Interview: Meet Family Business Consultant Aron Pervin
THE BUSINESS OWNER REPORT
Aron Pervin is a certified management consultant and leading authority on family business.
BUSINESS OWNER REPORT: Let me start by asking your view on the longevity of the family business. Too many of them seem to have disappeared lately.
ARON PERVIN: The scenario you describe is quite common. Other family advisors and I have found over the years that the greatest attrition rate is at the transition from founder to second generation, where only 30% of businesses are successfully turned over.
By the time the third generation takes the reins, there are usually about 5% remaining. There are a host of reasons for this, but predominantly two stand out: conflict in the family and the fact that the next generation's skills have not kept pace with the needs of the business. All to often, the family's way of doing things contaminates the business activities and issues become personal.
Conflict occurs when the overlap of the family and the business is so great that the family values and priorities overwhelm those of the business. Perhaps the most common example is when children, the next leaders, have different talents and abilities for business and the owner/manager decrees that regardless of their contribution to the business, they are loved equally and thus will be paid equally and own equal amounts of stock.
BOR: Is this a common transition?
AP: Yes, in a way! Although they profess not to be worrying about it, all family members are constantly concerned about the continuity process.
By stressing the need for family harmony, family members often end up avoiding any open discussion on critical business issues such as roles, accountability, compensation, retirement, performance, who can own shares, estate planning, leadership, and the like, and this is the exact opposite behavior that the business requires to thrive.
BOR: So how does the successful business family achieve their long term goals?
AP: A common characteristic of successful families is that they communicate effectively and they articulate their values and expectations.
In these families, everybody knows the ground rules and is willing to abide by them.
They approach the business as a partnership. with family members willing to subordinate their personal desires to the best interests of the family.
BOR: I can understand how this applies to those in the business, but how do business families deal with the inactive members?
AP: Most families prefer that shares be held by the active participants.
The wealth accumulated outside the business operation is kept separate and is part of the estate plan. The subject you've raised reflects on attitudes of wealth transfer.
Again, most successful families make it clear that working in the business is a privilege and not a birth right.
It is made clear to the family that they will be evaluated on their performance and if they do not perform up to established standards, they may be asked to leave.
While this may sound cold and heartless when addressing your own children, it is actually a fair and open approach.
There are few things more sad than to see the next generation drift into a business for which they may not be suited and spend unhappy lives because of pressure from the family.
BOR: But, how do children who have chosen to pursue a different career stay connected to the business?
AP: This a good question because it's one that's often overlooked by families. Many families achieve multi-generational success by establishing participative structures such as a Family Council. This Council is a meeting ground for all family stakeholders - passive and active alike.
It becomes the forum to address and explore family concerns that influence the business and the family.
It allows family members to discuss topics such as how the family should use its wealth and provide for its members, as well as values, mission, vision and legacy. Injustice and perceived inequities breed conflict in the family business rather than any overt act of malice. Accordingly, the Family Council minimizes secrecy, taboo topics, denial, resentment, distrust, preferential treatment and becomes an arena to resolve differences and keep the peace.
BOR: Do you think that the estate plan is a subject for family discussion?
AP: Without question! But, at the appropriate time. Most families do not have up to date estate plans to the dismay of every accountant and lawyer who urges them to deal actively with the matters rather than have a judge decide on the distribution.
They forget to consider the impact of income taxes, future control of the business and the differing needs of active and passive members.
This results in excessive income taxes, conflicts in the next generation and perhaps the forced sale of a good business that took a lifetime or two to build.
Again, the successful business families deal with their financial and legal advisors in a timely manner and parents discuss these issues with their family.
BOR: How does one start this process?
AP: Families should begin to see the value of communicating on those sensitive subjects that are so important to the longevity of the business.
To do this, I suggest families begin to have family meetings and start talking with each other about some basic issues. In most family businesses, while they may talk about operational issues, there is little discussion about the key family business issues as we've looked at today.
Family meetings offer a variety of other important benefits, including building a stronger family and a stronger business, planning for the future of the business and the family, planning family participation, opening up the succession process and preserving family tradition and history.
The meetings set the ground work for survival from one generation to the next while reinforcing the value of being a family and working together.
Aron Pervin works with a diverse client base in all industries assisting on the human side of the business. Aron can be reached in Toronto at (416) 360-0177.