The Final
Test of Greatness
of
Entrepreneurial Family Firms
NACCE Conference
October 14, 2013
Presented By
Kent Lutz
Assistant Professor, Business
University of Cincinnati, Blue Ash
Agenda for Presentation
•Brief Introduction and Background of Entrepreneurial
Family Firms
•Some Entrepreneurial Family Firm Statistics
•Obstacles to Entrepreneurial Family Firm Succession
Planning
•Case Study on an Entrepreneurial Family Firm
•What Can Your College do to Reach Out to Family Firms
Statistics
 65-85% Of all Entrepreneurial Businesses Worldwide
are Family Owned
 12 Million Entrepreneurial Family Firms in the U.S.
 70% of All Employees Work for Family Firms
 50% of GNP comes from Entrepreneurial Family
Owned Firms
 15 Trillion in Assets will be Transferred Over the Next
20 Years
 43% of Entrepreneurial Family Firms will Change
Hands Within 5 Years
 70% of Senior Generation in Family Firms are
Committed to Continuing Family Ownership
 70% of Younger Generation Hope to Take Ownership
 56% of Entrepreneurial Family Firms Have no Formal
Succession Plan
 40% of Owners of the Fastest Growing Companies in
U.S. have No Estate Plan
 Less Than 13% of Family Owned Companies Make it
Successfully to the Third Generation
 Of all Law Suits Settled in Entrepreneurial Family
Firms They Involve the Family Members of the
Company.
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Most Common
Entrepreneurial Family Firm
Mistakes
Inability to communicate effectively.
Not holding family members accountable.
Family firms do not acknowledge the normal
consequences of passing generations – that is
the glue that holds the family together.
Lack of formal business practices – no strategic
plan.
No family charter – no family mission
statement
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No family council – no Board of Advisors
No formal plan for hiring and firing – no
compensation plan with performance, position
descriptions, and sweat equity participation.
No formal way to resolve conflict and
differences – no negotiation skills.
No way to resolve differences – distinction
between takers and givers.
Not distinguishing between a entrepreneurial
family firm and a business family.
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No formal family retreat organized to enhance
communication issues and provide a forum for
all family members to participate.
No formal estate plan and wealth transfer
strategy.
No formal succession plan and/or exit strategy.
No strategy for leadership development of
successors.
No charitable or philanthropic strategy to
compliment estate planning.
No buy/sell agreements.
Defining Succession Planning
A multidisciplinary process, both comprehensive and
strategic in approach, that assists closely-held
entrepreneurial businesses structure an orderly
transition of management and ownership.
Includes the following planning modules:
 Goal Articulation
 Business Strategy Assessment
 Management Talent Assessment
 Family Information and Communication
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Corporate Finance
Estate and Gift Planning
Life Insurance Analysis
Investment Advisory Services
Shareholder Agreements
Disability Planning
Corporate Structuring
Current Business Valuation
Compensation Planning
Stock Transfer Techniques
Family Offices
The Why’s of a Good
Succession Plan
 To create something significant and of lasting value – a
sort of immortality.
 The opportunity for the next generation to manage
capital, be a community leader, have a sense of control
over one’s destiny.
 It enhances the value of an entrepreneurial business by
retaining the most talented potential successors.
 Creates entrepreneurial energy by the next generation to
take the business to another level.
 Helps eliminate ambiguity – that is you must face the
fact of mortality, forces choices to be made, and power,
prestige, and position must be met head on.
 Helps to openly discuss sensitive issues such as
retirement and death, as that tends to be difficult for
most people to address – dodging the issues protects
business owners from making tough decisions.
 Helps retain key people from departing the company.
 Represents the cornerstone of stewardship.
 Silence does not prevent family members from forming
their own opinions about their private expectations
regarding dividends, compensation, family participation,
and rights to ownership – worse case could lead to
litigation and destroy a lifetime of building.
 You plan because you don’t want the lawyers settling
your family’s future.
 You must separate your personal identity from the
business – you must think in terms of what’s the value
of the business apart from me, how do I move
functions to other people, how can I pass on my skills
and business relationships
 It is important to “Let Go” and find a new focus for
energies that help build the business and have a clean
and healthy break with the business.
 Founders need to sustain their standard of living
indefinitely without relying on their children or business.
 To avoid shareholder conflict where passive
shareholders may see the business as a birthright and
resent the pay and perks of family members who are
working in the business, and active shareholders resent
passive owner’s demands for dividends and liquidity.
 Helps form shareholder meetings and family councils to
become vehicles for finding consensus and defining
proper roles for passive holders.
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Ten Steps in Succession Planning
For Entrepreneurial Family Firms
The Final Test of Greatness
Establish a Family Participation Policy
Provide Excellent Work experience – and No
Succession Expectations
Commit to Family Firm Continuity via Family
Mission Statement
Design a Leadership Development Plan
Have an Active Board of Directors Containing
Experienced Non-Family Business Leaders, and use
Your Board
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Clarify Business Strategic Plan
Fund Senior Generation Personal Financial Security
Identify Successor or Successor Selection Process
Empower Organizational Succession Transition
Team
10. Complete Transfer of Ownership Control
Succession Planning
“The Final Test of Greatness”
“The Cornerstone of Stewardship"
“The Final Test of Greatness of a CEO is how well he/she
chooses a successor and whether he/she can step aside and let
the successor run the company.”
“The Attitude of the Business Owner is the single most
important factor in any succession.”
“A well planned succession is more like the graceful exchange of
the baton between runners in a relay race. The handoff is almost
undetectable to the spectator, yet it requires stamina, discipline,
conditioning and share goals.”
Peter Drucker
Suddenly in Charge
Practical things for the “CEO” to do.
What to do now to prepare someone to carry on.
 Put a number on your financial position.
What’s your company really worth? After debt,
if there is any?
 What Personal Benefits – Cars, Property,
Memberships, Health Benefits – Would have to
come out of personal funds without the
Company?
 What’s the overall health of your business? Is it
new and growing, or solid and established, or a
last hold out in a mature industry?
 If something happened to you, would someone
step in and snap up the Company? Why or why
not?
 How will your spouse continue to be paid by
the Company in your absence? Does the
Company support other family members, and
should they continue to be paid in your absence
and under what terms?
 If you were absent from the picture, are there
adverse covenants in your bank loans – due to
death clauses, etc?
 Who will make up your carry-on team? Who
should your spouse rely on – both inside and
outside the Company?
 Are there any business associates or industry
contacts who could advise your spouse? Whose
judgment should prevail in cases of disputes?
Make sure your successor knows the strengths
and weaknesses you’ve recognized in your close
associates.
 In the first few days of your absence, your
successor will have to address your employees
and customers. What kind of questions will be
asked? How will vendors and lenders react?
 Will anyone call in a state of alarm, and what
will they want to know and have done?
 In the months that follow your departure, your
successor will have to deal with ownership,
employees, customers, operations, ticking time
bombs and future vision.
 Who owns the business – Just you and your
spouse, or others as well?
 How much authority do they have? Are there
any buy-sell agreements in place? Any warrants
or stock options outstanding? Any promises of
ownership or participation?
 Where are the key documents, and who is the
attorney who handles these matters?
 Who are your key employees? Are there any
employee contracts?
 Any promises made regarding promotions or
bonuses?
 Who should be retained at almost any cost?
 What kind of incentives should be offered to
key people?
 Who should be promoted and at what level?
 Who are your key customers, and how will you
keep them happy?
 Who are most important for the long term
health of the business? What about marginally
profitable customers – should they be
maintained – why or why not?
 How to deal with customers strictly handled by
you over the years. How does the company
secure new customers? What sales and
marketing activities must be maintained without
lapse?
 What exactly does the Company do, and who
manages day-to-day production activities and
the office?
 Who manages the communication systems and
networks? What must be done to keep it
running smoothly?
 What key measures do you use to measure
productivity and efficiency? Are there any
capital expenditures on the horizon or any
equipment delivery expected? Are they any
plans to close down anything?
 What is the financial picture of the Company?
 Who is the accountant who knows the business
the best? Where are all the tax records? Is there
enough cash on hand?
 Do you have a line of credit? Are all receivables
collectable?
 What could you sell your business for today?
Who would buy it? Would your employees or
partners want to take over?
 Are there any issues in the background that
might suddenly come to light and cause
trouble? Any lawsuits or compliance issues?
Environmental liabilities? Insurance losses?
 What would be the downside here?
 What is your real attitude toward the business?
Is it your grand passion, and does it have a
strong mission yet to be achieved? Or is it
primarily a strong source of cash flow?
 Does your family know how you feel and what
your true wishes are, or are they included to
preserve the business intact to honor you?
Opportunities For Community Colleges To
Reach Out To Entrepreneurial Family Firms
And Make Them Part Of Your Entrepreneurial
Program
Create a Luncheon Series Focusing on Family
Firm Needs
Create a Next Generation Program Dealing With
Succession
Create a Newsletter Focusing on Family Firms
Seek Membership and Offer Value
Seek Community Partners
Seek a Benefactor
Create an Advisory Board of Family Firms
And Advisors to Family Firms
Create an Annual Awards Event
Create a Podcast/Radio Program/Website/Blog
Partner With a Local Educational TV Station
Hire a Full Time Entrepreneurial Family Firm
Director With A Faculty Member as a Bridge to The
College
The Use of Mentors
Partner With Local Chamber(s)/SCORE/SBA/
Local Economic Development Agency
Utilize Various Assessment Tools to Evaluate
Family Firm Issues
Possible Sponsors-Banks/Law Firms/CPA’s/
Insurance Companies/Investment Firms
Consider Creating a Separate 501c3
Engaging Entrepreneurial Family Firms Could
Very Easily Enhance Financial Support of Your
College
Presenting The
Lighter Side
of Entrepreneurial
Family Businesses
10 Most Prevalent Obstacles to
Entrepreneurial Family Firm Succession
Planning
10. Poor Expression of Feelings and Wants.
People are afraid to be vulnerable, which leads
to ineffective communication; we are taught
not to express our feelings; we lack the
confidence to talk about emotional issues.
Solution: Get some Communication Training
9. Differences are Often Seen as Liabilities Rather
than Assets
Differences are the key to an active and exciting life;
sometimes differences are interpreted a “you don’t
love me” or “you don’t care;” differences are not
brought up because of the fear of disrupting family
harmony; the failure to bring up differences often
results in the very problem you are trying to avoid.
Solution: Myers-Briggs testing helps understand
how we are wired
8. Indirect Communication:
A very insidious problem where family members talk
to other family members who are directly involved in
the business; this creates a triangle that destroys
family relationships.
Solution: Family Meetings - All Inclusive.
7. Entitlement:
Usually seen as a younger generation issue; using
the family name and influence only to take
advantage over other employees is a formula for
disaster; it’s a senior generation issue as well, as the
senior generation uses it to feel that they have the
primary and only responsibility for leadership.
Solution: Communicate a common family business
vision and work together to achieve it.
6. Scarcity:
Manifests itself around the discussion of money,
roles, and power; the lack of expression of
appreciation, recognition, and love is the underlying
problem with emotional scarcity.
Solution: Family members must talk directly about
what they expect from each other and family
members must empower each other to achieve their
fullest potential.
5. History:
The full history of a family is very important to
understand and embrace. Each family has
difficulties but must celebrate the history in some
way rather than sweeping it under the rug or
ignoring it.
Solution: Families must learn from their history.
“Life can only be understood backwards, but it
must be lived forwards.”
4. Other – Oriented Regarding Change:
Change is one of the most difficult things in life –
even when it’s positive it is difficult; when we
expect others to change only and not ourselves, it is
a formula for disaster. Classic Example –
Overlapping circles – founder and father (business
circle very big, family circle very small); Wife and
Mother (family circle very big, business circle very
small); Children’s circles are caught in the middle;
often we blame each other and expect the other
person to change.
Solution: We must take self responsibility for what
we successfully contribute, as well as, full
responsibility for our contributions to the problem.
3. Control:
Control is the Achilles Heel of most entrepreneurs;
control is about change; the succession planning
process can be viewed as treacherous to the senior
generation members because they fear that their
company is being taken from them and change is
tough.
Solution: Entrepreneurs are driven by their
dreams, and since it’s very difficult to change or
control entrepreneurs, it’s all abut helping them
develop new dreams in relation to their family,
business, communities, leisure time, and
philanthropy.
2. Lack of Forgiveness:
It’s impossible to work in a entrepreneurial family
business without stepping on toes, and if families
are unwilling to forgive transgressions, it can lead to
disaster.
Solution: May be to draw upon the family’s faith
background.
1.
Lack of Appreciation, Recognition and Love:
Often the root of wanting to be recognized for the
value and contribution one makes. There is an
implicit assumption that we are appreciated, but it is
seldom, if ever, actually expressed..
Solution: Talk about expectations in an emotional
sense and learn how to express sincere and honest
appreciation, recognition, and love. The emotional
bottom line is just as important, if not more
important, than the financial bottom line. Planning
is the key, and addressing issues in a proactive way
helps to achieve the success we are all seeking..
GENOGRAMS
A genogram is a pictorial representation of family
relationship across several generations. It can be a
convenient organizing device to help you identify patterns
or develop hypotheses about family functioning.
Genograms can vary significantly and are only limited by
your imagination. Most genograms include basic
information about number of marriages, number of
children of each marriage, birth order, and deaths. Some
genograms also include information on disorders running
in the family (e.g. alcoholism, depression) alliances, and
living situations.
Generally, males are identified on a genogram with a
square, females with a circle. Deaths are indicated by an X
through that individual’s marker. Spouses are connected
with lines, separations and divorces indicated by slash
lines running through the lines. Birth, marriage, divorce,
and death dates may be indicated by the initial and date
(i.e., b.89). Ages by numbers in the markers. Circles can
include and indicate members outside the nuclear family
living together. Cutoffs, alliances, enmeshments, and
stressful relationships are indicated by the nature of lines
connecting individuals. Alcoholism (or other relevant
issues) are frequently indicated by filling in the bottom
part of the individual’s marker.
Key to Symbols Used in Genogram
Male
Female
Marriage
Death
Male
Death
Female
Children (Listed in birth order beginning on left with oldest)
First Child
(daughter)
Twins
Adoption
Marital Separation
Divorce or Cutoff
Second Child
(son)
Unmarried Couple
Very Close or Fused
Immediate Household
Distant
Physical Emotional
Illness
Illness
Female Male
Stillbirth
Miscarriage
Husband W/ Several Wives
Poor or Conflictual
Fused and Conflictual
Close
This is a simple example of a family genogram. As you look at it,
you may want to generate hypotheses about how this family
functions. A variety of patterns and hypotheses (which are either
confirmed or disconfirmed) can be generated for any family
genogram and are limited only by your imagination.
Works at
Company
Frank
Mary
61
60
Barbara
35
M ’62 , D ‘90
Curt
?
All
Teens
39
Elizabeth
Sally
?
37
12
6
35
M ‘90
Jack
39
D ‘O1
3
?