreneurship about 30 years ago. Mike Mescon, former dean of Georgia State University’ business school, helped start an entrepreneurship chair on the campus. A few years later, Craig Aronoff was appointed to that chair. When the he asked entrepreneurs about their businesses, they often found that family issues—intergenerational communication, for example—were among the major problems in business. In about 1983, the first real research was done on family businesses, and for the first time a special issue of an academic journal was devoted to the topic. Only three institutions have family business programs that pre-date KSU’s, and only two of those were conducting research in the field at the time. Some independent researchers were working on family business topics as well.

Then, in 1987, Kennesaw State University (KSU) began hosting quarterly family business forums. As a relatively new college, KSU had an entrepreneurial spirit, and professors and staff members were freer to try new things than they might be in more established programs. The day-long forums started with breakfast, followed by a talk from a visiting expert. A family business owner would present, as would one of the day’s sponsors. The Family Business Forum model was copied by over 110 business schools around the country and came to be known as the K Model.

KSU’s family business program expanded from the quarterly forums also to include six breakfast meetings and one two-day, off-site retreat per year. The school also started the Georgia Family Business of the Year awards program to honor family businesses that have demonstrated commitment to families, employees and the communities. The awards go to multiple-generation families in small, medium and large categories as well as 100-year-old family businesses.

As the forums and meetings became more content rich, a change came about in the world of family businesses. Accounting firms, law firms and banks that had formerly ignored family business began targeting them with seminars of their own. Though the new offerings may not have been as neutral in content as KSU’s programs, they appealed to family business owners because they were free, whereas KSU’s family business participation required a membership fee.

The program continued to grow anyway. Joe came to KSU in 1992. In the mid 1990s, the relationship with the Cox family began to emerge. The Cox family owns a business that started in Ohio more than 100 years ago and has since moved to Atlanta. It is one of the largest family-owned businesses in the country. About 20 percent of the gifts from the Cox family and other donors fund ongoing programs at the Center, and the remaining gifts provide growth capital for new projects and research.

Executive MBA in Family Business Program

One of the projects was the establishment of the Executive MBA for Families in Business. Launched in 2009, the program began because researchers found that family businesses that were managed like non-family businesses experienced problems. Family businesses have unique issues that should be addressed and unique strengths upon which they can capitalize. The Executive MBA for Families in Business has now run four complete classes, each open to about 15 students who are family members in a business. Occasionally, if a family member has been through a course, the program allows a non-family member executive in the company to participate.

Though limited in size, the program welcomes students from all over the world. Every other month, class members travel to the businesses of other class members for one week of classes. One day is devoted to the host company, with tours, case studies and talks with family members or non-family member executives in that company.

In the future, Joe hopes to extend the Executive MBA for Families in Business offerings to non-family owners and professionals at the KSU campus, then to offer the curriculum at no charge to other business schools.

Meanwhile, he points to success stories coming out of the program. More than half of the participants have used their experience to help their companies make strategic decisions at high and integrated levels. He refers to Level 5 thinking, where businesses determine the optimal mix of activities to make the most money, given the demand for services or products and the restraints on resources. He says it’s similar to lean thinking, though KSU professor Dr. George Manners says it is “what lean thinking will be when it grows up.”

Other tangible results include more and better family meetings in participating companies. Joe says that relationship problems can’t be solved with structural solutions, such as regular family meetings. However, in families with good relationships, family meetings help ensure the participants are in continual conversation to educate and make decisions. He says families could easily meet once a month, but he’s happy if they even meet once a year. They should try to meet at least four or five times per year to continue conversations, some related to business and some related to the family itself.

Joe Astrachan’s Family Business Story

Joe himself grew up as part of a family business, Seatrain Lines. His father didn’t work directly for the company, but it was very much a part of his life. Publicly traded on the New York Stock Exchange, the company had in 1976 a market capitalization of more than $1 billion. It had 200 offices in the United States, several coal mines and owned the Brooklyn Navy Yards, where it built ships.

Joe says when he was an undergraduate at Yale and decided not to become a physician, he went back to his dream of being part of the family business. Yale did not have a business degree at the time, so he created his own major in family business, focusing on a combination of business and psychology courses.

During that time, the primary officer of the family business was Joe’s great uncle. In the 1970s, many things occurred to hurt the shipping industry. President Gerald Ford made changes in the flagging rules, and the Arab Oil Embargo was instituted. The company had already been harmed by the Cuban embargo and other international events before the end of the Vietnam War.

Then, about 1980, Joe’s great uncle had a heart attack and passed away. After six months, the family was still unable to choose a new leader. The company had about $300 million in debt, which was not a large amount for a company of its size. However, the bank called the debt in. The company’s shares started at $35 each one morning and fell to 19 cents by the end of the day.

Over time, despite the efforts of Joe’s father and grandmother to keep the family together, the family devolved. Without the core of the business they no longer communicated.

All of this happened while Joe was an undergraduate. As he talked to his advisors about what to do next, they recommended he pursue a doctorate. He was accepted into the program, where he continued studying family business.

Common Features in Successful Family Businesses

Joe says that the elements successful family businesses share depend on how success is defined, whether it is considered from the family dynamics side or simply from the business side. For example, to a family, a business that lasts multiple generations may be the most successful.

Joe says that those businesses that do survive have a different culture from other families, businesses or even from their local societies. In his travels, he has discovered that in virtually every culture, children are reluctant to disagree with their parents, and families don’t talk openly because they don’t want to risk conflict. Yet open communication is required in stable, long-term relationships. In successful family businesses, family members are willing to delve deeper into problems and to have difficult conversations. They have what Joe calls “pleasant confrontation.”

Another common factor of long-term family businesses is a willingness to put family interests before individual interests. In families where the parents have always put the happiness of their children first by giving them the things they want, children are not likely to learn to put others first and to cooperate. Yet in businesses and organizations, those skills are necessary. At some point, the parents have to step back and allow the child (or young adult) to take care of problems for him- or herself.

On the business side, successful family businesses must learn not to spend more than they make. If all family members receive a dividend from the business, then the business will have to grow fast enough to fund the rate of growth in the family. Joe says if a family is growing by two to three children per child, per generation, the profit growth rate must be 6 to 7 percent, before inflation to maintain a constant dollar level of payout per child. That means an overall growth rate of 10 to 12 percent after inflation.

Such a high growth rate can be hard to maintain. Joe says that in a mature industry, a company’s growth rate will mirror the population’s growth rate, which is about 3 percent worldwide. Yet if you need 12 percent growth, your company will have to make up that 9 percent difference. One way to deal with this is to scale back on the dividends family members receive. Joe says it’s important to have discussions about changes in dividend rates early rather than later in family life.

Joe says that only 30 percent of family owned businesses make it to the next generation, and the difference for those is in the family dynamics. If someone likes working with family, they will continue doing so as long as possible, even if the business is failing. If a family hates working together, they will leave the company, and likely the family, even if it is making money. Most family members can’t separate the emotion from the business.

Family Businesses Around the World

Joe says that the challenges of family businesses are similar across cultures. For example, one perception is that family businesses in Europe survive longer, but Joe says there is no data to support that. He points out, however, that the U.S. is a younger country, so businesses that started here will naturally be newer than some that have withstood centuries in other parts of the world.

As far as industries that seem to have more family-owned businesses, Joe says there aren’t really any where family ownership is more prevalent. Worldwide, almost every industry starts as family-owned businesses, though government regulation may change family involvement. For example, in the U.S., power generation companies are generally not family-owned businesses, but they are in other countries. Overall, the vast majority of businesses worldwide – 70 to 90 percent – have family involvement.

Bringing in the Next Generation

When only 30 percent of family businesses survive a generational change, it’s important to prepare next generation family members carefully. This is one purpose of family meetings. Family members need to figure out how they will treat each other, for example, and those guidelines may change as each generation matures. For example, cousins in their teens and 20s need to know how to handle boyfriends or girlfriends brought to the group, while parents in their 30s may need to discuss how to interact with or even discipline each others’ children. Families should also begin teaching new generations relatively early about how money is earned and managed. Family members should begin to understand important business concepts, such as balance sheets, equity and depreciation, in their teens and 20s. Joe says learning business is like learning a language; it’s easier to acquire when the student is younger.

Joe says no research has ever been done to determine whether it’s beneficial for a young family member to work outside the business before coming on board. While he says he doesn’t see a problem with allowing people to work elsewhere first, it’s unclear whether it’s better for the family, business or individual.

And when two family members simply don’t like each other? Joe says families must look at the underlying reasons, probably turning to a family therapist or psychologist before looking for business solutions. Often, such conflicts occur when each family member is putting personal needs or desires before the good of the family.

Joe Astrachan’s Three Tips for Family Businesses

Joe calls the following three items the “diet, exercise and don’t smoke” of family business—three things that businesses may not want to do and may not do all at once, but that are vital for healthy businesses.

  1. Regular family meetings.
  2. A functioning board of directors. Research is inconclusive on whether for privately owned companies the board should be made of family members only or include outsiders, but researchers have found that boards are most effective when they meet three to six times a year. The board should make sure the CEO and top management are doing what they say, when they say they will and with the expected results. The board members should not feel like they’re working for the business, but should remain neutral so they can make difficult decisions when needed.
  3. Strategic planning. Family members should have an ongoing conversation about where the business is going, why it’s going there, and how it will get there. Strategic planning allows family members, management and employees greater autonomy. If all know where the company is headed, all can make decisions that support the goals.

Contact Our Guest:

Dr. Joe H. Astrachan
Executive Director of the Cox Family Enterprise Center
Wachovia Eminent Scholar Chair of Family Business
Kennesaw State University
Phone: 770.423.6045
Email: jastrach@kennesaw.edu
Website: http://coles.kennesaw.edu/centers/cox-family-enterprise/index.htm

Family Business Expert Joe Astrachan Offers Resources and Tips

Cox Family Enterprise Center Executive Director Joe Astrachan, recognized around the world for his expertise in family business, visited with Family Business Radio host Meredith Moore on Thursday, June 21, 2012, to talk about the Cox Family Business Enterprise Center programs and offer tips for family businesses.

Emergence of Cox Family Enterprise Center

Faculty at Kennesaw State University (KSU) began working in the field of entrepreneurship about 30 years ago. Mike Mescon, former dean of Georgia State University’ business school, started an entrepreneur center on the campus. He was joined a few years later by Craig Aronoff. When the professors asked entrepreneurs about their businesses, they often found that family issues—intergenerational communication, for example—were among the major problems in business. In about 1983, the first real research was done on family businesses, and the first academic journal was devoted to the topic. Only three institutions have family business programs that pre-date KSU’s, and only two of those were conducting research in the field at the time. Some independent researchers were working on family business topics as well.

Then, in 1987, Kennesaw State University (KSU) began hosting quarterly family business forums. As a relatively new college, KSU still had an entrepreneurial spirit, and professors and staff members were freer to try new things than they might be in more established programs. The day-long forums started with breakfast, followed by a talk from a visiting expert. A family business owner would present, as would one of the day’s sponsors. The Family Business Forum model was copied by 110 business schools around the country and came to be known as the K Model.

KSU’s family business program expanded from the quarterly forums also to include six breakfast meetings and one two-day, off-site retreat per year. The school also started the Georgia Family Business of the Year award program to honor family businesses that have demonstrated commitment to families, employees and the communities. The awards go to multiple-generation families in small, medium and large categories as well as 100-year-old family businesses.

As the forums and meetings became more content rich, a change came about in the world of family businesses. Accounting firms, law firms and banks that had formerly ignored family business began targeting them with seminars of their own. Though the new offerings may not have been as neutral in content as KSU’s programs, they appealed to family business owners because they were free, whereas KSU’s family business participation required a membership fee.

The program continued to grow anyway. Joe came to KSU in 1992. In the mid 1990s, the relationship with the Cox family began to emerge. The Cox family owns a business that started in Ohio more than 100 years ago and has since moved to Atlanta. It is one of the largest family-owned businesses in the country. About 20 percent of the gifts from the Cox family and other donors fund ongoing programs at the Center, and the remaining gifts provide growth capital for new projects and research.

Executive MBA in Family Business Program

One of the projects was the establishment of the Executive MBA in Family Business. Launched in 2009, the program began because researchers found that family businesses that were managed like other businesses were managed incorrectly. Family businesses have unique issues that should be addressed. The Executive MBA program has now run four complete classes, each open to about 15 students who are family members in a business. Occasionally, if a family member has been through a course, the program allows a non-family member executive in the company to participate.

Though limited in size, the program welcomes students from all over the world. Every other month, class members travel to the businesses of other class members for one week of classes. One day is devoted to the host company, with tours, case studies and talks with family members or non-family member executives in that company.

In the future, Joe hopes to extend the Executive MBA in Family Business offerings to non-family owners and professionals at the KSU campus, then to offer the curriculum at no charge to other business schools.

Meanwhile, he points to success stories coming out of the program. More than half of the participants have used their experience to help their companies make strategic decisions at high and integrated levels. He refers to Level 5 thinking, where businesses determine the optimal mix of activities to make the most money, given the demand for services or products and the restraints on resources. He says it’s similar to lean thinking, though KSU professor Dr. George Manners says it is “what lean thinking will be when it grows up.”

Other tangible results include more and better family meetings in participating companies. Joe says that relationship problems can’t be solved with structural solutions, such as regular family meetings. However, in families with good relationships, family meetings help ensure the participants are in continual conversation to educate and make decisions. He says families could easily meet once a month, but he’s happy if they even meet once a year. They should try to meet at least four or five times per year to continue conversations, some related to business and some related to the family itself.

Joe Astrachan’s Family Business Story

Joe himself grew up as part of a family business, C Train Lines. His father didn’t work directly for the company, but it was very much a part of his life. Publicly traded on the New York Stock Exchange, the company had 1976 market capital of more than $1 billion. It had 200 offices, several coal mines and owned the Brooklyn Navy Yards, where it built ships.

Joe says when he was an undergraduate at Yale and decided not to become a physician, he went back to his dream of being part of the family business. Yale did not have a business degree at the time, so he created his own major in family business, focusing on a combination of business and psychology courses.

During that time, the primary officer of the family business was Joe’s Father’s uncle. In the 1970s, many things occurred to hurt the shipping industry. President Gerald Ford made changes in the flagging rules, and the Arab Oil Embargo was instituted. The company had already been harmed by the Cuban embargo and other international events before the end of the Vietnam War.

Then, about 1980, Joe’s great uncle had a heart attack and passed away. After six months, the family was still unable to choose a new leader. The company had $300 million in debt, which was not a large amount for a company of its size. However, the bank called the debt in. The company’s shares started at $35 each one morning and fell to 19 cents by the end of the day.

Over time, despite the efforts of Joe’s father and grandmother to keep the family together, the family devolved. Without the core of the business they no longer communicated.

All of this happened while Joe was an undergraduate. As he talked to his advisors about what to do next, they recommended he pursue a doctorate. He was accepted into the program, where he continued studying family business.

Common Features in Successful Family Businesses

Joe says that the elements successful family businesses share depend on how success is defined, whether it is considered from the family dynamics side or simply from the business side. For example, to a family, a business that lasts multiple generations may be the most successful.

Joe says that those businesses that do survive have a different culture from other families, businesses or even from their local societies. In his travels, he has discovered that in every culture, children are reluctant to disagree with their parents, and families don’t talk openly because they don’t want to risk conflict. Yet open communication is required in stable, long-term relationships. In successful family businesses, family members are willing to delve deeper into problems and to have difficult conversations. They have what Joe calls “pleasant confrontation.”

Another common factor of long-term family businesses is a willingness to put family interests before individual interests. In families where the parents have always put the happiness of their children first by giving them the things they want, children are not likely to learn to put others first and to cooperate. Yet in businesses and organizations, those skills are necessary. At some point, the parents will have to step back and allow the child (or young adult) to take care of problems for him- or herself.

On the business side, successful family businesses must learn not to spend more than they make. If all family members receive a dividend from the business, then the business will have to grow fast enough to fund the rate of growth in the family. Joe says if a family is growing by two to three children per child, per generation, the profit growth rate must be 6 to 7 percent, before inflation. That means an overall growth rate of 10 to 12 percent.

Such a high growth rate can be hard to maintain. Joe says that in a mature industry, a company’s growth rate will mirror the population’s growth rate, which is about 3 percent worldwide. Yet if you need 12 percent growth, your company will have to make up that 9 percent difference. One way to do this is to start scaling back on the dividends family members receive. Joe says it’s important to have discussions about changes in dividend rates early rather than later in family life.

Joe says that only 30 percent of family owned businesses make it to the next generation, and the difference for those is in the family dynamics. If someone likes working with family, they will continue doing so as long as possible, even if the business is failing. If a family hates working together, they will leave the company, even if it is making money. Most family members can’t separate the emotion from the business.

Family Businesses Around the World

Joe says that the challenges of family businesses are similar across cultures. For example, one perception is that family businesses in Europe survive longer, but Joe says there is no data to support that. He points out, however, that the U.S. is a younger country, so businesses that started here will naturally be newer than some that have withstood centuries in other parts of the world.

As far as industries that seem to have more family-owned businesses, Joe says there aren’t really any where family ownership is more prevalent. Worldwide, almost every industry starts as family-owned businesses, though government regulation may change family involvement. For example, in the U.S., power generators are generally not family-owned businesses, but they are in other countries. Overall, the vast majority of businesses worldwide – 70 to 90 percent – have family involvement.

Bringing in the Next Generation

When only 30 percent of family businesses survive a generational change, it’s important to prepare next generation family members carefully. This is one purpose of family meetings. Family members need to figure out how they will treat each other, for example, and those guidelines may change as each generation matures. For example, cousins in their teens and 20s need to know how to handle boyfriends or girlfriends brought to the group, while parents in their 30s may need to discuss how to interact with or even discipline each others’ children. Families should also begin teaching new generations relatively early about how money is earned and managed. Family members should begin to understand important business concepts, such as balance sheets, equity and depreciation, in their teens and 20s. Joe says learning business is like learning a language; it’s easier to acquire when the student is younger.

Joe says no research has ever been done to determine whether it’s beneficial for a young family member to work outside the business before coming on board. While he says he doesn’t see a problem with allowing people to work elsewhere first, it’s unclear whether it’s better for the family, business or individual.

And when two family members simply don’t like each other? Joe says families must look at the underlying reasons, probably turning to a family therapist or psychologist before looking for business solutions. Often, such conflicts occur when each family member is putting personal needs or desires before the good of the family.

Joe Astrachan’s Three Tips for Family Businesses

Joe calls the following three items the “diet, exercise and don’t smoke” of family business—three things that businesses may not want to do and may not do all at once, but that are vital for healthy businesses.

1. Regular family meetings.

2. A functioning board of directors. Research is inconclusive on whether the board should be made of family members or outsiders, but researchers have found that boards are most effective when they meet three to six times a year. The board should make sure the CEO and top management are doing what they say, when they say they will and with the expected results. The board members should not feel like they’re working for the business, but should remain neutral so they can make difficult decisions when needed.

3. Strategic planning. Family members should have an ongoing conversation about where the business is going, why it’s going there, and how it will get there. Strategic planning allows family members, management and employees greater autonomy. If all know where the company is headed, all can make decisions that support the goals.

Contact Our Guest:

Dr. Joe H. Astrachan
Executive Director of the Cox Family Enterprise Center

Wachovia Eminent Scholar Chair of Family Business

Kennesaw State University
Phone: 770.423.6045

Email: jastrach@kennesaw.edu

Website: http://coles.kennesaw.edu/centers/cox-family-enterprise/index.htm

Cox Family Enterprise’s Dr. Joe Astrachan To Visit Family Business Radio

On the next edition of Family Business Radio, we will welcome Dr. Joe H. Astrachan executive director of the Cox Family Enterprise Center at Kennesaw State University. He will discuss the trends and news in the family business industry with FBR host Meredith Moore at 1 p.m. on Thursday, June 21, 2012.

Our Guest:

Dr. Joe H. Astrachan

Dr Joe AstrachanDr. Astrachan holds the Wachovia Eminent Scholar Chair of Family Business and is Professor of Management and Entrepreneurship. He served as editor of the Family Business Review and as an editorial board member of several other academic journals. Dr. Astrachan is an internationally recognized scholar in the field of family business.


Contact our guest:

Dr. Joe H. Astrachan
Executive Director of the Cox Family Enterprise Center
Wachovia Eminent Scholar Chair of Family Business
Kennesaw State University
Phone: 770.423.6045
Email: jastrach@kennesaw.edu
Website: http://coles.kennesaw.edu/centers/cox-family-enterprise/index.htm

Recap: Debra Lasher: Use Internal Audits to Improve Your Family Business

Debra LasherAn Internal Audit Function (IAF) can improve the performance of family-owned businesses, according to Family Business Radio guest Dr. Debra J. Lasher, DBA, CPA. But those audits don’t have to be limited to financial audits; they can include reviews of anything ranging from company culture to processes and more.

Debbie discussed her research into the impact an IAF can have on family-owned businesses when she joined FBR host Meredith Moore in the Family Business Radio studios on Thursday, June 14, 2012.

Accounting and Family Business Interests Collide

For the last 15 years, Debbie has worked with Georgia’s Board of Regents which oversees the 35 public colleges and universities, the Skidaway Institute of Oceanography and The Georgia Public Library System in the state. The Board of Regents sets tuition, approves capital projects, approves presidential appointments, and makes other high level governing decisions. She came to the Board of Regents with 20 years of experience in a combination of private industry and governmental accounting and management positions.  She began her career at the Board of Regents as an audit supervisor, conducting audits and assisting institutions in their audit processes. She then served as the Director of Financial Systems and Services, involving the financial operations of the institutions and assisting them with business processes.  She then worked as the Executive Director of Business and Finance, serving as the Board’s Controller for seven years.

More recently, Debbie has served in a more strategic role as Business Process Manager, where she works with the system-wide implementation of business processes and change initiatives. One of the high-profile projects currently in progress is the consolidation of eight institutions into four. The mergers will include Middle Georgia College with Macon State College; North Georgia College & State University with Gainesville State College; South Georgia College with Waycross College; and Georgia Health Sciences University (formerly Medical College of Georgia) with Augusta State University.

As her career has advanced, Debbie has also steadily pursued academic achievements. She started college when she was 30, earning her associates, bachelors, CPA and MBA. She says she hit sort of a firewall at that point as she searched for a doctoral program in business that would allow her to continue working full time. She was accepted into the first class of Kennesaw State University’s Doctor of Business Administration (DBA) program in 2009, earning her doctorate degree in May 2012. Based on the European model, the class meets one weekend per month so students can continue to work while completing their studies. The average age of students in her class was 50, and the average years of work experience was 30. The experienced professionals learned from each other and from local and global scholars brought in to teach in the program.

As Debbie read about family businesses through her studies, she rekindled her own interest in the topic. She grew up in a North Georgia family-owned agricultural business focusing on poultry and cattle, and she and her husband owned a poultry business at one time. She didn’t think much about family business as an industry; she just saw it as a lot of hands-on, hard work. During her doctoral studies she came across an academic article on internal auditing in family businesses. The research came from Australia, and she found no similar efforts for privately held family businesses in the U.S. She decided to combine her love of accounting processes, governance, and family business to address this gap.

Researching Internal Audits in Family Businesses

Debbie admits that internal audits often carry negative connotations in any business. Employees may consider the process as an effort to police their actions or to catch them in doing something improper. Actually, an IAF is an independent activity that can provide reliable and consistent information to management so they can make good decisions. Not limited to accounting functions, an IAF can look at family and business culture, the company’s level of risk, processes and other aspects of business where management needs information critical to decision making.  An IAF can also help employees and management better understand roles, responsibilities, and mutual expectations.

An IAF should be structured so management knows the information is reliable, with consistent controls, processes, and feedback so management and employees can determine if different facets of the company are performing as expected.

Debbie wondered how often family businesses are utilizing an IAF and if the practice made a positive difference for the companies that relied on them. With the help of a research firm, she surveyed the CFOs or comparable officers of 257 privately held family owned businesses. Of those, 122 had an IAF and 135 did not.

While some studies of family businesses define “family-owned businesses” very specifically, her survey rated family involvement on a continuum. It asked the number of family members serving on the board of directors and in other areas of the company. She asked respondents to rate their companies in the areas of trust, affective commitment and performance using scales established in other studies. Performance was rated both as an objective measure, in which respondents marked their return on sales and equity within a range (to protect privacy), and as a subjective measure, in which respondents ranked their satisfaction with return on sales and equity on a scale of 0 to 100.  A key aspect of her research was the development of a new measure combining family and business culture and how it influences business decisions and outcomes.

Debbie had expected to find that companies with greater family involvement in ownership, top management, and on the Board of Directors would be less likely to have an IAF because the family members who worked closely together would not feel the audits were needed. The results indicated the opposite: businesses with more family involvement on the Board of Directors were more likely to have an IAF. While Debbie says she needs to complete more case studies to better understand the reasons, she believes that when more family members are on the board, those family member owners who are not on the board may show more concern and ask for an IAF to keep them informed of activities in the company. She also says the reason could be that when businesses have boards of directors at the center, the board may be directing management to conduct the audits. With the involvement of more family members, they become more aware of what’s happening in the business.

Why Do Internal Audit Functions Matter?

Because they can increase the bottom line.

Debbie found that having an IAF can increase business performance. In academic speak; she discovered that investment in internal audit functions was statistically significant in increasing objective and subjective performance. The mean levels of trust and commitment were also higher in companies with an IAF, but the results were not statistically significant for those variables.

If an IAF is good for business, why not have one? Debbie believes that the companies that don’t have them are simply younger than those that do. As companies grow, they become more complex and the family member owners more dispersed, perhaps leading to the additional oversight and need for information provided by an IAF.

Debbie says businesses wanting to get started with internal audits may want to outsource the function initially. However, ideally, someone within the company will perform the audit because of their company knowledge and expertise. The auditor must, however, maintain independence and report findings to management and/or the board of directors.

Getting the Word Out, Learning More

Debbie is now working with the Cox Family Enterprise Center at Kennesaw State University to continue her research and develop and present information at gatherings of family businesses and professional organizations.  She plans to provide family businesses with information on the value of an IAF, factors to consider in whether or not to implement, and how best to operationalize the function.  In addition, she plans to submit her current and future research for acceptance in family business and accounting journals and publications.

Next, she hopes to consider other data gathered through her research, including generational and gender data. To expand on her research, she would like to identify characteristics in businesses that might lead them to implement an IAF and conduct case studies with companies who have implemented an IAF recently or might be considering adopting an IAF.

Debbie Lasher’s Three Tips for Family Businesses

  1. For businesses that currently employ an IAF, Debbie says that the IAF should be updated as the business changes with new products, services, technology and/or processes. The assessment and any updating of the IAF should be conducted as part of the change process so it will be less likely to meet resistance from employees. Make sure your IAF is focused on the most value-added activities of the business, while considering both the culture of the family and the culture of the business.
  2. Businesses that are considering implementing an IAF should involve employees in its design for three primary reasons: the design will be better with more input, employees will understand why it’s necessary, and employees are more likely to embrace the change if they’re involved in the planning.
  3. It’s best to plan and implement an IAF before problems arise so that the function is not viewed negatively as a policing reaction to the issues.

Contact Our Guest
Debra Lasher

Board of Regents of the University System of Georgia
Phone: 404.202.5036
Email: djlasher4@bellsouth.net

Debra Lasher Shares the Impact of Accounting and Governance on Family Business Success

Debra J. Lasher, DBA, CPA, will appear on Family Business Radio to talk about accounting processes, internal controls and governance mechanisms that can positively impact family-owned businesses. She will join FBR Host Meredith Moore at 1 p.m. on Thursday, June 14, 2012.

About Our Guest:

Debra Lasher

Debra LasherDebbie recently earned a Doctor of Business Administration (DBA) in Accounting. Her dissertation, “Antecedents and Outcomes of the Investment in Internal Auditing and the Moderating Role of Family Business Culture,” combines her research areas of interest related to the impact accounting processes and controls have on family business decision making and performance.

Debbie is a seasoned professional with more than 30 years of demonstrated leadership, accounting, management, and training and development accomplishments in business and not-for-profit settings. Currently she serves as Business Process Manager with the Board of Regents of the University System of Georgia spearheading several system-wide change projects. She also continues to manage her consulting practice for not-for-profit foundations and commissions. Previously, she served for several years as the Executive Director for Business and Financial Affairs with the Board of Regents of the University System of Georgia. She has also worked in the private sector in a variety of accounting and managerial roles as well as in other State of Georgia agencies.

Debbie earned her BBA in Accounting from North Georgia College and State University, and DBA and MBA degrees from Kennesaw State University. She enjoys weight training, riding road bikes, running and aerobics and traveling internationally with her husband Harry.

Contact Our Guest:
Debra Lasher

Board of  Regents of the University System of Georgia
Phone: 404.962.3203
Email: Debbie.Lasher@usg.edu

Recap: Ed Butler Finds Just the Right Place for His Children in the Family Business

Ed ButlerEd Butler, chairman of The Butler Group, Inc., joined Family Business Radio host Meredith Moore on Thursday, May 31, 2012, to talk about the growth of his family-owned enterprise and the steps he and wife Betty took to welcome their three children into the business.

The Butler Group is a sales organization representing wholesale manufacturers and importers of home decorative accents, personal accessories and general gifts in a nine-state Southeastern region. The organization operates an 11,000-square-foot showroom in the Atlanta Gift Mart. The Butlers also are partners in Maison Chic, a manufacturer of baby gift items, and owners of Kaleidoscope, a distributor of jewelry and accessories.

Creating a Job That Won’t be Eliminated

Ed got his start as a janitor in a retail store. He says he gave extra in all he did and was eventually accepted to the manager training program. He then spent 21 years working in management for Montgomery Ward, a now-defunct department store with locations primarily in Texas and the Midwest. While Ed had planned to spend his entire career with the organization, his job was eliminated in 1982. He then worked for Federated Department Stores and managed Rich’s stores in Atlanta.

In 1988, Ed decided to create a job that wouldn’t be eliminated. He visited a business brokerage, where he first looked at retail businesses selling products such as paint, building materials and hardware. Every time he looked more closely at the businesses for sale, he could see their weaknesses. He then came across a manufacturer representative business for sale. Using money earned through investment in rental properties, he and Betty purchased it. Their main cost was for the lease of a showroom, which was located in the Merchandise Mart in downtown Atlanta. (Since then, a Gift Mart has been added to the Merchandise and Apparel Marts, and the three are connected into America’s Mart, the number one market in the nation.) Manufacturers provided free or low-cost samples for displays. Salaries were also a large cost, though he and Betty took no salary in the first two years of the business.

The Butler Group, Inc. got its start selling baskets, a popular item at the time. One of their largest accounts was Cracker Barrel, which offered a room of baskets in each of their stores. The Butler Group had 3,000 accounts managed through the showroom and five sales people who went onto the road to call on stores. About 90 percent of the sales were in baskets, with the remainder comprised of other gift items.

As the popularity of baskets dwindled, The Butler Group had to diversify offerings quickly. They analyzed the 3,000 stores in their customer base to determine the types of products they might use. Because their territory was the Southeastern U.S., they focused on lines that would be attractive to people in the South. In conducting their research, they found that their organization had developed a reputation as being one of the “must-see” showrooms at the America’s Mart. As they started to look for other manufacturers to represent, they found they were already well-known in the industry and their services were in demand.

Welcoming the Family to the Business

When they founded The Butler Group, Ed and Betty had one daughter who had finished college, a second daughter in college, and a son in high school. Ed says that none of the kids wanted to join the business because they thought their parents worked too hard.

Ed and Betty encouraged their children to pursue their interests in college. The oldest of the three, Christy, was working as a director for Mary Kay and home schooling her two children. The second daughter, Paula, earned a degree in theatre. While she landed a couple of bit parts and commercials, she also worked for a jewelry company. Greg worked in the warehouse of a wicker basket/furniture importer during high school. In college, he took every art class he could, exploring many different types of art.

Paula was the first to join the company in 2003. Her job was to drive a mobile showroom to florists. In 2004, Greg came on as showroom manager, using his artistic talents to design displays. Christy asked to come on board after her older child left for college. Ed wanted to use her sales experience, but there was no open sales territory. He gave her the clients that were a low priority for the other sales representatives, and she spent time with them to turn them into solid clients.

Family Meetings and Each Finding a Place

As Ed and Betty started to consider retiring and exiting the business, they realized their children might not have jobs if the business sold. They began working with Joe Astrachan and Kristi McMillan at the Cox Family Enterprise Center at Kennesaw State University. The Cox team interviewed each of the children and talked to the family as a group. They had some family council meetings so the children could become part of their retirement and exit planning.

As part of this process, Ed says he was concerned with having each of his children in the right position to match his/her abilities and interests. He interviewed each privately, asking them questions about their goals and things they enjoy doing. He also asked each what he/she thought the others should do in the company. Ed says they all agreed. Greg wanted to work with the displays and not have dealings with the manufacturers. He thought Paula should handle sales, which was exactly what Paula wanted to do. Christy also thought Paula was best suited to run the group, and she took on the role of cheerleader and supporter. Ed and Betty agreed with the assignments. As a family, they refined their respective roles and agreed to hire others to perform the additional functions.

Other family council meetings included one in which Ed says he and Betty revealed to the children how much money they make. While he says it was awkward for him and Betty, the kids’ response was neutral. The parents tried to express the time it takes to accumulate wealth. The family also talked about profit margins in a business where they work on a commission, which is limited and shared with sales representatives. They agreed to look toward finding a product they could develop on their own so they could enjoy the manufacturer’s margin. They would avoid situations they had encountered in the past where they had helped a manufacturer grow by teaching them good distribution practices, only to have the manufacturer leave them with no interest in the company. By having their own products to distribute, the family business could take advantage of revenue streams at different stages of the manufacturing and distribution process.

Opportunity Knocks With Maison Chic

In July 2008, the owner of Maison Chic offered the Butlers the opportunity to manage her business. The manufacturer of high-end baby gift items, the business had tried unsuccessfully to handle distribution from the factory, and the business had failed. The Butlers responded that they were not interested in managing the business, but they would be interested in purchasing it. Ed says they were mentally prepared when the unexpected opportunity came along because of the discussions that had taken place in their family council meetings.

The Butlers joined the current owner and her husband in a 50-50 joint venture partnership in January 2009. The Butlers handle distribution in North and South America, and the other owners handle the manufacturing and sell from the factory. She also has the final say in the proprietary designs of the textile-related products. Daughter Christy took on a new role and is the Executive Vice President of Sales and Product Development for Maison Chic.

The new line’s brand philosophy is to provide nicer textiles with hand-worked details. These details allow them to increase the price point. The venture has been successful for a number of reasons. First, the Butlers found that the customer base was already there. Store owners had liked the product, they just didn’t like that it was hard to get into their stores. With a policy in place to guarantee delivery, the customers returned.

Also, because the higher end product is primarily used for gifts, it attracts repeat customers. Finally, Maison Chic had the advantage of displaying products in The Butler Group’s nationally known showroom, where sales representatives come in looking for lines to represent. The company now has 150 people selling the line.

New Jewelry Focus With Kaleidoscope

In the original family meeting where new ventures had been discussed, jewelry had been the first idea. It’s small and easy to ship, women love it, Paula had experience, and Betty had a natural interest. In March 2009, Ed and Betty started Kaleidoscope, which offers 2,000 items including fashion jewelry, handbags, scarves and accessories. Their customers are the same kinds of gift stores that carry other items they have represented. Like Maison Chic, Kaleidoscope rents space in The Butler Group’s showroom in America’s Mart.

Kaleidoscope’s product line is also a sign of the times. Ed explained that many gift stores relied on home accents as a large portion of their sales in the past. With the housing bust and fewer people buying new homes, those sales have slowed considerably. His observation is that Americans still want to buy something personal in a down economy, they just buy less. The result is that 11 percent of sales in gift stores now come from fashion jewelry, greater than the amount sold in clothing stores. Accessories such as scarves and purses comprise another 6 percent of sales.

Responding to Changes in Consumer Buying Habits

Ed says it is important in his industry to be able to listen to and react to the customers. He has to be aware and have the flexibility to switch products. Except for the Kaleidoscope and Maison Chic lines, the Butlers do not have to acquire products, but the products The Butler Group represents need to reflect the economic environment. The sales representatives at The Butler Group also serve their customers—store owners—by helping them keep up with trends they may not see while they are tied to their shops.

What are some of the trends Ed is seeing? Right now he says that fashion jewelry, scarves and accessories make up about 17 percent of sales in gift stores. These categories are followed by Christmas items, baby items, candles and related accessories, and picture frames. Picture frames used to be a major category for retailers, but thanks to digital photos and the many new ways of sharing them, they have fallen to only about 1 percent of sales.

He says that this is the year of the scarf. Sales took off in January, and they will be big in the fall. He says belts were popular for a while, but interest has waned. Interest in gold fashion jewelry has increased this year, though silver is still 90 percent of the business.

In the Southern market, Ed says we see more bright colors and more monogramming and personalization than in other areas of the country. One advantage of the specialty stores they service is that they can base their product selection on the clients in their own neighborhoods.

Mixing Family and Business

The Butler family does not schedule regular family meetings, but calls them when an opportunity or need arises. Most recently, they’ve talked about goal setting. Ed has revisited his questions to each of them about what they enjoy doing and how their preferences may have changed in the past several years as their situations have changed.

While he wants to guide them to jobs they find fulfilling and interesting, he has to balance that role with also holding them accountable. They are currently looking at what the market value is for the jobs each of the children holds. Each will then be paid a salary according to his or her contribution to the company and receive separate funds for their ownership in the form of dividends.

The family is also looking at ways to involve the next generation; Christy’s daughter is in college and already helps a little. She is planning her studies so she’ll be prepared to work in the family business.

Outside of business, the Butler family enjoys many family gatherings where they don’t discuss work unless something unexpected comes up and they schedule a brief meeting. Initially, they had planned to have a special family council meeting as part of their annual family-centered Thanksgiving retreat so they could share with the third generation. The grandchildren were not interested, and the family has discontinued the practice.

Ed Butler’s Three Tips for Family Business

  1. Allow each child to do what they enjoy and hire others to do the rest.
  2. Separate ownership from job responsibilities. Pay a salary and bonus for the job and dividends for ownership.
  3. Communicate with each child individually and with all as a family. Listen to the spouses in the family; they know what’s going on.

Contact our Guest:

Ed Butler
Chairman
The Butler Group, Inc.
230 Spring Street NW, Suite 1212
Atlanta, GA 30303
Phone: 404.577.6941 or 800.241.9533
Email: ed@butlergroupgifts.com
Website: www.butlergroupgifts.com
Website: www.Kaleidoscopeaccessories.com
Website: www.maisonchiconline.com

Ed Butler: Welcoming the Next Generation

As chairman of The Butler Group, Inc., Ed Butler has welcomed all three of his children into the business he founded with his wife in 1988. He will join Family Business Radio host Meredith Moore at 1 p.m. on Thursday, May 31, 2012, to talk about the process of identifying each adult child’s interests and abilities in order to place them in positions where they and the company would thrive. Since they have joined the family enterprise, the family has started two new businesses under The Butler Group, Inc., umbrella, and the company has flourished.

Our Guest:
Ed Butler

Ed ButlerThe Butler Group, Inc., established in 1988, is a sales organization representing wholesale manufacturers and importers of home decorative accents, personal accessories and general gifts. The organization operates an 11,000-square-foot showroom in the Atlanta Gift Mart. Its territories cover nine southeastern states.


Contact our guest:

Ed Butler
Chairman
The Butler Group, Inc.
230 Spring Street NW, Suite 1212
Atlanta, GA 30303
Phone: 404.577.6941 or 800.241.9533
Email: info@butlergroupgifts.com
Website: www.butlergroupgifts.com

Recap: Dr. George Manners, Jr. Discusses Preparing the Next Generation for Family Business Ownership

George MannersOn Thursday, May 24, 2012, family business expert Dr. George Manners joined Family Business radio host Meredith Moore to discuss preparing upcoming generations for ownership in a family enterprise.

Currently a professor of accounting and management with the Coles College of Business Administration at Kennesaw State University, Dr. Manners began his career as an actuary with an insurance company. He earned degrees in actuarial science and accounting. In his work, he realized that most issues in business arise from the “people side,” so he earned his Ph.D. in management, focusing on behavior. He taught at Rensselaer Polytechnic Institute for 10 years, and then began consulting with large companies, focusing in the areas of manufacturing site start ups and managing research and development. He spent a decade with the James River Corporation as Director of Organization Development and Director of Technology Services.

Dr. Manners then returned to consulting and teaching. He has taught at Kennesaw State University since 1997 and currently works full time with the Cox Family Enterprise Center at KSU.

Family Business Choose Long-term over Short-term Success

Dr. Manners says that throughout his career, he has observed that businesses of all types and sizes are built by a series of choices. Those four types of choices are the same, no matter the kind of business:

  1. You choose your attitude.
  2. You choose short-term gratification or long-term development.
  3. You choose whether or not to take risks, exposing yourself to failure.
  4. You choose your associates.

Dr. Manners says the first time he was asked to help a family business in 2002, he noticed that the second generation brothers who owned it were making long-term choices that larger, public companies wouldn’t make. The brothers, owners of an aluminum finishing business, were trying to decide whether to sell the business versus to move it into the next generation. They decided to build it for the next generation. As a result of their planning, the company has quadrupled in size over the last 10 years.

Dr. Manners then started working with a family-owned snack food company. He again saw them making decisions based on a multi-generation time horizon. They were willing to take risks for the long-term, a willingness he says many public companies don’t have.

Dr. Manners says the most dramatic illustration of the different approaches of family business owners compared with executives of publicly owned business comes in watching them manage through different business cycles. He compares the different responses during difficult times in the business cycle with the fable of the tortoise and the hare. Like the tortoise, family-owned businesses are more likely to avoid panic and stay the course.

Changing Perceptions of Debt

Businesses have always used OPM—Other People’s Money—as leverage to help achieve initiatives they wouldn’t meet otherwise. Debt is good; excessive debt is bad. Debt service limits the freedom of a company in the future. The amount of debt considered excessive varies from person to person and business to business according to their willingness to take risk. A good rule, however, is generally, if more than half of your cash flow is going to service debt, your debt is excessive.

Dr. Manners has observed that most companies maintain a significantly lower debt ratio now than three years ago because they worry about being able to repay that debt during tough times. They also are considering more stable long-term debt over short-term debt that can be changed or called in.

Even before the economic difficulties of 2008, family business and large corporations have had different approaches to debt. A large company, such as GE, can negotiate good terms in borrowing. Even a reasonably sized family business, such as a $100 million company, can run into problems. As a result, businesses are being more careful now than before 2008. For example, they avoid balloon payments. They are finding financing on terms that will allow them to stay in business. Dr. Manners also sees them being more careful to keep relationships with bankers, whether they need them or not.

Understanding the Interdependence of Financial Variables

In thinking about debt and risks, Dr. Manners says that family business leaders need to understand the interdependence of four financial variables:

  1. The basic earning power of the business. The more earning power a business has, the more freedom it has to grow, pay dividends, avoid borrowing and achieve objectives.
  2. Growth objectives. How fast does the company want to grow? Leaders need to plan for growth.
  3. Payout. Leaders should consider what they need to pay each year in terms of dividends, to maintain the short-term wealth of the owners.
  4. Debt to meet objectives. Leaders need to understand how debt works and how changes to debt, in terms of interest rates, for example, affect the business.

Goals related to these four variables cannot be set independently, but must be considered together.

Preparing the Next Generation for Financial Management in Ownership

Dr. Manners, quoting work by Joe Astrachan and Torsten Pieper of the Cox Family Enterprise Center, says that many family businesses do a good job of helping their future owners understand the financial variables and the responsibilities that come with ownership. Preparing next generation owners, he says, should start early. He recommends the following sequence:

Ages 3 to 5: The child should understand actions and consequences. Waiting too long to teach this lesson, Dr. Manners says, could impact the child for this rest of his/her life.
Ages 5 to 8: The child should understand what money is. It’s more than just coins and paper, but something of value. It must be earned.
Ages 6 to 9: A child should learn how to trade and to reach agreement. If each child has something of value and each has something the other wants, they should learn what a fair trade is. They should understand that it’s better in the long run if everyone walks away from the trade feeling good about it. It’s important to get across while they’re young that it’s not good when someone walks away from an agreement feeling cheated. At this age, siblings should learn to make decisions together because they’ll have to work together when they are owners.
Ages 6 to 10: Children should learn the trade off between short-term gratification and long-term development. (See further discussion of delayed gratification below.)
Teenage Years: After getting children to understand the importance of delayed gratification, it’s time to start thinking about the difference in ownership and business leadership/management. At a minimum, they will need to learn how to be good owners.
Ages 18 to 25: Regardless of their areas of interest and whether they’ll work in the family business, the family should teach future owners to read financial statements. They should learn to recognize changes. Whether parents teach them, they learn at the office, or they’re taught in family assemblies, by the age of 25 future owners should know how to read the statements, and they should be encouraged to ask questions about the business finances. Information should be recognized as a tool for empowerment; families who aren’t willing to share financial information create an environment of distrust.
Going into the business: If the future owner will be going into the family business, he or she should gain experience outside of the business first, unless the company has a large portfolio of businesses.
By 35 years: Owners should develop the “crowning skill” by the age of 35—substantive financial analysis. They should understand the economics of value-added, cost of capital and “Dupont-type methods” of decomposing and return on equity.

Prepare Future Owners Through Understanding Delayed Gratification

Dr. Manners spoke of the “Marshmallow Test” conducted by Stanford University researchers in the 1950s. During individual interviews with 4-year-old children, the researcher excused himself for a few moments. He gave the child a marshmallow and said the child could eat it immediately or, if the child waited until the interviewer returned, he would bring a second marshmallow, and the child could have both. Forty percent of the children did not wait for the second marshmallow. Researchers followed the children for 14 years and found that those who had been willing to forego the marshmallow for the promise of another were more likely to excel in their pursuits, whether they were academic, athletic or in other areas. (View a video of a current version of the test on YouTube.)

Dr. Manners then referred to a 2006 issue of Business Week magazine that focused on leadership. Leaders from many different areas, including sports, religion, government and business, wrote a few paragraphs about leadership. The recurring theme was preparation. When young future owners see the value of foregoing the instant gratification of watching TV or playing video games to do homework or practice skills, they will see that delaying gratification will lead to preparation.

Referring to Tom Brokaw’s book, The Greatest Generation, Dr. Manners observed that the willingness to take action for the future and for others is not as strong in subsequent generations. He says not as many Baby Boomers and younger owners are willing to do what’s best for the family rather than for self. In contrast, successful family businesses will have a multi-generation time horizon. The concept of servant leadership is also more prevalent in family businesses than in public corporations, leading the family to grow not only in the business, but also in values and spirituality.

Teaching Next Generation to be Good Owners

Dr. Manners gave the following qualities of good owners:

  1. They are willing to make good decisions for the family, not just the individual.
  2. They understand the governance of the company, how decisions are made and how the company works.
  3. They work with a multi-generation time horizon.
  4. They know how to communicate desires to management and how to solve disputes.
  5. They understand how goal setting works.

Many of these lessons begin while the future owners are young, and may be taught through family assemblies. Preparing the next generation is an important role of the previous generation.

Dr. Manners observed that the European family business model tends to set up family members as owners who work with separate company management. This often happens because members of the family don’t trust other branches of the family to make good decisions. He has observed, however that the passion of the owners, such as the third generations now beginning to work in Chick-fil-A and leading Little Debbie, will not be replicated in non-family member executives.

What if the Next Generation Does not Work Out?

While Dr. Manners appreciates the passion family members bring to a business, he acknowledges that family members aren’t always the best choice for succession, and the obvious “next-in-line” family member may not be as well suited for business leadership as others in the family. He says decisions of succession should be made objectively.

In the case where there are no qualified successors, Dr. Manners sees one of two options. First, he says never underestimate the power of people to change. Second, he referred to the book Necessary Endings by Dr. Henry Cloud. Sometimes, he says, a family may have to admit that the next generation can’t continue the business. In that case, they will need to allow the next generation members to live on the dividends, buy them out, or even cut them off.

Dr. George Manners’ Three Tips for Family Business Owners:

  1. Do anything you can to develop in yourself and those around you the avoidance of greed. Greed is insidious and will ruin relationships with family, vendors and customers.
  2. Assume responsibility for your actions. Understand that it is your responsibility to move forward from where you are.
  3. Have the highest regard for the truth.

Contact Our Guest:
George E. Manners, Jr.

Professor of Accounting & Management
Coles College of Business Administration
Kennesaw State University

1000 Chastain Road #4900
Kennesaw, GA 30144-5591
Email: gmanners@kennesaw.edu
Phone: 770.499.3663
Website: http://coles.kennesaw.edu/centers/cox-family-enterprise/index.htm

Dr. George E. Manners, Jr. to Discuss Generational Differences in Money Management

Most of us don’t manage our personal finances the same way our grandparents did, so why should it surprise us that different generations have different views of finances when it comes to the family business? George E. Manners, Jr., Ph.D., Professor of Accounting and Management at the Kennesaw State University’s Coles College of Business Administration, will join Family Business Radio co-hosts Dwayne Samples and Meredith Moore at 1 p.m. on Thursday, May 24, 2012, to discuss the differences he has observed in the financial management goals and habits of family business founders successive generations.

Our guest:
Dr. George E. Manners, Jr., Ph.D.

George Manners Dr. Manners has had decades of experience as an educator, a consultant, and a business executive. His primary expertise is in strategy development, organization design, operational modeling, management accounting, and the management of technology. His clients over the past 25 years include GE, IBM, Cynamid, Philip Morris, Bank of America, Weyerhaeuser, Georgia Pacific, Cox Communications, WellStar Health System, McKee Foods, and Beaulieu.

Dr. Manners has occupied tenured positions at Rensselaer Polytechnic Institute, Clemson University, and now Kennesaw State University. His primary industrial experience was 10 years with the James River Corporation, where he held the positions of Director of Organization Development and Director of Technology Services. Dr. Manners received his Ph.D., MBA and BBA from Georgia State University. He and his wife, Beth, currently live in Acworth, Georgia.

Contact Our Guest:
George E. Manners, Jr.
Professor of Accounting & Management
Coles College of Business Administration
Kennesaw State University

1000 Chastain Road #4900
Kennesaw, GA 30144-5591
Email: gmanners@kennesaw.edu
Phone: 770.499.3663

Recap: Michael Blake Discusses the Value of Business Valuation on FBR

Michael BlakeOn Thursday, April 26, 2012, Michael S. Blake joined Family Business Radio co-host Meredith Moore to discuss the benefits of performing a business valuation on family owned businesses. As director of valuation services for Habif, Arogeti & Wynne, LLP, Michael has 15 years of experience helping business buyers and sellers through proper valuation. Michael also is co-founder of StartupLounge, a non-profit, grassroots organization that serves the startup ecosystem in Atlanta and Georgia.

Why Pursue a Business Valuation?

Not only does the value of a business affect estate planning, buy outs and succession planning, but in a thorough valuation process, the owner will also learn how to add value to the business. Most homeowners don’t hesitate to seek an appraisal before selling a home. If businesses are worth so much more, why hesitate to get a formal valuation before placing them on the market?

In the case of a home sale, the market is easy to see. When a business is put up for sale, the market is less apparent. A business valuation (or appraisal) makes the market visible to the owner. In addition, a good appraiser is a teacher, helping the business owner understand what makes the business valuable in addition to what the actual value is. Armed with this knowledge, the owner can work to increase the company’s value, whether or not the owner foresees an imminent sale.

What Determines Value?

Michael explained that many business owners believe that value is based on EBITDA: earnings before interest, taxes, depreciation and amortization. Actually, for many businesses, profitability is secondary as a value driver.  For example, in the professional services industry, revenue is seen by buyers as more important than profitability (thought it is still important). The buyer will acquire the client accounts but apply those accounts into its own cost structure, with the goal of making those accounts profitable after being acquired. In that case, if the appraiser focused only on profits instead of growth, the concluded value of the business would be misleading.

Michael proposed a theoretical case where a large firm, Cisco, purchased a firm with $1 million in annual revenue and $100,000 in annual profit for $50 million. Cisco has a value multiplier around 20, so an investment of $1 today could yield $6 in the future. They can afford to pay more for a company because their cost of capital is much cheaper than it is for the startup.

In a case like this, Michael says that some business owners will accept the offer gladly, while others will think a large company should be able to pay even more than first offered. Michael described two potential outcomes without a proper business valuation. First, the owner may sell the company too cheaply, leaving money on the table. Second, the owner could try to over-negotiate and lose a good deal because there was no independent, fact-based assessment of what the company was worth or what was driving value.

Three Approaches to Business Valuation

Michael highlighted the basics of three approaches to valuation, though he noted that each is comprised of many specialized techniques.

First is the income approach, in which value is a function of the potential of the business to generate cash in the future.

Second is the market approach, in which relative value is established. This is similar to looking at comparables when placing a home on the market, but the process is difficult and time-consuming for a business. The appraiser finds similar companies, considers implied pricing multiples and draws inferences based on comparables.

The third approach is the asset approach, generally used for very early stage companies or holding companies. This approach assumes that the value of the business entity is equal to the sum of its parts.

Appraising Family-Owned Businesses

When performing a valuation for a family-owned business, the same approaches are used, but the valuation techniques may be applied differently. For example, when the owners of a family business pay family members more than they would make for performing similar jobs in the open market, the appraiser cannot assume that a buyer would continue to employ all family members or to pay them the inflated rate. Taking those family members off of the payroll or reducing their salaries will probably increase profits and make the business more attractive to buyers. However, family members will lose jobs and/or income. In this case, if the owner’s priority is to provide secure income and employment for the family members, the business may be worth more to the owner than to an objective third party buyer.

Michael says this type of situation is a common issue for family-owned businesses. While it’s a difficult job to tell family members (or owners) they are overpaid, he says that it’s better for an owner to hear the news from an appraiser when adjustments can still be made prior to a sale than to hear it from a buyer. Appraisers will provide data, including salaries paid for similar jobs in similar companies, to help business owners make informed decisions.

Standards of Value

As in the case of the family business that is worth more to its owner than a buyer, the value of any business depends on perspective. According to the industry code of ethics, an appraiser should talk with a business owner at the beginning of the appraisal process about the appropriate perspective – or standard of value – and fact patterns involved in the valuation.

One standard is the fair market value, which Michael calls a 1959 artifact from the IRS. Typically used for reporting obligations, the fair market value includes discounts for lack of marketability (a recognition that it’s hard to sell an interest in a closely-held business) and for lack of control when business decisions are made by shareholders. These discounts may lead to a valuation of 5 percent to 35 percent from the undiscounted (calculated) value, depending on state specific laws and how the firm’s corporate governance is organized.

Sellers are generally more interested in market value or investment value. Market value is assigned from the investment banker’s perspective and is based on the highest price a rational person might pay in the best circumstances. Market value allows the appraiser to consider synergistic value of the firm; however, it does not consider “crazy value,” which is a random amount a rich investor might pay on a whim or error in judgment. (Michael notes that many observers have commented that the recent Instagram purchase might have demonstrated a “crazy value”, while his blog post argues that the Dodgers purchase  could credibly be considered a fair value price.)

Investment value represents the value of the business to a particular buyer, usually the owner. This is often the value figured in a family business that is the owner’s primary source of income, and the value is generally higher for the owner than for someone else who might buy it. For example, with a sole practitioner, when the owner is removed, the business no longer has value.

Fair value is more often associated with the buyer’s side of the transaction. Fair value reflects the price that ought to be paid assuming either the buyer or the seller is free to follow through on the transaction or walk away. Further, fair value presumes that each party to the transaction has equal opportunity to understand all of the relevant facts about the business. The definition of fair value varies by state. Fair value can be difficult to assess because the fair value standard is based on conditions that rarely occur in the field. However, the fair value standard is often used as a starting point for buyers (who may then chose to pay greater than fair value for strategic purposes), and it’s also used for legal reasons. For example, in a divorce case, shareholder dispute or shareholder exit, fair value is often used. The fair value standard ignores any synergies in the business, and usually ignores the fair market value discounts discussed. When applied in a dispute-related context, the standard fair value is designed to benefit the hypothetical seller.

Why is Business Valuation Important to Estate Planning?

Because the IRS says it is, according to Michael. Family business owners are allowed to transfer interest in their estates at fair market value, which is often the standard which produces the lowest conclusion of value because of the allowed discounts. Proper valuation is important from both the entry and exit perspectives. At entry, transfers up to $5 million are exempted from taxes (the exemption will drop to $1 million in 2013).

Business value is also important when an event or distribution causes an owner to exit the business. In the case of a nontaxable event, such as the death of a spouse, the IRS invokes a step up in basis. If the business goes from $0 when it was founded to $2 million in value and is being taxed at a 55 percent rate, the owners could save more than $1 million in taxes for the investment of a valuation process (usually between $10,000 and $20,000 at Michael’s firm).

In the event of an exit, if the transfer is not spouse to spouse, the IRS requires a valuation. If not provided, IRS agents will perform the valuation themselves, and the government appraisal is used for the final estate tax return. While Michael says that the IRS uses the same valuation methods as private appraisers and many IRS agents are themselves professional appraisers, it’s still generally in an owner’s best interest to have a private appraisal performed. The agents apply the same valuation principles, but their main goal is to protect the government from people taking advantage of the system. When questions arise about an appraisal, agents will generally ask intelligent questions and respond to reason, data and documentation.

Including Valuation in Buy-Sell Agreements

As a general rule, family-owned businesses should establish buy-sell agreements stating what will happen in the case of one owner’s exit. Often, buy-sell agreements will include a formula for determining the value of the company if a sale is forced and the agreement is implemented. Michael says that formulas used in these agreements are almost always incorrect in determining the value. If the formula undervalues the business, an owner may look for a trigger to force the sale of the business to him or herself. If the business appears overvalued by the formula, the shareholder may look for a trigger to compel his partner to buy him out.  No matter how the sale comes about, the use of a formula almost always leads to litigation, according to Michael.

Instead of a formula, Michael recommends that buy-sell agreements identify and rank a list of appraisers, set the definition of value that will be used (ie, fair market or fair value), and set the conditions under which the appraisal will be conducted. Those conditions should include (1) having the appraiser follow a set of professional standards, such as the Uniform Standards of Professional Appraisal Practice (2) preparation of a comprehensive appraisal report, and (3) the appraiser’s agreement to recuse him or herself from doing business with either the buyer or seller for the next three years. The last condition minimizes the appraiser’s financial incentive to benefit one party or the other.

Some buy-sell agreements require the board of directors to set the business’ value once per year. Michael says the problem with those agreements is the threat of litigation if even one person disagrees.

Timeliness of Valuation

Technically, a new valuation should be performed every time there is a transfer or gift of shares. However, Michael says if a series transfers or gifts is made in a relatively short time, a valuation would stand for three to six months, unless there were an obvious material change in the business. For wealth management purposes, an annual valuation is appropriate for private businesses. The valuation will not only give the owner the dollar value of the company, but also explain how the company came to have that value and what can be done to increase the value in the future.

Selecting an Appraiser

Business appraisers face minimal regulation and no licensing requirements, so business owners should be careful as they’re seeking a professional appraisal. While there is some overlap with the abilities of CPAs, some appraisers are not CPAs and some CPAs are not qualified to perform appraisals. Michael encourages owners to look for the following in business appraisers:

  1. Valuation-related professional accreditation, such as the ASA (Accredited Senior Appraiser), CVA (Certified Valuation Analyst) or CPA/ABV (Certified Public Accountant, Accredited in Business Valuation). Accreditations demonstrate the appraiser’s commitment to the field and also carry weight with the IRS and the courts.
  2. Full-time professional. An appraiser who works in valuations full-time is more likely to know the latest professional standards and court rulings. He or she has more likely invested in the data sources required to perform a credible analysis.
  3. Experience in testifying in court. In litigation, an appraiser’s work is critiqued. An appraiser experienced in testifying will understand what it takes for work to hold up under public scrutiny.
  4. Published articles. An appraiser who has published articles related to the industry is contributing something to the collective knowledge of the field. It shows that the appraiser not only “does” appraisals, but also thinks about the industry and the process and seeks to improve best practices.

Effect of Pension Protection Act (2006) on Valuations

Though the Pension Protection Act has many purposes, its effect on the business valuation industry relates to valuation for tax purposes. It establishes appraisers as a quasi-fiduciary position. If an appraiser causes a taxpayer to significantly underpay taxes, the appraiser faces penalties, ranging from fines to being barred from practicing before the IRS. Penalties may also be incurred if an appraiser causes a taxpayer to significantly overpay.

Michael Blake’s Three Tips for Family Business

  1. As a family business owner, make yourself the least important person in the business. Buyers are not willing to pay as much if the seller is key to the business. Broaden authority and delegate to lessen your importance.
  2. If you decide to sell, act with conviction. Don’t look back unless extreme forces require it. Going back and forth between selling and not selling is destructive to the business.
  3. Consider hiring an appraiser long before you will sell—at least five years. The appraisal process is the first act of diagnostics to find out if the value of the business is where you want or need it to be to meet retirement goals.

Contact Our Guest:

Michael S. Blake
Director of Valuation Services
Habif, Arogeti & Wynne, LLP

Five Concourse Parkway
Suite 1000
Atlanta, GA 30328
Phone: 770.353.8373
Email: Michael.Blake@hawcpa.com
Website: www.unblakeable.com
Twitter: @unblakeable

Visit with Michael through StartupLounge. He hosts “office hours” at no charge from 4 p.m. to 7 p.m. on the fourth Thursday of each month at the Taco Mac at Ashley Crossing. StartupLounge is hosting a Startup Spring Fling on Friday, May 4, 2012. The event will take place from 4:30 p.m. to 10:30 p.m. in Avondale Estates. Guests will enjoy games, live music and a food truck park. A $10 ticket purchases two drinks and two food items. Entrepreneurs and investors will meet in a fun, laid-back environment.

Michael Blake Discusses Business Valuation

What value would you place on your family owned business? While you may consider it priceless, there are many advantages to pursuing a formal valuation. Michael S. Blake, Director of Valuation Services at Habif, Arogeti & Wynne, LLP, works with families every day as they consider how the market views their businesses. He will visit Family Business Radio co-hosts Meredith Moore and Dwayne Samples at 1 p.m. on Thursday, April 26, 2012, to explain the valuation process and discuss how it can help your family owned enterprise.

About our guest:

Michael Blake

Michael Blake

Michael’s background includes transactional roles in investment banking and venture capital. He has 15 years of valuation experience, and the bulk of his practice is involved with helping clients buy, sell or raise capital for closely held businesses.  Michael also helps resolve business disputes, from helping manage shareholder buyouts, to serving as an expert witness in commercial litigation cases.

Michael earned his Bachelor’s degree, cum laude, in economics and French from Franklin & Marshall College and his Masters of Business Administration from Georgetown University. He is co-founder and president of StartupLounge.com, an online podcast and forum resource for entrepreneurs and private company investors. He has received many community accolades, including recognition as a nominee finalist for the 2009 Turknett Foundation Leadership Character Award and Nominee Finalist for the 2009 TechAmerica Spirit of Endeavor Award. He was named to the Atlanta Business Chronicle’s 2009 Up and Comers List for the top 40 executives under the age of 40. His personal blog, Unblakeable covers topics where sports and business overlap and his Twitter handle is @unblakeable.

Michael S. Blake
Director of Valuation Services
Habif, Arogeti & Wynne, LLP

Five Concourse Parkway
Suite 1000
Atlanta, GA 30328
Phone: 404.892.9651
Email: Michael.Blake@hawcpa.com
Website: www.hawpca.com

Recap: Stephanie Brun de Pontet: Tips for Next Generation Family Members Joining the Business

Stephanie Brun de Pontet On Thursday, March 22, 2012, family business consultant Stephanie Brun de Pontet joined Family Business Radio host Dwayne Samples to offer tips to next generation family members preparing to enter the family enterprise.

As a senior associate of The Family Business Consulting Group, Inc., Stephanie often helps family enterprises through important transitions, such as the on-boarding on new family member employees. She has experience working with sibling teams, establishing governing structures for growing enterprises, and developing training programs to educate next generation family members. The 20 advisors of The Family Business Consulting Group, a Chicago-based firm, help families in business unify their values and goals while guiding them in the development of structure around the different systems of ownership, management and family. They work with family businesses and families who have shared wealth in the U.S. and internationally.

Stephanie came to work with family businesses after spending time both in the corporate world and as an entrepreneur. She grew up as part of a family business—though her immediate family did not work in the business daily—and she married into a family business. She became passionate about the world of family enterprises and added a PhD in psychology to her business degree so she could work better with both the business structures and the family dynamics unique to family-held firms.

As Stephanie shared with Family Business Radio listeners, she based her comments on an article she co-wrote with colleague Carol J. Ryan. Published by The Family Business Advisor®, a Family Business Consulting Group, Inc.® Publication, the article is entitled “Should I call you DAD? And other perils of working for your family business….”

Stephanie says that entering the family’s business is a paradox, with the good things about working with family also leading to challenges and pitfalls. Like many of the questions that arise when a new family member arrives in the business, the issue of how to address other family members at work is “it depends,” according to Stephanie. The important thing, she says, is for the family to think through the issues, have conversations, and plan for the best ways to handle situations. There will be tradeoffs with any answer, but it’s helpful if all family members are “on the same page” from the outset.

Living under a microscope

New employees who are also related to the company founder will be more carefully scrutinized by coworkers than another new hire. Even with young family members who have summer jobs, other employees watch for special treatment and mistakes. Stephanie pointed out that all employees mess up sometimes, but with family members, other people remember those gaffes longer.

To handle living under the weight of coworker and family scrutiny, Stephanie says that employees have to set higher standards for themselves. It’s also important for the parents to set clear expectations. She says parents shouldn’t make working in the business too difficult, but give the newcomers an opportunity to succeed. If they mess up now, employees will remember a long time, and it will be more difficult for them to succeed in a leadership position later.

Another means of offsetting the hard scrutiny is to have the coming-of-age family member work two to five years in another company before joining the family business. Stephanie says this is one of the few recommendations her firm makes universally, and she says many family businesses actually require the young family members to prove themselves by earning a promotion at another business before joining the family enterprise.

The benefits of taking that first job outside the family business include the opportunity to make common, early career mistakes in a more forgiving environment and the establishment of the family member as a successful professional in the eyes of other employees. Perhaps most important, the family member who has proven himself outside the family business will be more confident. Mistakes may still occur within the family business, but they will be less likely for the more seasoned professional who is less self-conscious.

Water-cooler talk and the family member

Just as a family member’s actions are scrutinized carefully, so are the comments family members make. Stephanie has observed in many next generation family members, particularly those ages 25 and under, the concept of privacy and confidentiality has developed differently than in generations that didn’t grow up with the openness of social media. Yet family member employees are learning more than their counterparts as they are preparing to become owners of the business. They have to be careful about what information they reveal. Also, if they happen to make disparaging remarks about their supervisors, other employees or family members, those remarks carry more weight than similar comments made by non-family members. Going out to Friday happy hour with fellow employees carries a different burden than it does for non-family members.

Stephanie says the key here is to be deliberate. Think ahead about the situations that may arise—questions, remarks about the family and wealth, potential romantic relationships with employees—and consider how those will be handled. Stephanie says the family member needs to think “three steps ahead” about how anything he or she says will be received. She admits this is a lot for someone of any age to handle, but particularly for young family members.

She shared a story from one family business in which the family wanted to help a young member avoid some of the pitfalls of being a new employee with the family name. He went to work in a store outside of his community, under an assumed name. While he did avoid some of the scrutiny he might have encountered early on, the solution was not perfect. He still faced the same issues when he returned to work in the home office under his given name. He also faces the concern about revealing the deception later, when he assumes a leadership role in the company and his former coworkers realize what occurred.

Living up to the family legend

“Living up to expectations” can be hard for any of us, but when a second generation family member enters a business where employees and even the community have profound admiration for the business founder/parent of this person, it is a special burden. Next generation members often feel pressure to live up to those high standards, and may be compared to their parents by employees. In many cases, the adult children themselves also admire their parents and look forward to working with them and emulating them.

However, Stephanie says that founders, next generation members and other employees alike need to remember that the business is growing and changing. Second generation family members most likely need different skill sets than the founders to keep the company going. Rather than trying to be just like the founders, they need to apply their unique personalities and leadership qualities in a different way. Parents need to understand that different skills are needed as the company changes, and children need to understand that doing things in a new way is not disrespectful to their parents.

As an example, Stephanie explained that company founders are generally entrepreneurial. They’re outgoing by nature and have excellent sales capabilities, qualities that were needed in the early days of the business. She says the parents may be concerned that the next generation members are not as gregarious. However, she often points out to them that as the company has grown, it needs more structures and systems. A more introspective leader may be just the kind of person to build those systems and take the company to the next level.

Next generation family members also sometimes look at the progression their parents made in the company and wonder why their own rise to the top is taking longer. Again, Stephanie points to changes in the company itself. For example, she says that the company may have had only 40 employees when dad became a plant manager at 30. However, by the next generation, it may have 200 employees. Management is more complex and requires more development on the part of leadership before these management roles are assumed.

Stephanie points out that the legend of the company matriarch or patriarch can be a unifying factor for future generations. The sense of pride in the family gives future generations a psychological attachment to the company, and it can motivate them while also building a sense of commitment and stewardship. Having a “legendary” founder available as a resource is also a bonus for family members. The founder can help siblings learn to work together, for example, as they may be more willing to give up some of their autonomy in the service of the greater goals of building on the legacy of their forebears. While there are perils to working for the family business, many next generation members look forward to the opportunity to work side-by-side with older generations.

Relating to non-family member employees

Stephanie says that many founders build their businesses based on family values that employees share. From an early age, family members need to be taught how important the employees are to the business; working members should always speak positively of employees so younger family members learn to respect and appreciate them. When next generation family members come of age, they’re more likely to be humble, appreciative of employees and ready to pull their own weight as they enter the business.

Stephanie discussed two extreme cases of family members relating to employees. In the first, family members might try too hard to fit in with employees. Stephanie says this is probably a case of the family member being unsure of him- or herself and not quite ready to be part of the business. Yes, everybody is watching, but family members should still have the confidence to be themselves. This might be a situation where the family member should work outside the company first to gain confidence, feel they’ve earned a place in the company and become truly ready to work and collaborate.

At the other end of the spectrum are family members whose attitudes scream, “Do you know who I am?” These are people who are driven by entitlement, and Stephanie says this attitude is the single most toxic poison for a family business. Sometimes, the symptoms are more subtle. Stephanie gave the example of a young third generation family member who had recently had a child. The family had accommodated her by allowing her to set her own schedule, but she still was consistently late to work. Her non-family member supervisor had to watch her carefully and couldn’t rely on her to be there for the schedule she had set for herself. She then complained to her grandmother—the wife of the company founder—that she should be allowed to come in whenever it suited her best, as long as she got the work done. Her actions not only put her supervisor in a difficult situation, but also demonstrated that she doesn’t have a full understanding of her responsibility. While technically she could complete the work at odd hours, the family leaders want her to understand the responsibility that comes with her position in the family. Stephanie says that situations like this are part of a difficult journey, but provide life lessons that will serve the family member well in and outside of the business.

She also used the story to illustrate the importance of carefully choosing supervisors for family members. Ideally, she says, family members will be supervised by non-family members. If that’s not possible, they should not be supervised by siblings or parents (let parents be mentors, not bosses, she says). Non-family members who supervise family members should be trusted by the family and should be people with the courage to stand up to family members. Likewise, they should have the assurance that family leaders will support any difficult decisions or actions they may have to take in regards to the new family member.

Another issue in relating to other employees is understanding that people may assume family members have more information than their non-family member counterparts. Sometimes this will not be true, and other times, the family member may have information that can’t be shared. Stephanie recommends that family members think through situations that may arise and how to handle them, even practicing responses through role playing. For example, think about how family members might respond thoughtfully to comments that might be considered rude.

Realizing that other employees and even people in the community expect family members to have information about changes in the company, Stephanie says family leaders in the business should arm family members with information and appropriate responses shortly before news gets to employees or the public. They might do this through a phone call to family members the night before something happens, alerting them to the change that’s about to take place and telling them what to say if questions are asked. Knowing appropriate responses is particularly important in matters that could have legal ramifications, such as the firing of a key employee.

Managing family relationships inside the business

Once a new family member joins the business, expectations should be set about how and when to communicate with other family members. For example, if a family member employee is having a problem with his supervisor, should he go talk to Dad about it? And if he does, how does Dad handle it? Though the instinct may be to fix the problem right away, that action may cut the authority of the supervisor. Again, Stephanie says it’s important to think through such situations, set expectations, and act thoughtfully.

While family member employees will probably have some access and training their non-family member peers do not have, families may want to set policies to ensure access and training occur at appropriate times and frequencies. For example, will the family member go out to lunch with the patriarch every day and enjoy unlimited access? Or will they set up routine monthly or bi-monthly lunch dates, possibly also with key non-family member employees, for mentoring? Stephanie encourages families to think about balance and think about what other employees see and feel.

Stephanie says it’s also important to think about the relationships between family members who work in the business and those who have ownership but are not employees. Working members will naturally have more knowledge, and it’s important for them to communicate well with those who aren’t working so they understand what’s happening. As a possible solution, Stephanie gave the example of a company where the working family members are forming the habit of writing regular mini-summaries of what’s happening in the business for the benefit of non-working family members. These are similar to reports the company sends lenders and investors. While the working family members need to get in the habit of communicating regularly, the non-working owners must take the responsibility of reading the summaries and learning about the business, according to Stephanie.

Compensation for working and non-working owners

Stephanie says that roles of ownership and management are often blurred, especially in the second generation. However, family members should understand the difference in compensation for work and ownership. Family members who work in the business should earn a market-rate salary for performing their jobs and also get the dividends that other owners receive. All family members should have a clear understanding of the difference. Stephanie says that on these issues, as on the other situations that might arise, it’s helpful if the family thinks through policies in advance before the onset of problems, whether on their own or with an adviser.

Stephanie Brun de Pontet’s Three Tips for Family Businesses

  1. Have important conversations before a new family members starts working, even before a summer job. Talk about who the supervisor will be, what the goals are for the family member employee, what the expectations are, and how situations will be handled.
  2. Plan. Whether you use the help of the consultant or not, plan for issues that are likely to arise rather than just winging it. Set up policies in advance.
  3. Help the next generation find mentors. A member of the family or non-family member of the Board of Directors, for example, should be available to guide family members as they work in the family enterprise.

Contact our guest:

Stephanie Brun de Pontet, Ph.D.
Senior Consultant
Family Business Consulting Group, Inc.
Phone: 678.773.1675
Email: BrundePontet@efamilybusiness.com
Website: www.efamilybusiness.com

Stephanie Brun de Pontet: Welcoming Next Generation Family Members to the Business

When your last name is on the door, joining the family business can bring both special perks and potential pitfalls. Stephanie Brun de Pontet, Ph.D., will visit with Family Business Radio cohosts Dwayne Samples and Meredith Moore on Thursday, March 22, 2012, to offer tips to next generation family members preparing to become employees.

Our Guest:

Stephanie Brun de Pontet

Stephanie-Brun-de-PontetStephanie Brun de Pontet is a senior associate of The Family Business Consulting Group, Inc., where she helps family enterprises through important transitions. Stephanie has extensive experience working with sibling teams, establishing governance structures for growing enterprises, and developing training programs to educate next generation family members.

In addition to her consulting, Stephanie is the Executive Editor of the Family Business Advisor and a sought-after speaker. She recently co-authored a book with Drs. Pendergast and Ward, titled: Building a Successful Family Business Board, which was published by Palgrave in 2011.  Brun de Pontet currently lives in Atlanta with her husband and two daughters.

Stephanie Brun de Pontet, Ph.D.
Senior Consultant
Family Business Consulting Group, Inc.
Phone: 678.773.1675
Email: BrundePontet@efamilybusiness.com
Website: www.efamilybusiness.com

Recap: Cleve Hill Talks Operating Agreements and Exit Strategies on Family Business Radio

Cleve HillAlpharetta, Georgia attorney John Cleveland (“Cleve”) Hill visited the Family Business Radio studios on Thursday, March 15, 2012, to discuss operating agreements, exit strategies and more for family-owned enterprises. Cleve joined FBR co-host Meredith Moore to share information on the types of agreements that can be used in business to provide a smooth transition between business partners, whether they be family members or third parties.

Expertise in Family Business Matters

Cleve is managing partner of Bettis, Hill, and Vann, LLC, a boutique law firm specializing in estate planning, probate, and business law for families and individuals. Cleve often assists families in preparing documents to handle moving business assets to the next generation, key employees or a third party.

Cleve works with Phill Bettis, who specializes in commercial and residential real estate and mediation. Currently in his 32nd year of practice, Phill also has considerable experience in estate planning and probate matters. Cleve’s law partner, Caroline Vann, assists business owners through her tax expertise. Together, they offer family business owners comprehensive experience and counsel.

Operating Agreements

Owners of Limited Liability Companies, or LLCs, generally establish an operating agreement to govern their company. In this document, the owners, referred to as members, agree on how the company will be operated; who will make decisions; how profit, loss and tax matters will be allocated; how votes will be taken; and how disputes will be resolved.

Other types of businesses will have similar guidelines in their by-laws, shareholder agreements or partnership agreements. In the absence of any type of governing document, businesses fall under the default rules established in Georgia Code.

Cleve says that when he reviews a company’s operating agreement, he looks for several key components. The first area is taxes. The operating agreement should specify how taxes matters are allocated, the company’s accounting method, the company’s tax election, how profits and losses will be allocated, how the company will get tax advice, and how taxes will be paid. In many cases, owners file self-employment taxes and don’t get W-2 forms as typical employees do. The operating agreement may need to specify how the company will help the owners avoid a large payout on April 15. For example, the company may set up a hold back account, which would be similar to typical tax withholdings.

A second component Cleve reviews is the area of dispute resolution. The operating agreement should provide a structure and orderly process for resolving disputes to help owners avoid litigation costs and stress in the event of future disagreements. While no owners intend for disputes to happen in the future and rarely expect them to occur, dispute resolution clauses help owners to think through the best ways to handle things before the stressful situations arise.

An operating agreement should also define the roles, obligations and rights of the involved parties. For example, the agreement should define what issues owners can vote on and what matters the managers will control.  LLCs will sometimes divide the ownership into different classes with one class controlling the management decisions while also receiving profits/losses and the other class being merely “investors” and not having a say in the operational decisions of the company. Cleve says that many companies opt to form an LLC because of the flexibility in setting up the classes. For example, in the case of a family business, the matriarch or patriarch may pass the voting share the next generation but still receive the businesses’ profits or losses.

A fourth element in the operating agreement is the buy-sell provision, governing how the transfer of ownership will occur. This provision helps owners establish the business with the end in mind, helping them plan their exit strategies in the case of different contingencies.

Buy-Sell Agreements

Cleve says the buy-sell component of an operating agreement should protect the company and its owners in the case of circumstances that may seem far away or unlikely when a company is first formed, but still should be considered before they happen. Buy-sell agreements should address what will happen in the case of an owner’s death, purchase by a third party, the disability of an involved member, divorce of a member, or in some cases, even the moral turpitude of a member that negatively affects the company.

In the case of a member’s death, for example, the operating agreement may specify that the other partner will pay the first partner’s estate for the value of his or her shares. If there’s a redemption provision, the company would have the right of first refusal on the shares and could bring them back in, rather than having those shares go to other owners.

If a third party offers to buy out one or more owners, the operating agreement may give the other owners the right of first refusal so they can purchase shares themselves. Third party offer provisions might also include a “drag along” clause, saying an owner who sells to a third party will require other owners to sell with the same terms. Or they might include a “tag along” clause, in which one owner can sell to a third party only if the buyer purchases the other owner(s)’ shares, too.

Disability provisions should also be included in the buy-sell component of the operating agreement. The agreement should state how shares can be purchased if an involved member becomes disabled. The provision may force the sale if the member is not able to return after a reasonable amount of time.

In businesses that are tied to the reputation and moral character of owners, a buy-sell agreement might also contain a moral turpitude clause, governing what will happen if the actions of one of the owners negatively impacts the business.

It’s also important to protect the company in the case of one member’s divorce or, if a husband and wife own the company together, in the case of their divorce. In some cases, husband/wife teams will stipulate that the one who files for the divorce automatically moves from a management class member to an investment class partner. Sometimes, shares may go back to the company as a member is going through a divorce, at least temporarily. When ownership is being passed to a new generation, membership units may be held in trust to protect from creditors, including a divorcing spouse.

Ensuring Liquidity, Valuation in Case the Worst Happens

In many of the buy-sell contingencies, it’s imperative for either some of the owners or the company itself to have enough liquidity to purchase shares from the parting partner. Sometimes, especially in the death of an owner, the surviving owner might pay over time with a promissory note. Buy-outs may also be funded through company-owned, key man life insurance or disability insurance policies.

Cleve says that business partners will often buy insurance on each other. Partners should be aware of the tax consequences of having life insurance on yourself and others or of moving life insurance policies when a partner leaves. Family business owners should work with a team of advisors – lawyers, tax professionals and insurance professionals – to guard themselves against unexpected expenses.

To be fair to all members, the company should be properly valued, and the operating agreement should set up a method of regular valuation. Many companies annually agree on the company’s value by looking at assets and liabilities. Other companies may use a formula that also includes intangibles such as goodwill and intellectual property. A more expensive route is to hire a professional business appraiser. Agreements may call for annual book valuations then a professional valuation in the event of a dispute or death. The agreement should also spell out who will be responsible for paying for the professional valuation and any attorney fees associated with the transfer of ownership.

Key Issues Business Owners Might Miss

In addition to not thinking through liquidity issues, businesses may not seriously consider how things will be handled if a partnership goes bad. Agreements are often drafted in the “honeymoon phase” of a partnership, and owners may not think through changes that could occur.

Cleve gave the example of a successful business formed by five men. One owner got out of the hands-on aspect of running the company, but he continues to maintain his membership and receive a portion of the profits. When their agreement was drawn, the owners didn’t foresee a time when they might want to expel a member, so they went against the advice of their counsel and removed the clause. If they had been open to looking at worst case scenarios, they would have had established steps for handling the partner’s departure.

Cleve also says that businesses should revisit their operations agreements every one to two years or when a major change occurs (including new managers, new marriages, or great increase in the value of the business, for example). Corporations are required to hold annual meetings, and many take the opportunity to review their agreements then. The document should grow and change with the company.

Changes in state laws may also warrant a review of existing agreements. For example, Georgia has recently changed its non-compete laws. Previously, the courts would strike the entire agreement if one provision was invalid. Now courts can change provisions. The law also sets the number of years presumed reasonable for a non-compete agreement and the reasonable geographic regions. Existing agreements and anticipated new agreements should be reviewed in light of these new laws.

Cleve Hill’s Three Tips for Family Businesses

  1. Make sure you have an operating agreement in place. Many family business owners are doing a great job running their businesses but are not thinking about the legal mechanics that need to be operating
  2. Think about your exit strategy within the agreement. What will happen in the case of death, disability or a third party buyout offer? Think about valuation, payment and transfer. The provisions can be very detailed so you know exactly what will happen in each situation.
  3. Make dispute resolution provisions. Litigation costs could ruin a small business and deplete the resources of individual owners and family members. With an agreement to go to arbitration or mediation, the business can keep moving forward in the event of a dispute.

Contact Our Guest:

John Cleveland (“Cleve”) Hill
Managing Partner
Bettis, Hill, and Vann, LLC
1815 Lockeway Drive, Suite 106
Alpharetta, Georgia 30004
Phone: 770.475.8041 or 1.866.916.3590 (Toll Free)
Email: chill@bhvlegal.com
Website: www.bhvlegal.com

Ready to Buy or Sell Your Family’s Business? John Cleveland Hill Discusses Best Practices

On Thursday, March 15, 2012, Family Business Radio will explore operation agreements and the best ways to draft a buy-sell agreement for your family-owned enterprise. Co-hosts Meredith Moore and Dwayne Samples welcome special guest John Cleveland (“Cleve”) Hill, managing partner of Bettis, Hill, and Vann, LLC.  Mr. Hill’s specialties include small business entity formation, business succession planning and estate planning.

Our guest:

John Cleveland (“Cleve”) Hill

Cleve HillCleve Hill began his law practice in 2004 at Powell Goldstein LLP (now Bryan Cave), one of Atlanta’s oldest and largest law firms. Since 2007, he has focused his practice in the areas of estate planning, including wills, trusts, special needs planning, powers of attorney, health care directives, probate and estate administration, conservatorships and guardianships, small business entity formation, and business succession planning.

A native of Cherokee County, Georgia, Mr. Hill attended Sequoyah High School before attending Oglethorpe University in Atlanta, where he received his B.A., magna cum laude, in 2001. Mr. Hill then attended the Mercer University Walter F. George School of Law in Macon, Georgia, where he obtained his J.D., cum laude, in 2004.

Mr. Hill resides in Canton, Georgia, with his wife, Allie, daughter, Olivia, and puppy, Reagan.  The Hills attend Woodstock First Baptist Church. Mr. Hill remains active at his alma mater where he serves as President of the Oglethorpe University Alumni Association for the 2011-2013 term and as a Trustee on the Oglethorpe University Board of Trustees. Mr. Hill is also a member of the Rotary Club of Windward.

About Our Guest:

John Cleveland (“Cleve”) Hill

Managing Partner

Bettis, Hill, and Vann, LLC

1815 Lockeway Drive, Suite 106

Alpharetta, Georgia 30004

Phone: 770.475.8041 or 1.866.916.3590 (Toll Free)

Website: www.bhvlegal.com

Recap: Holman and Company Owners Discuss Transition to 2nd Generation

Holman Brothers Bill, Bob and Alan Holman joined Meredith Moore and Dwayne Samples on Thursday, March 1, 2012, to discuss with Family Business Radio listeners the transition of their business to second generation owners. Holman and Company is an Alpharetta-based insurance brokerage and risk management firm, founded by the Holmans’ father in 1983.

Holman and Company gets its start

Penn Holman began his career in the insurance industry in 1963 as a direct sales representative for Liberty Mutual Insurance Company. In 1972, he joined a partner to form an independent company, Holman and deVarennes & Co. The partners parted ways in 1983, and Penn formed Holman and Company. He lost his accountant in the split, so he brought his wife in to handle the company’s books.

Though it started in Chamblee, Holman and Company has since moved to Alpharetta. The firm offers a full line of insurance products, from commercial to personal, ranging from employee benefits and casualty to homeowner and auto insurance.

Welcoming the brothers

Bill, Bob and Alan Holman don’t remember being involved in the family business as they were growing up; rather, they remember just a general awareness of what their father did. Like most children, they saw him as “dad,” coming in from work in the evenings, spending time together on the weekends.

One-by-one, the brothers graduated from high school, then went to the University of Georgia. Bill, the oldest of the four children (they also have a younger sister), wanted to become a stock broker. Black Monday hit in October of 1987, and he decided against the career. With his dad’s encouragement, he earned a degree in finance with no specific insurance classes. After graduating in 1990, he immediately joined Holman and Company, where Penn trained him in the insurance business. He started by making cold calls for personal insurance products. He made some customer calls with his father on commercial accounts, and gradually moved to focus more in that arena.

When middle brother Bob attended UGA, his father also encouraged him to earn a degree in a broader background, not specifically in risk management. Upon earning his finance degree in 1992, Bob went to work for Merrill Lynch at a new Jacksonville, Fla., mutual fund processing office.  Within a year, he realized that wasn’t what he wanted to do for a career, and he joined the family business in 1993. Holman and Company had always been there as an option for him, but Bob says he wanted to try something outside first. His father encouraged him both to try something different and then, when he wasn’t completely satisfied there, to join Holman and Company. Like Bill, Bob started at the family business by making cold calls regarding personal insurance products.

Alan says he followed almost the same exact path, earning a finance degree from the University of Georgia. Upon his graduation, he worked two to three years in the accounting department of a Roswell company that owned several technical schools around the country. In 1996, his dad approached him with a sales opening at Holman and Company, pointing out Alan’s greater opportunity for growth there than in his accounting position.

As the brothers joined Holman and Company, each earned a small base salary and was expected to earn commissions through sales, though no specific goals were in place. Each was given general product training, and each was also trained by going along with the elder Mr. Holman as he made calls on customers. Bill and Bob started in personal insurance then moved to commercial. In Alan’s case, Mr. Holman had identified a niche industry – automotive risks – for Alan to focus on and build. While he worked in other areas, too, the niche gave Alan a jumpstart into the business.

Bill says the agency had about six or seven employees when he joined in 1990, including two or three producers in addition to his dad. The brothers agree that non-family members were given similar training and also made sales visits with their father, though they probably did not receive quite the same level of mentoring simply because of the nature of the relationships.

Meanwhile, the brothers say their sister had no interest in joining Holman and Company. They noted that she is in a completely different industry today and is very successful in her career.

Brothers, sons and business partners

Bill, Bob and Alan are close in age, all three born within a five year period. Now that they are also business partners, they are still close. They get together regularly at their parents’ home. At those times, their conversations generally center on casual topics rather than business.

Other than these family get-togethers, the brothers don’t generally socialize outside of work. They live in different neighborhoods, and each has his own family, friends and activities. They keep up with each other at the office, though they are often going in different directions. In fact, they admit to times when they won’t see one another for a few days, only to learn that the “missing” brother has gone out of town for work or vacation. They agree they work together well without getting in each others’ way.

Joining the staff at Holman and Company also gave them a different perspective on their father. The first big change for each brother was learning to call their father by his first name, something he asked them to do.

Penn Holman remains very involved in the company. In fact, though the brothers purchased most of the stock in the company just over a year ago, they say that Penn is still very involved with the business. Mrs. Holman, who had run the accounting aspect of the business since the doors opened in 1983, retired at the end of 2011. Replacing her with a non-family member was a key concern of the business. The company had always had an involved family member keeping an eye on the books, and finding the right person to take over the task was a primary focus.  Once they found the replacement, she spent four months working alongside their mother to learn the job thoroughly.

Changes in the industry

The brothers report that the commercial insurance industry has experienced a buyers’ market for the last eight years or so, with customers expecting pricing to continue to fall. Recently, however, prices are starting to transition up, and the brothers say this means different types of conversations with customers. While the transition from buyers market may indicate a slight improvement in the economy, many of their clients are not feeling the improvement significantly yet and are discouraged by price increases. The Holmans differentiate themselves in the market through their extensive knowledge of the industry and the products. One way they have demonstrated their knowledge is through acquiring professional designations.

Changing roles, business practices

When the Holman brothers began working for their dad, there were no set sales goals or other means of governance in place. Over a decade ago, they began working with a consultant to bring an outside perspective to their business, help them set goals, and facilitate quarterly meetings among the four Holmans. While it’s different from the way things had been done in the past, the brothers say their dad supports the effort and recognizes that something needed to be done to help them organize and hold each other accountable. They say he saw the effort as neither good nor bad, just different.

At these quarterly meetings, the facilitator helps the owners to stay on track as they review budgets, set goals for the agency, assign tasks, and hold each other accountable. While each brother is responsible for his personal production, their additional roles in the company are now more defined. Bill focuses on the financial aspects of the business; Bob manages the office, IT and human resources functions; and Alan oversees sales and mentoring of sales staff. As for Penn, he still owns some stock, he maintains his clients, and he serves as a resource for others in the company. He has an office and is welcome in the business as long as he wishes to remain.

Holman and Company works with mid-market commercial businesses, many that are also family-owned. Like Holman and Company, many of them are welcoming their second and third generations, and owners will often ask questions related to family business transitions in the course of their business with the Holmans. The brothers believe that this commonality – the idea that many of the businesses they serve are mirror images of their own business – will help them keep these clients into the future.

As they look forward, the Holmans see growth and the addition of more sales team members who are not family members. As their dad gradually transitions out of the business, he brings another person with him on client meetings so clients will become accustomed to working with others in the company. Because the agency owns the policies that are written (not the individual sales person), the transition will be easier from a business standpoint when Penn leaves the company.

As far as bringing the next generation into the business, the brothers say it’s too early to tell. The oldest member of the third generation is only 13. Of course, the family business will be open to third generation members if it’s the career path they choose, and the brothers say they are more prepared to help the next generation enter the business because of their own experiences. For example, they will require that each family member work somewhere else first, something Bob and Alan did and Bill wishes he had done as well.

The Holmans’ Tips for Family Businesses

  1. Involve an objective third party in the transition to the next generation. Bill says the transition can be an emotional time, especially for the parents. An objective third party can hear all sides of the discussion and remove the emotional aspects.
  2. Communicate. Bob says it’s easy for each family member to fall into his own work, but the family needs to work as a team. Keeping the lines of communication open is key.
  3. Keep business problems in the business atmosphere. Alan says things are not always perfect, but business problems should not bleed into personal problems. That’s when business jeopardizes the family relationship.

Contact Our Guests:

Bill Holman
Bob Holman
Alan Holman

Holman and Company

3655 North Point Parkway
Suite 425
Alpharetta, GA 30005
Phone: 770.992.4760 or 800.229.2465
Website: www.holmanandcompany.com

Holman Brothers Visit Family Business Radio to Discuss 2nd Generation Company

Bill, Bob and Alan Holman are the second generation to own their family’s Insurance Brokerage and Risk Management firm -  Holman and Company. They will join Family Business Radio cohosts Dwayne Samples and Meredith Moore in the studios at 1 p.m. on Thursday, March 1, 2012. The brothers will discuss the ins and outs of working not only with each other, but also with their parents. Dad and company founder, Penn Holman, is still active in the business, and mother Mary Holman worked in the business office until recently.

About Our Guests:

Bill Holman

Bill Holman

Holman and Company was founded in 1972 as Holman and deVarennes & Co. Penn Holman bought out his partner in 1983, establishing Holman and Company. The brothers joined the business one-by-one from 1989 through 1993. They purchased the business from their father at the end of 2010, and the family is still transitioning into the new ownership. Still located in Alpharetta, the agency provides insurance solutions to help companies and individuals protect the assets they’ve worked hard to build.

Holman and Company

3655 North Point Parkway
Suite 425
Alpharetta, GA 30005
Phone: 770.992.4760 or 800.229.2465
Email: bill.holman@holmanandcompany.com
Website: www.holmanandcompany.com

Recap: Family Business Radio Talks Funeral Homes, Publishing with John W. Yopp, III

John Yopp, IIIJohn W.  Yopp, III, visited with Family Business Radio co-hosts Meredith Moore and Dwayne Samples on Thursday, February 9, 2012, to tell listeners about his family’s 100+-year-old publishing company. Through his trade publications, Mr. Yopp has a close view of the funeral home and cemetery industry, one of the largest sectors in the family-owned business industry, as well as sharing his involvement with the beginning of the packaged ice and cold storage industry and discussed the trends that are affecting those businesses.

From Ice to Funeral Directors

In 1907, Mr. Yopp’s grandfather, John W. Yopp, Sr., was an entrepreneur who saw a growing industry: ice and refrigeration. At the time, condensers and air conditioners were just being developed. Companies earned money by delivering blocks of ice to businesses and residences, where the blocks would be stored in wooden ice chests for refrigeration.

Mr. Yopp was interested in the industry, and he started a publication to inform the ice manufacturers and distributors and to help them network. The tabloid-style publication was produced 13 times a year or every fourth Monday and mailed around the nation. For content, he relied on the industry groups, advertisers, subscribers and others pertinent to the ice industry including the Southern Ice Exchange which is celebrating their 123rd anniversary this year.  With the growth in refrigeration, the elder Mr. Yopp changed the name of the publication to Refrigeration Magazine in 1912. The new name expanded the magazine’s reach.

In 1919, several friends of Mr. Yopp’s approached him about starting a magazine for funeral directors and the funeral industry.  Although Mr. Yopp knew very little of the funeral industry,he did know something about publishing.  Within a few months of discussions and reassurance from his peers in the industry, Southern Funeral Directors Magazine was launched with a similar mission of helping members of the industry connect.  Both magazines offered informative articles pertaining to their businesses along with features on the business themselves, convention and conference summaries and pictures along with a number of advertisers and a section for classified ads.. They relied on a combination of the ad sales and subscriptions for revenue. Refrigeration Magazine continued to have a national audience, while Southern Funeral Directors Magazine focused on 16 Southeastern states, with limited distribution to the remaining 44 states.

All printing was outsourced, as it is today. Until relatively recently, the job of laying out the magazine for print was a labor-intensive task of literally cutting and pasting images and copy. An old machine equipped with metal plates and pins was used to manage circulation. The metal pin would be inserted in the plate to mark the month when the subscription expired and would trigger the machine to print or skip an address.

Family Transitions

Mr. Yopp, Sr., died suddenly in the 1930s. His young wife, Beatrice O’Keefe Yopp, took over the publications. Previously, she’d been involved in Atlanta real estate, where she purchased, repaired and re-sold residential homes. She took over the magazines with little understanding of the business and ran them for several years. Eventually, she wanted to get back to the real estate business, and she leased the magazines to another editor.

Meanwhile, in 1943 John W. Yopp, Jr., was beginning his college education at Georgia Tech. He paused his college career midway to fight in World War II in the Air Force. When he came home from Germany in 1946, he attended the University of Georgia and earned his degree in Journalism.  His mother wanted him to work in a different industry before coming to the magazine.  So he joined Trust Company Bank (now SunTrust) for several years before coming in as publisher and editor at the family business. Mr. Yopp, III, says the time at the bank helped his father understand “what to do and what not to do” in the management and financial side of running the family’s enterprise.

Mrs. Yopp had managed the business directly or indirectly for 20 years before her son came to work. When he took over in 1953, the business had seven employees in three departments – editorial, advertising and circulation. Mr. Yopp, Jr., started a third publication, Southern Cemetery, which was produced bi-monthly. That publication is no longer produced, as it was combined in to the funeral magazine.

Mr. Yopp, III, remembers that when he was about 8-years-old his father drove him to a typing class on Atlanta’s Spring Street each Saturday morning. Following his class, the weekly reward was a trip to the nearby Varsity restaurant to celebrate. He recalls sitting at an old typewriter to type cards with subscribers’ addresses, not understanding that he was beginning to help learn and edit the magazines’ circulation.

The younger Mr. Yopp graduated from Northside High School in 1975 and enrolled at UGA and majored in Journalism with a minor in Business.  Even though he would attend funeral industry conventions during the mid-70’s, he officially started working for the family business in 1979 along with his sister, Mary Yopp following her college education at UGA.   Ms. Cronley focused on the editorial side of the business, while the two Mr. Yopp’s traveled together to network with advertisers and cover events at different state funeral and ice associations.

Mr. Yopp, III, worked with the magazines for about 12 years before leaving in 1989 to work for a funeral home acquisition company. In the 1990s, Mary Yopp Cronley and her husband purchased the business from her dad through a 10-year buyout plan. Mr. Yopp, Jr., was still visible, continuing to network with advertisers. Meanwhile, Mr. Yopp, III, kept working in the funeral home acquisition and consulting worlds. His sister gave birth to a son and, two years later, to triplet sons. In 2006, she called her brother and said she was too busy and either the magazines or the boys had to go. With that, Mr. Yopp, III, returned, leaving the door open for sister to help if needed.

Mr. Yopp says that technology had changed the publishing industry tremendously from his departure in 1989 to his return in 2006. With the changes, the publishers can get more precise and more timely material to their subscribers and readers. Mr. Yopp says the magazines give producers of products and services an opportunity to speak directly to industry leaders through articles they submit, paid advertising, and classified ads. Some articles are online, but subscribers in both industries have made it clear they want hard copies of the magazines to keep for referencing certain articles, business features, advertising information and pictures from certain state and national meetings.. Generally, they don’t even throw them away when the next edition arrives.  It is not uncommon to find some businesses that will keep the issues going back 20-30 years.

Future of the Family Business

Mr. Yopp says the door is left open for any of his nephews–who are still fairly young—or for either of his three daughters to join the business. His daughters are young adults with, but they have not yet expressed an interest in coming to work for the magazines. Still, Mr. Yopp says he is ready to welcome any of them should they want the opportunity.

Mr. Yopp says the publishing industry and seems to have stabilized, with numbers trending better than normal compared to a year ago at this time.  He says the need for trade publications is still there—people still have products and services to sell, and magazines are their avenue for telling people why they should buy them.

Family Business and the Funeral Home Industry

The two largest industries in the family-owned business world are agriculture and funeral homes. Mr. Yopp reported that there are 19,670 funeral homes in the U.S., many of them owned by families. From 1985 to 1998, there was a tremendous amount of consolidation of funeral homes and cemeteries.  You had small regional companies that would acquire 50-100 properties, then they would be acquired by the larger publicly traded funeral home companies.  Because of the large number of broker houses and venture capital groups in the U.S., acquisition funds were plentiful and led to extremely high multiples on purchase prices, thus allowing independent owners to sell at a much higher price than originally anticipated.

Unfortunately, many of these large acquisition companies were unable to make their shareholders happy.  Lawsuits, mis-management, loss of business and other losses followed. Wall Street monies dried up and they started demanding that acquisition companies stop buying the funeral homes and begin to effectively manage what they had acquired. Already having overpaid for many of their deals, pro forma’s, budgets and heft goals fell way short of their projections leading to a tremendous slow down in the acquisition market.  Today, there are a small number of publicly traded companies and a few regional acquirers that are in existence.  Firms are still acquired, but in smaller volume with more realistic purchase prices being paid.

About 10 years ago, the buying slowed down. Families that weren’t ready to sell during the frenzy are now looking at selling within their families or to key employees rather than a larger corporation. In other cases, non-compete clauses are expiring. Families that sold out during the 80’s and 90’s and invested their money well, are considering getting back into the business for themselves or the next generation. Many were able to sell high and are re-purchasing at lower prices.  Being locally owned and operated is still a big advantage in the industry.

The cost to start a new funeral home in the current market is well more than $100 per square foot, with about a 7,000 to 8,000 square foot facility needed at the outset. With equipment, furniture and other incidentals, the cost to enter the business is about $1.2 million.

Mr. Yopp says there aren’t many children of current funeral home owners who are choosing to carry on the family enterprise. Because of the high cost, it’s difficult for key employees to purchase the funeral homes.  A couple of lenders have emerged that are willing to concentrate more on cash flow lending than asset lending.

Another trend in the funeral home business is a move to more cremations. Georgia once had only one or two crematories, and now there are about 75 in the state. With greater availability, people see them as more of a memorialization option. Cremation is often chosen for economic reasons, too.

While South Georgia’s funeral practices are still largely based on the traditional burial—even to the point of choosing a funeral home based on family tradition—the transient nature of Atlanta means that more families are choosing cremation. Other than the metropolitan cities in the southeast, the region is still known as “the Bible Belt” and lends itself to more traditional burials where you have a service, casket, vault, cemetery plot and bronze marker or upright granite/marble headstone.  Similarly, the many retirees who have settled in Florida and in coastal towns are sometimes disconnected from family or have no family remaining. They will often choose cremation. For funeral home directors, the challenge is to help families memorialize their lost loved ones in new ways.

The case of Ray Brent Marsh, the man who accepted bodies for cremation but then buried them on the backside of his property, impacted the funeral home industry primarily in the diligence required to make sure bodies are handled properly. The funeral homes were not at fault in these cases, but they now are more careful about their liability and verify each step in the cremation process. Georgia’s laws and policies now require stricter documentation, too.

Another challenge for today’s funeral home directors is maintaining and growing market share. The death rate generally remains at 1.2 percent of the population, so funeral homes have to market their firms and services in more effective ways to the families of their communities.  One means of servicing families is pre-need arrangements, in which individuals and families make funeral arrangements long before they expect to need them. They pay for the arrangements over many years, establishing a long-term relationship with the funeral home. Georgia laws allow the funeral home to either trust a 100% of the monies paid in or use an insurance product to insure the final funeral costs.

More so in the last 10 years, as an additional service, many funeral homes have expanded into pet loss care. They may provide cremation, a burial ground, and even memorial services for the beloved pets. This is another means of expanding markets.

Changes in the Refrigeration Industry

Mr. Yopp reports that the refrigeration industry also went through a period of acquisitions and consolidation. He witnessed similar events as those in the funeral home industry, where acquisition companies overpaid for the plants, couldn’t operate them efficiently and closed many. There is now one major family-owned company and two struggling publicly owned companies in the industry.

Preparing for Mergers and Acquisitions

Part of Mr. Yopp’s business now is to consult with companies on succession planning and mergers and acquisitions. He says the first order of business for family business owners is to have a plan in place. Next, especially if you think you might want to retire in a few years, go ahead and start running the business as if you’re selling tomorrow. That means cleaning up the financial statements, balance sheet, buying smarter, correcting areas where revenue is soft, and adjusting prices. All of these steps will not only make the business more attractive to lenders, but also increase the value of the company and profitability.

Mr. Yopp plans to continue helping families through his magazines and his M&A consulting. He enjoys helping families find financing, create plans together, then grow as a business and a family.  As mentioned earlier, he’s excited to have found some new lenders this year who are making  loans based on cash flow. That means key employees in funeral homes may have the ability to purchase. The lender looks at cash flow, call history, recurring business, stability and the potential buyer’s role in the business. Mr. Yopp is optimistic about the opportunities these new loans present for the creation of more family businesses.

John W. Yopp, III’s  3 Tips for Family Businesses

  1. Communication and relationship building are keys to success. He lists nine words to implement in any relationship in order to achieve your goals: Acceptance, Affection, Approval, Appreciation, Attention, Empathy, Respect, Security and Support.
  2. Don’t rely on Legislation for your company’s growth and recovery. It starts with “Me.” The owner must put faith in the heritage and tradition of the firm and what it’s created and accomplished in the past, then go the extra mile and make the extra sales call needed to be more successful.
  3. Your Behavior Reveals Your Heart. How you conduct your business affects those you touch.  Ethical and Professional will win out every time.

Contact our Guest:

John W. Yopp, III
Publisher and Editor
Southern Funeral Director Magazine and Refrigeration Magazine
President and Owner
Extreme Marketing Group, LLC
P.O. Box 768152
Roswell, GA 30076
Phone: 404.513.9405

Email: johnyopp3@aol.com

Website: www.southernfuneraldirectormagazine.com
www.refrigerationmagazine.com

Third Generation Publisher John Yopp, III, to Visit Family Business Radio

John Yopp, IIIFamily Business Radio co-hosts Meredith Moore and Dwayne Samples welcome John W. Yopp, III, publisher and editor of Southern Funeral Director Magazine and Refrigeration Magazine. The third generation family publications were started by his grandfather, John W. Yopp, Sr., in 1919 and 1907 respectively. John will discuss his family’s enterprise with Family Business Radio listeners at 1 p.m. on Thursday, February 9, 2012.

The Yopp family’s magazines were edited and published by the senior Mr. Yopp’s wife, Beatrice O’Keefe Yopp, from the time of his passing in the 1930s until her son, John, Jr., took over the business in 1955. During the 1990s, Mary Yopp Cronley purchased the business from John, Jr. She ran it until 2005, when John, III, became publisher and editor.

In addition to running the family’s publishing business, John is also president and owner of Extreme Marketing Group, LLC, where he provides marketing, business succession, M&A, and capital procurement for small to medium sized privately held businesses. Born and raised in Atlanta, he attended the University of Georgia, where he majored in journalism and business. In addition to working with his family, John has been associated with several major and publicly traded funeral home acquisition companies in their corporate development departments. He also has worked with ReMax of Atlanta and Cigna Individual Financial Services.

About Our Guest:

John W. Yopp, III
Publisher and Editor
Southern Funeral Director Magazine and Refrigeration Magazine
President and Owner
Extreme Marketing Group, LLC
P.O. Box 768152
Roswell, GA 30076
Phone: 404.513.9405

Email: johnyopp3@aol.com
Website: www.southernfuneraldirectormagazine.com
www.refrigerationmagazine.com