The Family Business: preserving and

transferring wealth

19th November 2014

The Legacy Series

The Family

Business:

Preserving &

transferring

wealth

Event Partner:

Supporters:

Quinn Family

Foundation

Quinn Family

Foundation

Workshop Business Overview

‘Paddy’s Italia’ is a 3rd generation family run chain of restaurants.

Originally set up as a pub today ‘Paddy Italia ’ has 5 restaurants and

a franchise branch and employs 65 people.

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Foundation

Paddy, the founder The original pub ‘Paddy’s’

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Foundation

Stephen, current CEO

‘Paddy’s Italia’ restaurant Dominic,

next generation

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Paddy Founder, long retired

Stephen Current CEO, Paddy’s Son

Dominic Group

Manager

Emilo Part Time

Coordinator

Rachel Looking to

join the business

Philip Doesn’t

work in the business

Sofia Doesn’t

work in the business

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Foundation

Issue:

Trust & reluctance to

‘let go’

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Situation

Mr. Stephen O’Hare is the current CEO and sole shareholder of Paddy’s Italia, a successful family run chain of restaurants. He is in his early 60s and he and his wife have five children, two of whom are involved in the business. Stephen’s son, Dominic, is eager to take over management responsibilities from his father; however, Stephen is finding it difficult to step back. Stephen’s perception is that his son is not yet capable or experienced enough to manage the business—an outlook that is causing frustration for his sons, especially Dominic, the eldest. This is impacting negatively on both the family and the business.

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Foundation

Audience participation: • This scenario demonstrates a need for communication and clarity of roles and responsibilities.

• It calls for a greater handling of power issues and struggles.

• The issue arises from the cultural difference between generations. The older generation is the entrepreneur while the next generation represents the more professionalised approach.

• Respect needs to be shown for both incoming and outgoing generations.

• Stephen should work on trusting his judgment in appointing his successor and he should develop his trust in others to lead the business.

• Stephen should still be kept in the loop. This may be in the form of a debriefing following the meeting.

• Unemotionally discuss issues. By separating business issues and family issues you can survey the business in a more objective manner.

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Other points to consider: Family businesses are typically not good at planning the succession process, simply because they do not do it very often. The typical tenure of a leader of a family owned business is 20 years, whereas, in public companies, CEOs are in their position for usually less than 7 years. In order to successfully transfer the business to his successor, Stephen needs to not only prepare his son, but he also needs to prepare himself to ‘let the firm go’. Preparing to let go is more than putting a succession plan in place and identifying a successor. For the transfer to be successful, and to enhance the probability of success, successors need to be developed and nurtured over time.

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Other points to consider (continued): A critical element in being able to ‘let go’ is investing in the process of knowledge transfer for the nominated successor. Firms with formal succession plans require successors to: (1) ‘learn business’ through formal education and working outside the business; (2) ‘learn the family business’ in particular the family network and network management skills; (3) ‘learn to lead the family business’ by codifying knowledge and learning the tacit knowledge, training in operational and financial management, and thinking strategically in the business. The most successful multi-generational firms are those who are more adept at managing these factors. Below are three useful and practical steps that can be used to ensure a smooth transition: Define a timeline. Develop a defined timeline for retirement. The timetable works better if the founder has developed it and done so early. Create management development systems. Valuing and creating management development systems is part of all three earlier learning phases (4Ls), and is important to support ‘a clear line of succession’. Stick to the plan.

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Foundation

Issue:

Dividing assets

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Situation Stephen and his wife have five children, two of whom are currently involved in the family business. His other three children work elsewhere, and hold little connection to the business. Stephen is unclear about ownership succession planning, specifically in terms of allocating the assets amongst his children. Should he only divide the assets between the two children that are working in the business or should he also include his other three children? This issue is causing tension between Stephen and his eldest son Dominic, who believes he should inherit the entire business.

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Audience participation: • This issue developed from a lack of communication.

• This problem can manifest when family members feel a sense of entitlement to the business.

• It may be necessary to separate business assets from heritance assets.

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Foundation

Other points to consider: U.S. evidence suggests that 70% of wealth transitions fail (Williams and Preisser, 2003). Typically, the failure in transition is attributed to a breakdown in communication and trust in the family unit, and a lack of preparation of the next generation. Successful transition requires soft skills such as communication, knowledge transfer and learning, in addition to building industry, network, and entrepreneurial skills. The biggest hurdle family business owners must jump is the mindset of treating children equally. In dividing family business assets there is rarely fairness in the equal division of assets. Instead, owners must consider being fair and equitable. These goals can be mutually achievable. One option would be to use a ‘buy-sell agreement’ that equally divides shares of the business among all of the siblings. The agreement, however, could give the eldest son (Dominic) the first right to buy the shares owned by his siblings. The younger siblings would benefit from the sale of those shares, while Dominic would retain ownership of the family business.

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Foundation

Issue:

Experience vs.

education

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Situation With a strong entrepreneurial spirit, but no formal education, Stephen took over his father’s pub/restaurant business at the age of 21. He worked hard for the next forty years and grew the business into a very successful company, experiencing firsthand the ups and downs, successes and failures of the business. The sacrifices he made and fear of scarcity along the way help him manage the reality of having significant wealth. Stephen’s children, on the other hand, have all received a formal education, two of them with Masters degrees. The issue of experience vs. education is now posing a problem between Stephen and his son Dominic, who both view their ‘past’ as providing them with the authority to make the best decisions for business.

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Audience participation: • This issue requires acceptance and compromise from both generations, with the new generation

accepting traditional elements of the business and the outgoing generation embracing new techniques.

• The ideal is to marry together tacit knowledge with education.

• Respect should be shown to both parties as both have worked for their place in the business.

• This situation calls for more open discussion among family members.

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Other points to consider: Both men need to understand that the experience and tacit knowledge held by Stephen, and the formal education of Dominic, are both equally important going forward and to make decisions for the business. A key element in preparing to let go of the business, and thus the implementation of a successful transfer of wealth, is the process of knowledge transfer. One of the most valuable assets in a business is the ‘know-how’; this is a core intangible asset of the business. Moores and Barret (2010) suggest the ‘inside-outside’ paradox for acquiring and transferring business knowledge. ‘Going outside’ the family business to obtain formal education and work in other companies provides vital learning opportunities to develop new skills and broader perspectives not readily available within the family business. It also allows the family member to prove themselves worthy of career progression and promotion into senior management roles, an important pathway in order to ‘return inside’ the family firm where they will learn the unique aspects of the family business. Family business leaders hold specific knowledge, often based on tradition, and part of ‘the way we do things around here’. It is important to capture theses traditions in order to explain why ‘we do things the way we do’ and what is unique to the firm. The successor needs to spend time with the incumbent when he/she ‘returns inside’ in order to ensure this transfer of this ‘tacit’ knowledge takes place.

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Foundation

Other potential issues to consider

Compensation &

equality

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Situation Throughout his time in the business, Stephen has always held a modest salary. Often, in order to attract experienced professionals in areas where he lacked expertise, Stephen would offer a higher rate of compensation than his own. However, the 3rd generation have earned significant salaries and have owned luxury company cars since they first joined the company. This is causing tension amongst the non-family employees. As Stephen is now approaching his mid-60s he is becoming increasingly conscious that he has failed to adequately plan for his retirement. After all his years of hard work in the business he would now like to provide financial security for his wife and himself. He suggests a “pay-out” upon retirement, but his son Dominic is not too keen on the idea…

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Points to consider: Any family firm has three choices of orientation: family-first, ownership-first or management-first. In family-first businesses, employment in the family business is a birthright. Family members are encouraged to work in the business, and remuneration and dividends depend on family needs. In ownership-first family businesses, time horizons for investments and perceived risk are the most important issues. Management-first family businesses require work experience outside the family firm as a prerequisite for employment of family members. Family firms need to be aware of their main orientation, as this will guide their strategic decisions. In the case of Paddy’s Italia, it looks as though the business has moved from an ownership-first or management-first family business, to a family-first business. It needs to be decided which orientation the family firm will take into the future.

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Other potential issues to consider

In law involvement

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Situation Stephen’s son, Dominic, is married with children. His wife comes from a different family background to the O’Hare’s, with different values and ways of communicating. She is very straight to the point, whereas in the O’Hare family they tend to hint and beat about the bush a little bit. She doesn’t get on with Stephen and is always pushing for Dominic to take his Father’s position as MD of the business.

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Foundation

Points to consider: Approaches to this issue vary, and there are interesting cultural differences around the world. At one extreme (common in some Mediterranean countries and in Latin America), in-laws are fully accepted and enjoy family member status in relation to the business. At the other extreme (expecially in the U.S.), in-laws are often excluded, not just from share ownership, but also from any involvement in the business or its family governance architecture. One of our ‘case companies’ has take a middle course. They have adopted a formal entry process to the family business covering both young family members and their prospective spouses. They are invited to annual meetings (before which they sign confidentiality agreements) at which they receive a detailed briefing from family leaders on financial and trust arrangements in place, along with the opportunities and roles available for new family members. The main aim of the briefings is to ensure that each new family member finds out what their new family can expect and what is expected of them. With benefits balanced by obligations, the positive message is clear – that new members are welcomed into the family, but they are required to respect rules and traditions that have developed across generations.

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Other potential issues to consider

Brothers vs. sisters –

women in business

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Situation Emilio and Dominic are brothers, both work within the family business. Dominic is older than Emilio and has been in the Business since he graduated…Emilio has gone onto college but has always worked summers and Holidays in the Family Business and now works part time. Emilio has discovered that their Father has decided to make their sister Rachel who is recent masters graduate an HR Director…Dominic thinks this is a great idea, whereas Emilio is freaking and saying that it just cannot happen….

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Foundation

Points to consider: In May 2014, the Irish Independent published an impressive list of businesswomen entitled, “The 50 most influential and powerful women in business.” Such a list would have been unimaginable even 30 years ago, and it stands as a testament to the tenacity, ability and ambition of women in business. Among those 50 were Margaret Heffernan and Sharon McMahon of Dunnes Stores, Caroline Keeling of Keelings Fruit and Marion O’Gorman of the Kilkenny Group

Our Supporters

Quinn Family Foundation

Event Partner

DCU Centre for Family Business

www.dcu.ie/centreforfamilybusiness

Email: familybusiness@dcu.ie

Phone: +353 1 700 6921

Linked In: DCU Centre for Family Business

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Foundation