Succession when your son is 50 plus is too tough

Succession, which has never been easy for families, is getting tougher. Today, greater longevity means many patriarchs stay in power much longer, forcing a whole generation of family members into other pursuits. 

“Kids” these days don’t want to wait until they’re 50 plus to take charge. By that time, they have usually found their own passion or are weakened by waiting in the wings, so to speak.

This is an enormous threat to the ability of the company to survive and thrive when the next generation do finally pick up the reins. Cracks in the family happiness are often showing too. There is nothing sadder than seeing a family where Dad has not given a clear line of succession and worked hard to pass over the real decision making and leadership before son or daughter reaches middle age.

At the same time, too many patriarchs adhere to the age-old practice of passing the reins to progeny, regardless of talent. That tradition brought acceptable odds of success in less competitive eras. One way to allow the next generation to remain in the business is to bring in 30% private equity partners who understand how to accommodate family business dynamics but make sure there is an excellent COO to run the show. I have seen some talented managers work well within the family business environment, respecting the family business ownership structure as well as drawing on the private equity skills.

Jacoliine Loewen, family business expert recommends:

Every Family's Business: 12 Common Sense Questions to Protect Your Wealth

Family businesses emphasize wealth preservation, not growth

Family businesses are a major part of the Canadian economy and being in one myself, I can see the strength of the more resilient culture. Employees may feel more of a sense of belonging and human connection more than working for a professionally run corporation. These are reasons that family businesses, in these troubled times, have been better performers. These are also the reasons private equity treasures family businesses above all other types of business ownership.

I have been working with family business owners over the past decade and I have come to see a big threat looming in their future which, if left ignored, will impact on the future of the Canadian economy.

My  major concern is that I notice the main goal for family businesses is to preserve wealth, over accumulation. In other words, the family business is less likely to invest in new projects for the sake of growth.

“Why would I risk our own money to grow? If it is not successful, I am out of pocket,” is the typical comment. Quite understandable, but in this new environment, that sort of thinking will be the ruin of the family business.

I am not the only one has picked up this pressing crisis. Jack and Suzy Welch also write about this increasing crack in the foundation of the family business which will threaten their survival.  Jack Welch says,

“That protect-the-assets approach often worked in simpler times, but it could prove devastating in a global environment where risk-taking and growth are essential to survival.”

There is direct action for family business owners to counter this global economy threat to the family business and I usually ask these question: Would you like to have the world's best business minds apply their ideas to the business? Would you like to grow into new geographic regions but without using your own cash? Would you like to reduce your growth risk by having experts who have already worked in those regions?

Private equity brings these valuable skills to the Board room table, and far more. To have Board advisors who are global and who bring a third of the money to the business, it is a winning path to growth of wealth. 

I strongly encourage family business to bring in private equity partners who sit at Board level, but do not get involved in the day-to-day operations. This extra investment will allow the family to take money out to invest in other companies which diversifies their own wealth while also addressing their reluctance to invest in the risk of growth. 

Jacoline Loewen, expert in family business and private equity, author of Money Magnet, now used as a text book for Ivey Business Schools' MBA program.

How to get your hotshot people boosting revenues

Private equity wants to know how to get a business bringing in revenues.

The first place I look is to see if the business leader wants control. The Mission statement can give the rough map of the path forward, but it also relinquishes control to the managers, something that often grates with baby boomer leaders who are used to commanding all. It is confusing, infuriating, and to some leaders weak, to reduce control, and just like the interpretation of motherhood, leaders may not want to accept alternative interpretations of what the Mission means.

I have observed, though, that most women leaders are able to accept that they cannot control their people. Women leaders are exciting when they roll out strategy with their teams because they tend to nurture an openness, leading to that first spark: Permission to have intellectual and emotional curiosity about how to enhance the business. Canada’s school system can struggle to develop this curiosity – my grandfather said members of one union teaching all of our children could perhaps be a little one-sided in their views – and I fear for our future work force if universities think that preventing raging debate in public means that the ideas also stop. That is one of the ways leaders have the illusion they are in control, as we witnessed recently with University of Ottawa’s debacle over Ann Coulter, an American Conservative pundit. The result is I am now curious about her books.

As leaders of businesses or universities, I think once we own up that we cannot control every action, and that luck and timing play a large role, we can improve our odds of success.

Here’s the catch: We desperately need to believe that we are in control of events. Only high self-esteem and a sense of responsibility for results boosts us from bed on cold mornings. With a detailed, language-rich Mission Statement, a leader can improve this sense of control for her team so that they feel personal accountability. They can get that spidey-tingle that there is work to be done, let’s do it.

If a leader’s attitude is that the Mission is to help guide those people brimming with enthusiasm to get out into the real world and take a few punches, fantastic. Without those experiences, management stagnates. Your hotshot people want to take on more in their interpretation of essential work, to try their ideas and leadership style to make it happen or not. Managers can get moving on their own initiative, fit into the company’s deep marketing “groove,” while developing the gumption to be able to change drastically when that groove proves to be a rut.

We are all very aware that today’s star product is quickly tomorrow’s Tiger Woods.

Having colleagues who are running counter to your views and not under your exact control is the only thing that ensures organizational adaptation and survival. Most long-term companies look quite different over decades and there is usually a leader who encouraged their people to take risks while following that North star and dumping the boat every now and then.

Read full article Post.

LOST turned out to be a helluva long job interview

For LOST fans, here is a interesting perspective on job interviews. It's by Robyn Greenspan, Editor-in-Chief, ExecuNet and you can reach him to comment at Robyn.Greenspan@execunet.com:
So, in the end, LOST turned out to be a helluva long job interview. For those who didn't spend the last six years alternately fascinated and frustrated by the series, I'll translate it into corporate language:
Like many good leaders, Jacob, knowing his tenure was coming to a close, had a succession plan. Well in advance of retirement, he started filling his talent pipeline and selected his top potential replacements. Due to the "unavailability" of some of his recruits at the last stages of the interview, very few candidates made it to the final slate.
The position came with tremendous responsibility and Jacob elected the candidates undergo an arduous series of situational interviews to assess their skills and qualifications. Plane crashes, death, destruction, explosions, polar bears, time travel, electromagnetism, good Locke/bad Locke, and a smoke monster — all to determine who was most qualified for the role of island caretaker.
An interview is an opportunity for candidates to evaluate if the role is a good fit for them too, and of those remaining — Jack, Hurley and Sawyer — two seem less certain they want the position. So Jack selects himself as Jacob's replacement, and when he inquires about the length of his employment contract, Jacob tells Jack he must do the job as long as he can.
Instead of a handshake, Jack drinks from Jacob's cup, and immediately begins onboarding into his new role by accompanying the evil John Locke on a business trip into a cave. But Jack is among the 12 percent that ExecuNet-surveyed recruiters report don't complete their first year in a new job and during a hostile takeover, he learns this role was only for a turnaround specialist on an interim assignment.
Before his exit interview, Jack expediently manages the institutional knowledge transfer to Hurley, who, with his servant leadership qualities, turns out is better suited for the longer term role.


Written by Robyn Greenspan
Editor-in-Chief
ExecuNet
Robyn.Greenspan@execunet.com
twitter.com/RobynGreenspan
295 Westport Avenue
Norwalk, CT 06851

Where is the economy - fiscal issues, union salaries, union pensions

Here is a recommended reading list from Mish's Global Economic Blog. Read more. Mish is a self taught economic commentator and his blog has made more sense to me than most over the past three year ride. 
Any business owner needs to understand the true state of the American economy, not the one that politicians are trying to sell to the media and public. It will affect all of us over the next ten years.
The US economy is going to be weak for a decade thanks in part to refusal of politicians to address fiscal issues, union salaries, and union pensions now. Mish's book choice explains why in practical and readable terms.

• Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlit
• Economics for Real People by Gene Callahan
• What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar by Murray N. Rothbard

Private Equity in Sell Mode

Well, business owners cannot moan that they were not warned that their opportunity to sell their business at a good price is rapidly declining. If you own a business in Canada, and particularly if your revenues are below $20M, you are going to have a far harder time selling your company. There is still time to get in Private Equity Partners who will buy 30% and let you stay on to grow the business with them and sell your remainder share five years down the road.

"For the first time in 16 years, private equity funds are selling more companies than they are buying," reports Andrew Willis, Globe and Mail. Here's what else Willis had to say: 

News on Monday that Cerberus Capital is selling a health care company in its portfolio, Talecris Biotherapeutics, to Spain’s Grifols marked something of a turning point for the private equity sector. According to data from Thomson Reuters, the $4-billion (U.S.) sale meant that for the first time since 1994, global mergers & acquisitions involving a private equity seller outweigh takeovers involving private equity buyers.Funds have sold $67.1-billion of companies, year-to-date, and done $64.2-billion worth of takeovers. Overall, the volume of deals involving private equity funds is soaring, largely due to a recovering in credit markets over the past year - loans fuel leveraged buyouts. Year-to-date 2010, Thomson Reuters found activity involving financial sponsors as sellers was up 132 per cent, while sell-side activity is up 174 per cent. M&A activity involving a private equity fund accounted for 13 per cent of the total value of worldwide M&A so far this year, up from 6 per cent of deals during the same period in 2009, according to Thomson Reuters. 

What does this mean for business owners? It is similar to the housing market, investors are selling off properties and this pulls down the price of housing in the neighborhood. Same for businesses. The last eight glory years of getting great multiples are over.

However, I was in Boston this past week and American Private Equity firms are very keen to buy into Canadian firms and willing to invest in equity partnerships of 35% upwards. They would be exciting partners for Canadian owners and are very similar in culture - polite. 

If you are a Canadian business owner with a company with revenues over $20,000 revenues, now is your chance.

Jacoline Loewen, expert in private equity, author of Money Magnet: Attract Investors to Your Business.

The Role of Institutional Development in the Prevalence and Value of Family Firms

It was a surprise to me the number of family firms in Canada, but this not unusual.

Family firms dominate economic activity in most countries, and are significantly different from other companies in their behavior, structural characteristics, and performance. But what explains the significant variation in the prevalence and value of family firms around the world? 

The two leading explanations are 

1. legal investor protection and 
2. institutional development.

Cross-country studies are unable to rule out the alternative explanation that cultural norms are what account for these differences. In contrast, China provides an excellent laboratory for addressing this question because it offers great variation in institutional efficiency across regions, yet the country as a whole shares cultural and social norms together with a common legal and regulatory framework. In this paper, HBS professor Belén Villalonga and coauthors study ownership data from a sample of nearly 1,500 publicly listed firms on the Chinese stock market. They conclude that institutional development plays a critical role in the prevalence and value of family firms, and that the differences observed across regions are not attributable to cultural factors. Key concepts include:

• Family firms do not inhibit growth and development, as is sometimes argued. This seems clear due to the relatively higher prevalence of family firms even in regions with high institutional efficiency.
• The effects of family, ownership, control, and management in China are remarkable similar to those found by professor Villalonga in her earlier research based on U.S. data. Namely, family ownership is positively related to value, family control in excess of ownership is negatively related to value, and family management, when exercised by the firm's founders as is primarily the case in China, is positively related to value. However, in China these effects are largely driven by the low institutional efficiency regions. In the high efficiency regions, none of these effects are significant.
• These findings are particularly relevant for China as it continues its transition from a central planning system to a market economy.
• On average, family firms are significantly smaller, younger, and less capital-intensive than non-family firms. Yet they exhibit significantly lower systematic risk, and they are not significantly different from non-family firms in their growth and leverage.

Read in Full at Harvard Business Review;

Published:June 23, 2010
Paper Released:May 2010
Authors:Raphael Amit, Yuan Ding, Belén Villalonga, and Hua Zhang

Every Family's Business: 12 Common Sense Questions to Protect Your Wealth

Surprise - Government stimulus can reduce private sector spending

If you are wondering if your tax dollars can re-build the economy, I recommend reading more about this fascinating study by HBS which confirms that government spending skews opportunities for private businesses.  I like it when we can separate out the social rhetoric and see the economic factors clearly, particularly with well-meaning government interventions. Central planning has been shown to be far less effective in the many political forms it has tried over the past century.  If you are running your own business and having to meet payroll, you will already be aware of these findings even thought the researcher, Joshua Coval, was surprised.

Executive Summary:

New research from Harvard Business School suggests that federal spending in states appears to cause local businesses to cut back rather than grow. Read the full article here - A conversation with Joshua Coval.
Key concepts include:

• The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three congressional committees. In the House, the average is around 20 percent.
• For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.
• In the year that follows a congressman's ascendancy, the average firm in his state cuts back capital expenditures by roughly 15 percent.
• There is some evidence that firms scale back their employment and experience a decline in sales growth.

Robin Hood Should Have Been in Private Equity

I saw Robin Hood this long weekend. It is a truly, extraordinarily bad film: long, boring and yet, at times, preposterously silly. The low point came towards the end, when a bloodied, chainmailed Robin lept out of the English Channel, and gave a dramatic, slow motion roar. The whole audience burst out laughing. But it’s a real shame the film is so terrible, because it actually has quite a positive message about hard working people keeping the results of their work. This is the not the Robin Hood conjured up by those Dalton McGuinty tax advocates, who think confiscating bank and business profits will solve all the world’s problems. This Robin makes speeches about liberty, battles King John’s tax collectors, and even tries to force the King to sign an early version of Magna Carta. If the film hadn’t been so utterly charmless, I’d have been cheering him on. Robin could have been a private equity partner to Maid Marion, helping her seed her farm while thinking bigger about the long term view.

This version of the Robin Hood story made me think of Jean Baptiste Colbert’s famous quote: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. King John, plainly, failed to master that art. Yet modern governments have become very good at it, taking up to half of what people earn without triggering a revolt, or even any serious resistance. The reason is that people today often pay their taxes without realizing it. Most is simply withheld by their employers (hopefully they get a slip seeing what was taken), while much of the rest is passed on to the taxman by retailers with GST and HST. I suspect a lot more people would be advocating low taxes if they had to actually reach into their pockets and pay them directly with cash. In this spirit, perhaps it is time for tax withholding to go. Private equity is increasingly coming under pressure in the USA to have their income from investments into companies taxed as a business owner, not as a capital investment. That is a whole other blog.

"Should Lady Gaga have most of her wealth taken from her and redistributed to artists who did not sell five top chart hitters last year?" Eeer...that seems awfully unfair and why prop up those who have not created their own market? Conrad Black used this example to talk about taxes in his column in The National Post. Worth reading. Go to NP.

Uncertainty created by government involvement.

I watched the movie 1984 which was filmed in 1984 by, interestingly enough, Richard Bransom. Virgin's movie company, Virgin Films, does a good job interpreting the dense book 1984, and had the soundtrack by stars on the Virgin Records list. Very interesting as the movie tries to capture the human psychological results when the big government gets so involved in the market and day-to-day life of its citizens. You can see a few of Richard Bransom's personal bug bears, but it is well worth watching to remind ourselves of how 1948 looked to those who had suffered through the rise of a government like Hitler's, and why other countries and people accepted Nazis for so long.
We are experiencing a rise in how much the government gets involved in the economy again, and I listen to many earnest 27 years olds who fervently believe their government work is critical. A recent study by the rational and dispassionate Harvard Business School shows that this belief, just like 1984's O'Brian's belief, is dangerously misguided. In fact, this Harvard study shows that government spending shuts down private sector activity.
I have certainly seen that government funding of NGOs and not-for-profits sucks up talented engineers and marketing people while the public sector struggles to find such skills.
Find the full article here.
Here is the researcher's comments on their insights which they did not even mean to study:

Q: Although you didn't intend to answer this question with the research, what does your team suspect are some of the causes that could explain why companies retrench when federal dollars come into their neighborhoods?

A: Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.

Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

Q: These findings present something of a dilemma for public policymakers who believe that federal spending can stimulate private economic development. How would you suggest they approach the problem that federal dollars may actually cause private-sector retrenchment?

A: Our findings suggest that they should revisit their belief that federal spending can stimulate private economic development. It is important to note that our research ignores all costs associated with paying for the spending such as higher taxes or increased borrowing. From the perspective of the target state, the funds are essentially free, but clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive private-sector response, it seems even more difficult to justify federal spending than otherwise.

Christopher J. Malloy is an assistant professor in the Finance unit at Harvard Business School.

• More Working Knowledge from Christopher J. Malloy
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  About the author of the HBR article

  Sean Silverthorne is the editor-in-chief of HBS Working Knowledge.