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On-Demand: Business Ownership Transitions--Perspectives of the Rising Generation

Sep 17, 2020

Our panelists covered the multi-faceted decision points that have helped clients successfully navigate business transitions.


Good afternoon everyone and welcome. My name's Onofrio Cirianni. I am with EisnerAmper Wealth Management and Corporate Benefits and I'm happy to be your host and moderator today for our webinar. As a result of COVID-19, most of all, most of you if not all of you are probably working from home or at an alternate location. We're doing all our best to manage in our family, our personal lives and our businesses.

Onofrio Cirianni:We hope everyone remain safe and healthy during these times. Despite all the challenges we have faced over the last six or seven months, there's still that entrepreneurial spirit. We see that it’s strong and businesses continue. It hasn't been easy, but many of these closely held businesses that we work with and represent are getting creative, working harder, smarter to maintain at the least. But still with the efforts to grow the value of their businesses profitability, take care of their employees and for those customers that they serve.

With some of the downtime that we've all had as a result of maybe less commuting as an example or less travel, we see this as an opportunity to work on the business not just being in the business. So a lot of businesses we find they're retooling and looking at maybe those projects whether they be short-term or long-term projects that may have been put aside. I can tell you from my personal experience over the last 30 years working predominately with closely held family businesses and its members. And in most all circumstances the largest asset within the family is the business on the balance sheet.

So like others on our panel, which you'll meet in a moment, we've created a process. We take a very collaborative approach to protect, to grow and transition these businesses. Now, as we know, business transitions can go down one of several paths. They can grow and sell these businesses potentially to a strategic buyer, maybe to a private equity firm, maybe go public or some type of internal buyout with management or an ease up. But today's focus is going to be that transition, keeping the family business within the family, within its family members.

And the planning is quite different depending on any one of those paths that I just described. So most of the content historically that we've published or webinars that you may have seen in the past has focused really from the perspective of the founders, the patriarch or matriarch of the family, but as you can see from the title of this webinar today, Business Transition Perspectives of the Rising Generations, we're going to focus through the lens of the next generation.

So what we've done is put together a panel of experts in various disciplines that work with family businesses. We'll touch on what we have seen over the years and we'll highlight some concepts, some strategies, share some facts that we happen to see as a practice amongst the panelists. And learn hopefully a couple ideas to walk away from here in regards to how do we make the best of this process, which is not easy at times so that all family units will benefit from it and most importantly that we're trying to maintain family harmony.

We have a saying in our practice that we want to make sure the families are financially ready, but we also want to make sure that they're mentally ready. And it's really the mental aspects and the family dynamics that really is where a lot of work we find needs to be done and addressed. So as a result of this webinar, we're going to start off with building a foundation in regards to some of these challenges that we've seen. I'd like to take the opportunity now just to introduce our panelists. We have Natalie McVeigh, she is the director in EisnerAmper Center for Family Business Excellence.

She's also director in the Center for Individual Organizational Performance. We have Jordan Kaplan, he's an attorney with Fox Rothschild. And we have David Gottlieb, he's my colleague and a wealth advisor in EisnerAmper Wealth Management. Before we dive in to the content of our webinar, I'd like to just start by asking each of the speakers just to give a one minute background in terms of what their role is and then we'll dive into the prepared material. So I'll start off with Natalie, if you'd like to just give a minute and tell the audience a little bit about your background and your role within the group. Natalie.

Natalie McVeigh:I am Natalie and Onofrio let you know my title. My background is in management consulting and neuroscience. So I really help privately held companies deal with the emotional aspects of owning entities while not letting go of the actual financial and business science side. So we walk in parallel tracks for both of those.

Onofrio Cirianni:Thank you. Jordan.

Jordan Kaplan:Good afternoon everyone, my name is Jordan Kaplan. I'm an attorney with Fox Rothschild here in Morristown. My practice focuses primarily on business divorces and business disputes. What happens if you don't listen to David and Natalie and Onofrio? What happens if your business is not prepared? And what happens when business owners rather start fighting with each other. So as much as my practice is styled to both prepare for and prevent business disputes, more often than not people come to us after there's already a dispute trying to figure out a way to resolve it.

So my practice revolves around identifying those pitfalls, how to prevent them and if you're already in them, how to resolve them.

Onofrio Cirianni:Thank you. And David.

David Gottlieb:Hi everybody, David Gottlieb, as Onofrio said, I am a wealth advisor. My focus is financial planning in guiding people within a narrow range of the confidence level to accomplish their one best financial life utilizing our proprietary model called the Advocacy Process. And I've been a proud member of this team for a long time and my focus at this point is working with people in the generation-X and the millennial Generations in preparing for accepting, taking on and establishing the responsibilities of the great wealth transfer that's upon us.

Onofrio Cirianni:Thank you David. So Natalie, why don't you kick it off.

Natalie McVeigh:Thanks, Onofrio. I'm going to spend some time today just laying the foundation of why even though we work with all kinds of companies, family companies are different. So there's lots of research in this field believe it or not and a lot of things that are happening to you as the rising generation are happening to other rising generation members. And so we know that we've heard the old adage from shirt sleeves to shirt sleeves, it's actually in many different languages.

Natalie McVeigh:In Italy it's foreign 00:08:31] from stalls to stars to stalls. It was earliest recorded in Lancaster, England from clogs to clogs, which is still used in the Netherlands today. We could spend the whole webinar actually just talking about the different translations of this phrase, but we're not going to. We'll just say that we know that family businesses have failed.

We also know that many have been successful, but the point at which they fail is usually centered around transition. So the largest study of family well transitions by Roy Williams and Vic Preisser said that these are why family businesses fail. So 60% of that reason, this gold that you're seeing on this graph here is trust and communication. And we're going to talk about how that's multi-faceted. Many of you on this webinar probably telling me my company, my family, we communicate really well. And you probably do, however, communication involves as we get older, we have different stages of life and also for business. It is a different type of communication and trust.

There's lots of theories about what trust is or what it isn't, but we now know with neuroscience that trust is oxytocin. They've actually done studies that showed a wealth manager loses everyone's money. Rightly so people would be made and so in the group where nothing has been changed, everybody says they're really made at their wealth advisor, they don't trust him or her anymore. In the group where they'd sprayed oxytocin in their nose, they actually said they still trust their wealth advisor. So as soon as you can get this on the market, I will absolutely send you that so you can just drug your family members and trust each other.

But until that day comes, we have to figure out how to create trust with one another and that really takes some very special skills. And then 25% is the lack of prepared heirs and that's a bilateral responsibility. That's the current generation really explaining to heirs what their inheriting. In our estimation, most family businesses are two to three enterprises. It's usually one operating company, some sort of investment asset and something else there. And the skills to manage those things are quite different. So it's the current generation telling the rising generation and the rising generation really seeing what they need to do, crating that skill set and building that over time.

We know that it takes time, they've done studies that it takes about 10 years to pass what's called tacit knowledge. What I know at being an experienced professional in my field to any one person. And then 10% is a lack of a family mission statement. Now this isn't a fancy document that someone creates for you. This is really the family all together having a joint discussion and saying, what's the direction we're going in.

Even if it means we're not going to own this business anymore, we don't think of wealth transition failure as a sell of the enterprise, we actually mean that there is no family wealth left. Whether that's the business is been used or people have used that money unwisely. And the last 5% is tax or other. What that is really, those perfect plans, those wonderfully technical solutions. But those wonderfully technical solutions are only technically wonderful for the families if they know what they mean and they have the skills to execute against those. You can have a magnificent operating agreement, but if we don't know how to have discussions, manage conflict well, we're not going to do those things effectively.

I'm not a failure person. We're going to talk later about the study that says the 100 families that have succeeded over 100 years is absolutely true that you and your family can succeed at this, but knowing the predictable patterns that happen to every privately held company and family business makes it much more easy for you to navigate the times that will get bumpy. Now, many of you might have said that your family communicates really well and it does. However, the way we communicate with our family is limited and it's limited for a reason.

Neurologically speaking, our desire to belong outweighs our desire for safety. That means that I really want to be a part of something so much that I might hide little bits about myself that I think you're not going to like. I may phrase things really cautiously because I want to get the right result and I know how you'll respond because you're my dad or my mom and I've been saying the same thing to you for almost 40 years now. That absolutely make sense where we most want to belong is our family. So even though we have good communication in our family, it's usually slightly stilted or slightly modular.

I'm not going through the deck you all were given 100% because all of you can read and I want that to be a reference for you, but here's some common ways that families really truncate their communication. On the parental side, your parents aren't telling you a lot not because they don't trust you, although that's often our assumption, but it's because they don't want to burden you. These enterprises are both a burden and a blessing at times. And young people often aren't asking the answers because they don't want to seem ungrateful or impertinent.

And what really keeps people together in many cases is the enterprise. It's like its own constellation or planet where we orbit around. So the question is if we do things differently with this thing that's bringing us together, will we stay together? And these are some of the components of trust. Trust changes over time, it's multi-dimensional. One of the stories I love to tell about trust in my family that seems a little silly is my sister and I. My sister is a lovely human being, she's a terrible driver.

She's been kicked off USAA, she's not allowed to drive vehicles on USAA. So I don't let her drive my car, but if I need someone to pick up my son, I sure as heck call my sister first. And the reason is because I can trust Nicole to do what I've asked her to do relative to my son. Now, the inconsistent part is in both cases, a car is involved. And this is that multi-faceted relationship with trust. We too often say in our families we trust each other, but if you really think it through and you can do this exercise if you want. I call it a trust matrix where you name each person and each activity that you encounter them with in your family and write the trust matrix and understand that maybe you trust your brother for five things, but not four.

And maybe of those four, they would be involved in the business going forward. And here those natural patterns that I mentioned earlier that just make being in families a little more complicated. There's birth order, there's expectations for what I'm going to do as the eldest or what you might do as the youngest. We have stereotypes and we created them very young. So maybe you cried a lot when you were a kid, but now that you're an adult you don't cry, but your siblings or your parents still think of you as the sensitive child. We do something with families we call updating assumptions where we really help our family members start to talk to one another about how they are today.

And I'll just talk about one last thing. It's a fancy term that's not that complicated, it's called transactional analysis. There's three ways that we interact with everyone in the world. There's our adult self, right now if you and I were having a discussion, we'd be having an adult dialogue. I'm treating you like an adult, you're going to treat me like an adult. Now, when we get in work, we change that way sometimes. There's our parent self and our child self. So bosses often parent, they finger wag and our parents also finger wag at us. And if you're a parent, you're finger wagging at someone. And there's our child self, we're smaller, we're a little more scared, we're a little more timid. Parents and children actually get stuck in that transactional analysis where it's so hard to remember there are children who are adults are adults.

So they're attempted to stay in their parent selves and children are tempted to stay in their child self and there's neurological reason for that. But one of the things to really help is frame how we come together in our family company about our conversations when we're staying in our adult selves. So this is the three circle model, it's very simplistic. Think back to third grade where we have our families, we're all born into families. Two people fall in love and they have kids. They also fight over their first Thanksgiving, who's traditions are better and of course all of you on the call, I know it's your family's traditions.

But there's another side of the family that comes there and they create all of these things. And then one of the people in that relationship goes and starts a company and the way that they start the company is exactly their own way. Most entrepreneurs create organizations that do everything they want them to do, exactly their way. And they bring a different side of themselves that isn't in their marriage or their parenting to that business. A more structured side and there's some rules there for predictability. And then along the way we create ownership. This is the neglected circle in here and it's often what we call chaotic. The rules in that system change, they're not known by everyone and these three circles create several roles.

So each circle has one role, that's three and each area of overlap is another role. So there's seven roles in family's companies. We often call them hats and so in family companies you might be talking as an owner, a manager, or a family member and that gets really tricky to navigate. I mentioned the trust concept here and where trust is in our brain and how to get that. And one of the things we see with family planning that sometimes stresses us out is the company's the most tangible asset. The wealth is the most tangible thing, but on these types of family capital, it's one of seven. There are many types of capital and spending time increasing intellectual capital or human capital or helping people understand their structural capital really ensures that that financial capital works in the future.

And one thing none of us can change no matter how many assets we have is our time capital. And we see that that is really the thing that we have to choose, how much time are we spending as family in the company so and so forth. Now, here's the study I promised you. There is hope. Yes, 70% of families fail, your family is not going to be one of those. There's 100 year study done on over 100 families in which they said there are things that made them really successful. They had non-family co-stewards at some point and time because at the end of the day it's really helpful to have some outside perspective. They also got an independent board which also meant non-family members. They created some governance bodies that helped them make decisions because you're already doing governance, it's how you make decisions now.

And they started educating their next generation and made it okay that we could leave if we needed to. And most families when you leave the option for getting out, people stay. What I want to talk about with transition real quick is it's a multi-faceted process, it's not a point in time and you can transition many different ways in a family company and many of the times that you do. So if you were thinking we got six siblings, well, look here, there's a list of different successions that can happen in those three circles that we looked at earlier. There's a place for everyone. And the question is what's the leverage point? What's the skill set? How do we manage those together?

I apologize, that slide got a little messed up there, but it was just showing different governance bodies, ways that we make decisions in these areas that are overlapping, but discrete. So people who own the company have different rules and rights as managers. And here's just a list of some common ones, the many ones that are most important to families, our social media agreements. How do we talk about ourselves in the public? Prenuptial agreements, how do we enlist our spouses, co-stewards to help us maintain that same asset and then many of the standard documents? I just want to close by saying before we talk to my colleagues about how this happens is families are complex systems, but they have the most opportunity. And the question is how do we proactively look at these points of entry and make decisions around them by design and not by default?

Onofrio Cirianni:Thank you Natalie. I appreciate that. So I'd like to build on all the comments and foundation that Natalie just laid out for us in terms of some of the challenges and where the opportunities and where we've seen some success. So I'd like to start off by asking some questions. I'll start with David. David, what are some of the biggest financial related concerns that once you prepare to face as a business owner?

David Gottlieb: Yeah, so thank you for the question. The major financial concerns that I believe need to be address are gaining the clarity, confidence and control in accomplishing one's ideal financial livelihood. One is have a clear understand of not only the business goals, but also the personal. Incorporating those values in intended accomplishments et cetera, and it is also encouraged to be sharing these values with the patriarch and matriarch generations of the family. What we do is that we incorporate some of the behavioral financial aspects with our clients to best understand and head toward their vision of an ideal one best financial life. And naturally we allow this to dovetail into the more numerical or financial topics that come about such as liquidity, safe planning, tax planning, et cetera, et cetera.

Pretty much what it does is that it provides personal motivation behind the more traditional aspect of financial planning. We do utilize some pretty impressive tools in order to incorporate both the behavioral finances as well as the numerical finance behind this. We use a tool call the money line, which really best understands a person's monetary bias. Number two is the honest conversation, which really allows us to best understand not just what their priorities are, but why those priorities are ranked where they are in their minds.

And we also find it to be mandatory for spouses to participate in all of these exercises. What we do is that we use these tools and many others to feed into our proprietary method which is the advocacy process to work as a team in addressing the full family and all their financial planning needs.

Onofrio Cirianni:Great, thank you David. I'll ask Jordan a question. Jordan, for businesses with only one owner, when should they start thinking about drafting operating agreements, bylaws that address all these complicated issues and company operations?

Jordan Kaplan:Thanks Onofrio, the answer to that questions is now. Even if a business is owned by only an individual person, it's important to set up for what may happen in the future. If you're the individual owner setting up standards for fiduciary duties are a lot easier. What fiduciary duties do you owe yourself? Would you be willing to wave a duty in one way or another? It happens, but what happens if that individual business owner suddenly passes away and his business passes on to his children or a business owner passes away and her business passes to her husband who didn't have experience before.

When you're not sure what's going to happen the next day, which is pretty much always, it's best to set up a structure, a framework for what's going to happen next. Now, in New Jersey, we're lucky. We have what's called the Revised Uniformed Limited Liability Company Act. It's been passed in several states, New Jersey's is pretty strong, pretty well established. And what that means is under New Jersey law, if you have an LLC and you haven't set up an operating agreement yet, you're not out of luck. The statute says that in the absence of an operating agreement, the statute hold and the statute does have specific provisions in place that address fiduciary duties.

For example, under NJSA42:2C-39D, I hope everyone's taking notes, it states that whether an LLC is managed by its members or its manager and in the case of a single person who's the sole owner of the LLC, there is no distinction there, each member owes the fiduciary duty to all other members to exercise any rights consistent with the contractual obligations of good faith and fair dealing. That's legal ease for don't do anything to take someone else's reasonable expectations away. So yes, there are standards that will protect you, but it's not necessarily the standards that you want to carry on your legacy. So why is it important to establish an operating agreement right away?

So when the next generation takes over, whether it be tomorrow or 40 years from now, they understand the framework upon what you should build your business and what you should continue to grow your business. And that carries on the legacy that you want to establish moving forward for not only the next generation, but to make sure that you're in the 30% that Natalie pointed out survive beyond the third generation.

Onofrio Cirianni:Great, thank you. Natalie, do you have anything to add from your perspective on some of the comments David just shared with us or Jordan?

Natalie McVeigh:I think they're coming through the right approach. It's really about that conversation and that conversation should be between spouses when they're both there. The parents as leader of the family, but incorporating that next generation as quickly as possible in these conversations because when you create these legal documents, your structural and you decide for how that next generation will behave. They don't have the skillset to do that whether you're making one sibling a trustee for the other or when you're saying they need to be a joint shareholder's agreement for them to make decisions unanimously and they can't do that. One of their only ramifications is to call Jordan later because eventually they want to get out of those very structured documents. We say in our work that structures are the proxy for trust.

So all these documents and processes are amazing and the skills to execute against these best practices are one of things we want to sure up.

Onofrio Cirianni:Yeah, thank you. I see it as well. As Jordan said and Natalie you just confirmed it's really memorializing the essence of what everybody wants to accomplish. When it's not in writing it's not very clear and that gives room for either misunderstanding or in the event of an unintentional event or someone as your example passed away it leaves everybody else really looking at each other, where do we go from here? Thank you. David, what are some of the best ways you have found to protect losing key employees within a business and a family business when this transition is occurring from generation one to two or two to three?

David Gottlieb:Absolutely. In most cases a business greatest assets are its people. And it's very appropriate to consider all key members and or stakeholders of a company when any kind of a transition occurs. It is imperative that the next generation is mindful and respectful that there are non-family members that are very important participants in the family's company. And it is very much in their best interest to attract, repay and reward those people to insure that the transition run smoothly and the business continues to grow.

There's actually a case study that our team has come across that really speaks to this. There was a patriarch who had built a very successful company and he had two sons he intended on leaving his business to as part of his own retirement solution. Turns out that the two sons were two years apart in age and they both went directly from college into the business. So within a two year period of time, they had both graduated and at that point, there was concern as to whether they would actually grow into the business.

Well, the good news is that 10 years in, they had grown into the business and they were ready to really take over from many aspects of all the transitional concerns. However, there was a second in charge more or less that he would have been taken over the business had it not been for the boys and it was very important for these young men to acknowledge that the person has and still was a very important part of the equation. So what they ended up doing was they designed unique benefits and equity plan, deferred comp, enhanced group benefits, that included some additional life, health, long-term care, disability for him and that person's family.

Something that that individual would've had to acquire on his own, but in this case got it at an attractive price and at a taxable discount. And that's just one area that I think is very important for new business owners to come and understand.

Onofrio Cirianni:Great, thank you. Jordan, what are the most common issues that second generation business owners that you see, what's risk back to continuing these operations?

Jordan Kaplan:Sure, the first one is always whether you've planned it or not infighting. Especially, when it comes to siblings, I could tell you this, I love my brother and my sister more than anything in the world, but there's no question that we would have disagreements when it comes to a business. And when you're siblings, you as much as you love each other unconditionally, maybe that opens up the door for you to be more willing to go to battle with each other because you know at the end of the day you're still going to be siblings no matter what.

The reason I bring this up is because what happens more often than not is siblings will get equal shares in a company, but only one or two siblings will be placed in charge of the company, maybe the manager of the LLC, the CEO of the corporation. The other siblings may just merely be stockholders, stakeholders, where in some cases they may actually still be an employee. And the biggest issue comes when you're dealing with distributions. Normally what happens when a patriarch or a matriarch owns the business, they'll give distributions to the members of their family as they see fit upon request, maybe periodically if they've established a firm structure.

But nobody really questions the patriarch or the matriarch because that's the cash cow. That's where it comes from, period, end of story. You listen to your parents as Natalie stated before there's the parent and the child model. But that does tend to go away when you're looking at siblings, cousins, et cetera, because no one wants to recognize that their sibling or their cousin is the parent over them. So where as they no one raise questions before when distribution where either non-structured or upon request now, when one sibling is in charge of the purse strings, it becomes a lot more contentious. Why are they getting more distributions? Why are they doing more?

In some cases, the sibling can justify it. They can say well, I'm the CEO of the company, I'm showing up every single day. So what I'm getting is actually a salary. Under those circumstances, it becomes very difficult for the other sibling to challenge the salary especially when the sibling in charge is running the business. Under other circumstances, the sibling in charge may give willy nilly distributions that's not necessarily illegal term, but they maybe more free in giving distributions to one sibling over another. Those challenges are a lot, I'll just say easier to fight because fiduciary to the members of the LLC to treat them equally based upon their membership interest to not destruct someone's reasonable expectations in their membership of the business.

So the biggest problem, infighting. How can that be resolved? Exactly going back to before, set up a structure, establish under what circumstances or distributions provided. If it's not a distribution, is it a loan? Is the loan accounted for in the company's bylaws or offer agreement? What are the payback structures? Can you document this? Has everyone been placed on notice? So while infighting may incur, it's a lot easier to resolve that infighting when we've planned it. If there are distributions you made, every time a distribution's made make sure it's done equally to all of the equity holders in the company.

If there are loans being made, make sure everyone's placed on notice of the loans or the reasons for the loans, the terms of the repayment. If there is someone who's getting more money, particularly in the situation where one is actually working for the company providing sweat equity or putting some other form of capital into the company, make sure that everyone knows. And with respect to the last point, if someone is putting more capital into the company such that it will affect the equity stakes, make sure everyone knows because an ounce of prevention is worth a pound of pain.

Onofrio Cirianni:Thank you, well said. Natalie, I would suspect based on some of the examples that Jordan just shared with us, that you've seen where people were not on the same page or maybe the documentation wasn't there. Can you maybe weigh in and give us an example from your perspective?

Natalie McVeigh: Absolutely. The unpleasant part of my job although I do do it is I'm a mediator. One of the things I think that goes to both the question you asked Jordan and David is really shareholder education. I mentioned that that ownership circle is very confusing. Many smaller companies and all entrepreneurial companies, the owner, founder is the manager and the shareholder. And they do all of those jobs together, they're also the family member, usually your mother or father, right? But they're doing all of those jobs together and there's two circles that I showed as separate, had a slight overlap, actually sit on top of each other.

So many times when you educate shareholders and let the rights and responsibilities, everyone wants the rights. I want my dividend, but what's the responsibility? Which is putting the capital up in the company, making sure that we're letting the business have enough money for CapX growth, whatever it is that we're not reducing that tension. That's really useful and that shareholder education also helps when you're saying let's retain the best talent. How can we think of creative ways to bring them along with us? And we've seen some of these high net worth families when I said they have an investment on, they get on big investments that are really useful.

And you can allow that CEO or CFO to do a co-investment with you that they wouldn't normally have opportunity for. So that ownership education, there was a great article that just came out I think yesterday from HVR that talks about co-CEOs. Also in public companies, there's a way to do fair leadership and many of you in the audience who are next generation will be co-shareholders even if you're not co-managers. So really that problem solving, that way to conflict constructively, those are all the skills that'll help you get there.

Onofrio Cirianni:Great, thank you for weighing in on that. I appreciate that. David, what are some areas that you feel the next generation needs to know and learn based on your experience before they step into maybe their mom, dad, uncle's shoes? Give me some examples.

David Gottlieb:So I think the first part is going to harken back to my last point about key employees, but you need to understand the two major groups of people that are involved with your organization. The first would be the key people that are inside the organization the key employees, the fellow managers, it's very important to understand where they are in terms of phases of their lives as well as what their motivations are, et cetera. But also you need to understand the external people, those outside of the organization that can help you run the most efficient and most successful approach to your business possible.

And so that could be your CPAs, your attorneys, your financial planners, your banking relationships for lines of credit, insurance personnel, et cetera, et cetera. And having that external team really allows the professional in those areas to worry about the concerns that pertain to their areas of expertise. So that you can focus on running your business the most effective and efficient way possible. This is also an opportunity as the second generation or the next generation stepping into the leadership role to really build your own relationships. If you see any flaws or any inconsistencies or inefficiency within these groups, this is an opportunity for you to bring in new strengths to the company to help it reach new heights.

Onofrio Cirianni:Thank you. Well said and I know having been in the industry for as long as I have now working from one generation to the next, that transition is a process in itself in terms of how the professional advisors are working from one generation to the next. I know sometimes it is challenging, but at the same token, it's been great just seeing that next generation coming up with fresh new ideas. A lot of people, I'll speak for myself, I have three millennials out of my four children and it's a large group of people in the United States and statistics show it's a large group, most educated, highest income earners, think differently, and I think it's a matter of some of the things you've said embracing maybe new ideas and infusing that into the business as well as the family in terms of the mission that they're all trying to accomplish.

Anybody want to add anything to David's comments as well? Jordan or Natalie?

Jordan Kaplan:Yes, Onofrio. David hit it right on recognizing the important people in your business both internal and external makes a world of difference. Especially when you're dealing with the for lack of a better term, old school people. The people who have dealt with things in a certain way because that's how it's always been done. By way of an anecdote, I had dealt with a company that was run by a patriarch, wildly successful. The patriarch did everything in a specific way. He ruled with an iron fist. Everyone appreciated it because he was earning money hand over fist.

And the way he was able to do that was he worked with a specific CPA and a specific attorney to achieve his goals. Unfortunately, he died suddenly and the next generation wasn't necessarily prepared. So what happened was one of the siblings came in, took charge and tried to deal in the same way that his father dealt. He didn't necessarily know the accountant well, he wasn't introduced to the attorney and he floundered a bit. He wasn't able to jive with the accountant because he didn't know the procedures that the accountant used the way that his father ran the business.

And this was an error. Yes, the father died suddenly, but the son was grown. He was in his late 30s, he was already working in the business, but he was never introduced to the management of the business. And had that business been run correctly or the transition been prepared correctly rather, the son would have known this accountant specific way of working. He would've understood why the attorney was making specific decisions trading properties, leveraging one asset over another and making certain decisions so that the company could keep flourishing. Unfortunately, that company did wound up failing within about 10 years after the son took over mostly because he couldn't transition into the position that his father held and he made no effort whatsoever to either work with the accountant and the attorney or instead to obtain his own accountant and attorney who he had a different perspective who could help him understand the business in a way that would allow it to run in the future.

Onofrio Cirianni:Thank you, any other comments, Natalie?

Natalie McVeigh:I think these gentlemen covered it.

Onofrio Cirianni:Great. Thank you. Jordan, what are some of the issues that you feel from your perspective are most commonly overlooked when transitioning that control from one generation to the next?

Jordan Kaplan:Actually exactly what I was just talking about. The biggest issue that people have is not being prepared and not knowing who to work with. A common phrase that we come across all the time is the worst thing you can do in a business is say this is how it was always done. If you do that, you're never going to advance into a new generation, you're not going to have your business grow to the next level. Instead you're going to be stagnant. So one of the big issues that the parent generation needs to discuss with the next generation is who do I work with? Why do I work with them? What do they bring to the table?

And a common question that I ask often is who's the next person behind them? If you're dealing with a specific accountant, who at the accountant's firm is the next rising star? Who are they dealing with? And if that accountant is a sole practitioner, who do they trust to be the next rising star? Who's going to be there in 50, 60 years from now when the first generation is hopefully still alive, no longer practicing, but taking the business to the next level. This is something that's really not looked at by the next generation. Everyone just assumes that their father or their mother's attorney is the best attorney and no one will change that fact.

The next generation needs to find their people who they trust. They need to find their sphere of influence. They need to get their own connections because your parent's connections are not going to stay around forever. Your parent's connections are hopefully going to retire comfortably. They're going to, I don't know, move down to Boca, but the long story short is the next generation needs to find out how they're going to run the business. How do they take the framework that their parents’ generation created and move it to the next level. Applying it to well-known examples, look at what Tim Cook did with Apple. He's not Steve Jobs, he's not the same type of genius that Steve Jobs was in terms of artistic vision, he's a business man.

And Tim Cook, what he did so much better than anyone else was say, what are my strengths, what are my weaknesses and how can I surround myself with the right people to address my weaknesses? Because Tim Cook's weaknesses are much different than Steve Jobs' weaknesses. And just because Apple is, I think, a trillion dollar company at this point, doesn't mean that it doesn't apply in the same exact way as it does to a family business. What are the weaknesses the second generation and how can they surround themselves with the right people to address those weaknesses?

Onofrio Cirianni: Thank you. Natalie, David, anything else to add?

Natalie McVeigh:Yeah, one of the things we help clients do is really create a competency for the job. One of the things where you had saw the policy slide and we didn't get into, but we create policies so it doesn't feel personal. When something happens as a one off, it feels personal, so we'll help create a job role where we create competencies based on best match and often as Jordan pointed out, we're not looking for a hand print overlay of exact same skills. We're looking for complementary skills because entrepreneurs, as successful as they are, they're also some unattended consequences of that drive and of that risk taking that show up in which things get really hierarchal, it's lead.

Natalie McVeigh: So that next generation might be doing more maintaining rather than being an entrepreneur. So we want to see what those skill sets are and we can use psychometric assessments that can say what is the capacity this next generation has? Is this the skills they have, are they complementary? And or are they coachable? Or are they not there yet, but how do we reach them there? So the more data and the more process that you have, the less personal it will feel. So there been some examples of a young woman or a young man taking over a company and essentially they fail because they didn't have the right support system in place.

Many of these competencies can be created in the capacities just by learning. We know with neuroplasticity that everything is learning and we're changing every day. So the answer is maybe not now, but tomorrow. There's some great research called The CEO Next Door that kind of debunks a lot of myths about chief executive officers and one of them says that it takes no less than 24 years to really become a CEO. So when we're talking about young people thrust into leadership and they fail, the answer is no wonder. If they hadn't, they'd be super human and most of us just aren't.

Onofrio Cirianni: David, anything else you'd like to add?

David Gottlieb:Yeah, just some feedback on what both of them had just said. Natalie can probably speak to this a bit as well, but I find it to be far more common that the next generation does not match the previous generation in terms of skillsets as well as personality. That they tend to always be divergences from the previous generations to the next and it's up to that next generation to find where their skills truly do lie as there's actually more harm in trying to be something that you're not rather than focusing on what you can do best and just again finding the right people to surround yourself with to continue to help your family's organization grow.

Onofrio Cirianni:Well said. I think all three of you have just a common theme across all your comments without really having clarity in regards to the roles and responsibilities and the skillsets you're almost setting yourself up for failure, right? We've seen it where next generation, an individual comes in, a child and either A, he doesn't have the skillset or maybe he does, but he doesn't really like the role. And we have found over time without both, it's going to be a breakdown at some point in having that process as you described in terms of documenting that or going through exercise to better understand the alignment in regards to skillsets and in roles.

We're winding down towards the end here and I want to be mindful of everybody's time. We did get a few questions coming in from some of our listeners and I have a question for the three of you. Either any one of you can jump in. We have a business owner that's in a multigenerational business and she was asking what groups or places that you're aware of that someone in that next generation role can network with, learn from, learn more and some thought leadership around that? If you can share if you have anything you can recommend.

Natalie McVeigh:Go ahead Jordan.

Jordan Kaplan:Go ahead Natalie. I'll chime in, I'm current a member of a BNI networking group, it's a Business Networking International, it's a large organization. That's actually where David and I met. But it's not targeted towards the next generation, nor do I think that there are groups that would be targeted towards the next generation rather the next generation needs to find a group or find people who can help them with their skillsets. It's not necessarily about hey, everyone in this group is under the age of 40 and in an executive position for that, there's Chamber of Commerce, there's the Young Professionals Networks in the Chamber of Commerce, but that's not necessarily going to provide you with the resources that you need to make your turn at home the most successful.

What's important is filling in the gaps in your personal knowledge. In some circumstances, maybe it works best for you to have an attorney who's younger and an accountant who's older. In some circumstances maybe you want a financial advisor who's younger and a CFO who is older. It's not necessarily about age or years of experience, it's more about you as an individual and self-recognition, finding out what are your weaknesses and how you can surround yourself with the right people to put yourself in the right place. Generally, CEOs of companies are not necessarily the smartest people in the room, but a successful CEO is the most self-aware person in the room and that's the biggest difference.

Natalie McVeigh:There are some groups for the next generation, there's a group called Sons of Bosses, the acronym is SOB. It could also be interpreted a different way. That was kind of the pun when they created it. Many YPO groups are many of them are younger professionals who are the Young Presidents Organization who are in privately held companies. This is an in between, it's somewhat mature, but in some relative area many are also in privately held companies. Many family business centers at universities like Cornell, Kellogg Northeastern have some networking for young professionals. There is something to have to peer learning, there's actually a lot of studies that show that we learn better when we do it as a group. I agree with Jordan that you want to also find formal coaching whenever possible. Our team does executive coaching and leadership coaching.

One of the other things is mentorship. And many of those mentors are non-family mentors. There's a very famous research study that talked about non-family mentors unless it's the opposite gendered family member are much more successful. So sons annoy their fathers and daughters annoy their mothers, but fathers are really good mentors to their daughters and mothers are really good mentors to their son. And that is very useful. It's going to be a combination between coaching your own growth as well as mentors who are either non-family or family done very well, but these peer learning groups so that you can learn from others who are like you because some of the challenges you are going to have are very different than people who are in public companies in different ways.

So being very clear about those dynamics that are there and trying to grow are important. I know IMBD is another that has peer networking.

Onofrio Cirianni:Okay, thank you. So we have only a few minutes left. I would just ask the three of you just for any just closing comments. David, if you want to just kick it off.

David Gottlieb:Absolutely, I think that one of the prevailing themes from today's discussion is that communication is very, very important. And communication can be boiled down to what is most important to carry on from one generation to the next. What are the new leadership holders most passionate about? What are the priorities that people want to accomplish? And then how do we not just monetize, but how do we also set a course for accomplishing it. So I think it's very important to maintain strong leadership at the helm of an organization that is worth passing down from one generation to the next. That communication between the generations and then communication amongst the new leadership team and all the other stake holders involved is most important.

Onofrio Cirianni:Great, Jordan.

Jordan Kaplan: One of my favorite quotations of all time is from Thomas Jefferson and he stated that, "The strength of an organization is measured by the character of its leaders." And I think about that quotation very often. And what necessarily does it mean. My personal interpretation of it is that character is about being introspective, looking at yourself, understanding what you want and how you can achieve those goals. And especially when it comes to family businesses, it's so incredibly important because a family is often distracted by their personal relationships by not wanting to hurt someone else's feelings.

But if you can put that aside and look at your own personal goals, what you want to do, how you want to do it, it'll ensure that the generation that comes after you and after that is going to be successful in a business. So look at yourself, figure out what your weaknesses are, how can you plan around that and look at your children, your cousins, your siblings, see if they can do the same and identify it, plan around it and see how you can prepare for the future. I would be remiss if I didn't say consult an attorney, consult a tax advisor, consult an accountant. We do it professionally and we can see beyond your familiar relationships to help you achieve the goals that you really want to achieve.

Onofrio Cirianni: Thank you. Natalie, do you want to close it out?

Natalie McVeigh:Yeah, in organizations, family or not, it's been studied that 90% of our expectations aren't communicated. So one of the things I really challenge you to do is communicate those. And if it's hard for you to do and there are predictable reasons why it's hard, is to find some sort of third party that can be neutral to help start these conversations. It's very difficult to do, but it's going to be very useful. And I'll leave you with a quote because I love quotes too. There's a quote by John Wallen that says, "We judge ourselves by our intention. We judge others by their impact."

In my experiences, there's no parent or child in a family that does objectively want to hurt each other. It happens because you're in close proximity. That analogy I gave earlier like the solar system that asset is pulling you all together and sometimes you can't get space, but it's well intended behavior that unfortunately creates these unintended consequences. So giving some grace, some patience and there's no shame to ask for outside facilitation. In fact, it makes these things much more easy.

Onofrio Cirianni:Great, thank you. So certainly you can see by some of the areas that we highlighted today this is not just an event, it's a process. It takes time, it's been mentioned by all the sooner that you can embrace the transition, it helps all parties just learning. And what I'll add which might be obvious, but we don't see it that often is as we're going through these stages of transition, all generations is documenting everything. It's making sure that this is not just communicated verbally, but documented so that it essentially becomes your playbook for your family and for the business that you can continue to build on.

And it's going to take time, time commitment, energy, an investment, it's going to take some money invested, hiring the right professionals to maybe not totally avoid, but maybe minimize some of these challenges. So we hope we've given some things to think about. We're available, all here to help you. Our contact information is on the screen and it will be provided to you. We thank you again for your time and participation. And we hope everyone remains safe and healthy. Thank you.

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Natalie M. McVeigh

Natalie McVeigh is a Managing Director in the Center for Individual and Organizational Performance and the Center for Family Business Excellence Group within the Private Client Services Group and has more than 10 years of experience as a consultant and coach.

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