When the 'hard side' meets the 'soft side'
In the family business world, issues tend to be divided into those requiring “hard side” expertise (such as investing, tax planning and legal compliance) and those necessitating “soft side” competencies (like family meeting facilitation, leadership coaching and conflict resolution).
In an environment where love and money intersect on a daily basis, this dichotomy is unhelpful. For example, financial issues must be explained in a way that family members will understand, and family values around inclusiveness determine who may own shares in the business.
In this edition, we address two “hard side” areas that require “soft side” sensitivities: debt and valuation. If you don’t look up from your spreadsheet and note the expressions on your family members’ faces, you’re setting yourself up for an argument, or maybe worse.
Here are some questions that straddle the lines between “hard side” and “soft side”:
• Does your family reject debt out of hand because the business founder never borrowed (or because a previous generation borrowed too much)? Is an inherited fear of debt holding you back from an expansion that could boost profitability?
• Has your ownership group developed a policy on how much debt the family is comfortable with?
• Has your ownership group reached consensus on the option of taking on a private equity investor or other partner in lieu of borrowing?
• Are your family members taking too much cash from the business for perks like cars, fancy meals or short business trips that turn into long vacations?
• Does your business have an independent board that can help you sort out questions related to debt, risk and cash management?
• Are dividends or other liquidity options available to family members so they have a means to obtain cash and realize a return on their investment in the family business?
• If a family shareholder wanted to cash out, would the business leaders view this as a slap in the face or an individual making a financial decision in their best interest?
• Does your shareholder agreement spell out how the value of an owner’s shares would be calculated upon exit?
• If there are wealth discrepancies among households, has your family come to terms with the difference between what is “fair” and what is “equal”?
• Have you developed a mission statement for the family’s collective wealth, based on your shared family values?
• How are you teaching your NextGens about ownership, management and stewardship?
Wealth and assets are emotionally charged issues. Having clear policies created through a consensus-driven process — before they are needed — will help your family prevent or manage conflict when money questions are raised. You may need the help of both “hard side” and “soft side” consultants to help you navigate around minefields.
The questions raised here are challenging ones, with implications for the future of the business and the family (individually and collectively). They will take time to sort out. But if family members believe the process of addressing them was fair, they will likely be comfortable with the result.
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