Move to core values and communication

From shirt sleeves to shirt sleeves in three generations. That’s the way many family businesses go where there is inadequate attention given to transition planning and a failure to involve the receiving generations in business decisions. With family dynamics playing such a vital part in each individual business, lawyers and consultants are finding that they have to move their practices away from hard, technical law to soft issues like core values and communication.

Terri Heggum-Allen, of Loftus Allen and Co., has a particular interest in this problem because of the transition problems her third-generation public accountant and consultancy firm has gone through. Her research into how other families deal with the problem led her down the path of teaching families how to have meetings about wealth.

“The first generation makes the money, the second generation manages the money, and the third generation spends the money,” she says, noting that this occurs when there is inadequate transitional planning.

“Traditionally the business owner would sit with an accountant and lawyer in a closed room and decide who he was leaving the business to. The kids know nothing about it and don’t get what they wanted, so then go to war against each other. No parent wants to leave that legacy.”

Instead, Heggum-Allen proposes a family circle. She finds that it moves the focus from the assets of the business and the assumptions of the asset owner to a focus on the relationship between the parties. “Parents need to address the question of what legacy they want to leave, apart from money. People are afraid to talk about money, especially if they have a lot.

They’ll talk about sex but not about money,” she laughs. “Often one family member is shouldering all the responsibility. They think they are doing a good thing and if they don’t die first, that might be okay. But what will happen if they do? Do they want to leave a family that’s very capable of carrying on?”

Often the question that brings family tensions to the surface is how to divide up the wealth when the current generation moves on. “If it’s cash, it’s not too hard, but business assets are difficult to divide,” says Heggum-Allen.

She recently saw this problem in a farming scenario. “Traditionally the farm goes to the eldest son or the son who farms, but that means he gets much more wealth than the other children. In an open forum with all the stakeholders you can explain that it is not a choice between the children.

You explain to the non-farmers that four little farms are not economic and what would happen in other scenarios. You see if they can accept being shareholders in the company, perhaps. In that way you teach them to be stewards and pass the asset on to the next generation.”

“In a business scenario you need to ask the family, ‘What do you want to do with the business? What is your vision, what is your goal?’ There are different values between different generations, but there are often a lot of common values. Sometimes the children come up with amazing plans that the parents never thought of. Then they leave the legacy that the children can work together.

You could call it Parenting 202. Sometimes the business owner still has a difficult choice to make, but he can say that he’s got their input and weighed the pros and cons. They may not necessarily like the decision, but they’ve been part of the process.”

Paul Milne, a family business consultant and a partner of Simpson Wigle LLP of Hamilton, has also found that, where family businesses are involved, you can’t just stick to the technical side of the law. “What we realized some time ago was that applying a tax-driven plan wasn’t reflecting the best solution for a business family.

We needed to find methods to get a better understanding of the family dynamics in each unique situation. Through the consulting process we do the transition planning. The true legal work is implementation of the transition plan, whether it be the next generation taking over, a management buy out, or a sale to a third party.”

Milne uses a process that involves initial meetings with the family where they address issues of value clarification, family business history, and genogram work. “There are three value clarification processes. We work individually with each family member, then with the family as a whole and then with the business management, establishing, defining and interpreting values.

It gives everyone a common vocabulary for decision making, resulting in clarity of thinking and more understandable decisions.” Milne sees a divergence of values as fertile ground to begin a conversation.

“We also spend a lot of time on the family business history. We need to understand the past to determine the future. A genogram is a way of looking at that family history. We identify triangles of relationships between family members and find where there are fixed modes of behaviour, then make interventions to detriangulate them.”

Milne conducts personal, confidential individual interviews and an extensive review of family and company documents. This results in a depth of understanding that paves the way for a full discussion on transition options. Then there is usually a family retreat of two or three days where different consultants make presentations and the family delves into issues in depth.

“We look a lot at governance, from the traditional matriarch or patriarch through to the directors, boards of advisers, and prospectors,” says Milne. “If the father is the founder, then his wife and children probably have shares, and their own particular needs and wants, and he has a relationship with them. He also has a relationship with the senior executives on the management side. There is a balance point resting in the founder as he tries to find a balance between the family and the business.”

This intensive process leads to what Milne calls a respectful collaborative working relationship in which families can even tackle difficult issues like addiction and emotional problems. “Sometimes a family therapist or psychologist is involved. The family trusts us to know the good, the bad, and the ugly about the family, which means the lawyers must be very respectful and accommodating and take the trust placed in them seriously.”

This whole transition planning process can take a year or more to complete. Afterwards, Milne also endorses ongoing family meetings, whether quarterly, half-yearly, or yearly. “It is very important to have a family council, where people can impart their views about the business so there is clarity with management. Often there is a disconnect between the values of the family and the long-term goals of management.”

The family council is where Heggum-Allen’s particular version of the circle process comes into play. She first came across circle processes in parenting courses, where families were trying to divide the chores. “This is more professional.

We teach family business governance, where they set up a family circle and a business circle. The power of circles is to get people to connect, then they love to agree. But before the dialogue, you must teach them how to listen. People in families are good at finishing each other’s sentences because they think they know what everyone else is thinking.”

She stresses that the parents can make the children far more civil when they are alive. “If there is no connection between the family members other than the parents, they have nothing to lose when they go to war. Teach them a process to meet quarterly as a family. Some talk about philanthropy, what education they will pay for future generations, what they want to do together as a family. They start teaching the kids to read financial statements, how to invest and do budgets.”

Heggum-Allen stresses that the family council should include all family members who are 18 or over, who understand what confidentiality means. “Even if they don’t work in the business they have the right to understand how the business is going to impact on their standard of living.” She finds that it can be incredibly enriching for families. “It can actually make the children better friends. It develops family relationships and makes the transitions smoother.”

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