Brendan Freeman:
Welcome to the First Business Bank podcast. I'm Brandon Freeman, President of Private Wealth for First Business Bank and I'll be your host for today's episode on keeping peace in the family business. With me today are two talented wealth advisors from First Business Bank, Jessica Colby and Ryan Witt. For the benefit of our audience. Jessica, would you mind introducing yourself?
Jessica Colby:
Absolutely. Thanks Brendan, for having me today. My name's Jessica Colby and I am a vice president and wealth advisor for First Business Bank, with over 20 years experience in the financial industry.
Brendan Freeman:
Wonderful. We're glad you're here, Ryan. How about you?
Ryan Witt:
Sure, Brendan, thanks for the invite. I've been in banking for just under 20 years. My first 10 years being in commercial lending, my most recent 10 years being in private wealth. And I've worked with small and large businesses, anywhere from a negative balance sheet up to 50 billion or so.
Brendan Freeman:
Great, great. Well, you're both very capable and we're glad you're here to talk a little bit about keeping peace in the family business. Why don't we just jump right in. Research shows that 30% of family businesses make it to the second generation within families and only 13% actually make it to the third generation. Well I'm sure that's not the primary reason for being the disruption in families, but it does play a part. And so from each of your experiences, can you help our audience to understand what's going on there? And Ryan, maybe let's start with you on this one.
Ryan Witt:
Yeah, sure. I think there's a lot of reasons why the family businesses tend not to make it past a second or third generation. I think a lot of it has to do with a combination of things, but mostly due to the owner's maybe decision making, not realizing all the dynamics at play. Maybe the expectations are too high or too low. Maybe just not realistic. I think there should just be a discussion more often, more frequently, maybe more in depth around management relationships, leadership succession, things like that.
Brendan Freeman:
Right. Great. Jessica, anything that you would add?
Jessica Colby:
Sure. I mean, I echo Ryan's comments, but I'd also say in my experience, it's really two key factors. One is typically lack of interest and the other is lack of abilities. And regarding lack of abilities, there's a movie that comes to mind. I don't know if y'all remember the movie, Tommy Boy?
Brendan Freeman:
Oh sure.
Jessica Colby:
But Tommy Boy barely graduates from Marquette university and he does it in seven years. And so his father Big Tom is ready to promote his son and he's going to be the next executive. Well, as you can imagine, the culture of the senior leadership and decision makers in the company are not that excited. And there's one particular scene where Tommy Boy is trying to display his confidence to Richard saying, "Well, I graduated in seven years," and Richard said, "Yeah, they're called doctors." And so instantly when owners are thinking about bringing in the next generation, as Ryan just alluded to earlier, is you've definitely got to be thinking about what that transition looks like. Because in Tommy Boy's case, he has a very uphill battle to earn his respect and demonstrate if any abilities he might have to be the next in line to run the company.
Brendan Freeman:
I love it. Great, great visual. I'm sure our audience, our listeners are appreciating the Tommy Boy reference and you can just picture that they weren't really ready for that next generation. And ultimately failure was a big time potential for them. So great reference. Thanks, Jessica. That kind of gives us a great picture.
Brendan Freeman:
Okay. We'll move on to the next question. And a recent issue of First Business's Bank's Private Wealth Enlightened Magazine, we actually had a article with the same topic and we talked about and outlined ways to keep the piece. And there's some distinct strategies that are outlined there, the first one being creating a family strategic plan. Jessica, from your perspective, can you tell us about that and maybe why that might be helpful or insightful for our listeners or owners of family businesses?
Jessica Colby:
I definitely think it's critical, especially if the intent is to have of your family members involved. And I think the only way to help family members create buy-in on the company's vision and mission, is for them to have their own family vision and mission. To really understand what is the objective over time that these family members have relative to being involved in the company and/or managing expectations as time goes on, with role clarity, having an honest discussion about actual family member abilities, kind of what I mentioned earlier, and really, like I said, talking through what that role clarity looks like as time goes on.
Brendan Freeman:
Yeah. Ryan, anything you would add?
Ryan Witt:
Yeah. I think I would, again, reiterate how important honest communication is and how important of a role that takes when talking to family members. Even if the next generation may not take over the business, it's so important to let them know why. And even if it just keeps that family dynamic stronger, even if someone's not going to take it over, but, and of course, if they're going to be taking it over and stepping into the new role, they need to know early on too, why? When? And just being personally and professionally ready for that.
Brendan Freeman:
It seems like that the transparency, that communication's really, really critical for all parties involved. Ryan, we talk about keeping family matters separate from the business. From your experience in working with families, working with businesses, can you share any tips or insights that might be worthwhile for our listeners today?
Ryan Witt:
Yeah, I think, and I keep going back to this, it seems about communication, but once again, I think what I've seen that works the best is being able to draw that line in the sand, keeping family where family is, business where business is. And if a family matter does come over to the business side, the family, I hope, is able to talk about that and even create some consequences, some hard rules before that happens, so everyone's on the same page.
Brendan Freeman:
Wonderful Jessica, from your perspective, would you agree any, anything that you'd add?
Jessica Colby:
Oh, I definitely think that there needs to be an understanding of family is family and business is business. I think we're all human and I think that can be difficult. So thinking about what interventions you can put in place should family issues tend to bleed into business and also thinking about you might have some children or family that work in the business and some do not. And so making sure, again, going back to role clarity and making sure that there's not this sense of entitlement, that there's not this level of, like I said, jealousy or entitlement within the family, that can cause business disruption.
Brendan Freeman:
Sure, sure. It's important to try to keep that family intact, even if you have some members that are not a part of the business and really having that separation, communicating about it, being transparent, all really important. Jessica, sticking with you and getting into a topic that really lends itself to private wealth management and a lot of the work that we do every day around business succession planning, where does that fit in here? And how important is that process of discussing the plans for the future of the business and what benefits can that provide to the business and to the members of the family? From your perspective, can you shed some light on how that might work and help us understand that a little bit more?
Jessica Colby:
Sure. I would say business succession planning is probably, and estate planning then, is probably near and dear to my heart. I think that when you work with business owners and families and you see over time how hard they have worked to build something and grow their wealth over time, having a succession plan is so important and sooner the better. I think discussions need to happen early on and the way to go about it is with the end in mind. So once you figure out what that end or transition idea looks like, we'll then allow you to bring that future to the present and begin thinking about how do we work towards that? I would also say that I love to tell my clients, "Succession planning is not for you. It's for the living." People need to know, whether it's future decision makers or family members, what to do when something happens, not whether. And it's not just about death, it's about incapacity as well.
Brendan Freeman:
So it's really a plan that draws in that next generation. And oftentimes in these types of scenarios, if there is going to be a transition from one generation to another, having clarity, having conversations, trying to do it in a tax effective way, trying to do it in a way that doesn't hurt the business, all really critical right?
Jessica Colby:
Right. And I also think about the legacy that they want to leave behind. I've seen as we all like to say, the good, the bad, the ugly. When it's identified early that, Hey, my son or daughter has zero interest in working in the business, that can then be potentially an easier task to think about what that future looks like in transition, whether it's retirement or in the event of something unfortunate. You know, at the same time I've seen deathbed planning because the owner gets aggressive cancer and then the line of credit that the operating line for the company has, is closed by the bank because the owner is the guarantor and people forgot to fund the trust with the company stock. And so that can hold up business, delay who is the intended beneficial owner and decision maker, and can really put a dent and/or destroy such a well oiled machine, they call their company. So ...
Brendan Freeman:
Really have to be thoughtful in that planning. Really have to pay attention to those details and communicate those plans. Ryan, did we cover it or anything that you would add?
Ryan Witt:
Yeah. I like how excited Jessica gets about this part, because it's what we do. This is a really emotional time for them, if not even more emotional than creating a trust in a will, because it's something they have worked so hard to create and they're looking at either handing it down or selling it or potentially dying. And, and those are just really hard discussions we have with clients. And we have to do it though. And I know Jessica and Brendan, you both will talk to clients for a year or two years before they actually agree with having this discussion, because it's so emotional. But it has to be done. So ...
Jessica Colby:
I would also add that no different than a business owner and their team thinking about the growth strategy for the year, what those projections might look like, business succession planning needs to be on that agenda. Because again, it's just thinking about the what if scenarios. No different than they're talking about other business strategies and just keeping that top of mind oftentimes too, because business owners and families don't want to talk about this. It's not a pleasant conversation. And oftentimes we'll have analysis paralysis, because they don't know what to do next or how to solve for what they think could be a hurdle down the road. And so I think the other thing that they worry about is how expensive it is. I think business owners try to manage expenses the best they can and the thought of forking out dollars to put some of these things in place, don't realize that it's so much more costly on the other side, not just costly regarding dollars, but could detriment family unity.
Brendan Freeman:
Yeah. Really well said. Avoiding it doesn't make it go away and so I really like how you frame that up and almost making that a part of your strategic plan, your growth plan. It just makes you a healthy business if you have a strong succession plan and you have clear communication with all parties involved and you've brought in professionals to help you in that process, whether it's a private wealth team at First Business Bank or others. And kind of to that point Ryan, I guess my next question is for you with any situation where a family member or a business might not have specific expertise, business transition planning, business succession planning, is not necessarily what a majority of our business owners that we work with, focus on. They manufacture, they're in the services business, they do something else other than that. And so in those situations where you're not an expert, it might be really beneficial to seek professional guidance from other sources. And so from your perspective, what resources are out there for our listeners, for our business owners and where should they start?
Ryan Witt:
Yeah, I think business owners, I tell all business owners this, they need four advisors: a corporate attorney, a trust attorney, an accountant, and a wealth advisor. And out of those four they're usually well connected. They have experience working with other strong advisors that they can refer to them. But I think every business owner should have these and take advantage of them. And even if they don't think that they can benefit from talking to one, at least give it a shot. And I think out of every conversation that they have, something good will come out of it.
Brendan Freeman:
I like that. I like how you outlined exactly who they need to work with and at a minimum. Jessica, anything you'd add from a resource perspective?
Jessica Colby:
Sure. I think depending on the business you have and where you're at in your business cycle, some other advisors that I think about would be business valuation companies, oftentimes you're thinking about again, what that future looks like and how to transition this and so it's good to know where you stand with evaluating. Oftentimes business owners think their company's worth a certain amount and they've either undervalued it being humble or they are overvaluing it because they're so proud of what they've built. Business evaluators can offer SWOT analysis which is Strengths, Weaknesses, Opportunities, and Threats. And so when you think about selling a business or transitioning a business down the road, you kind of want to make it move-in ready, just like when you're selling a house. What things need to be addressed and how do you make your business appealing whichever direction you choose in the future?
Jessica Colby:
I'd also add a broker. Again, if you're thinking about a third party type of transition, then again, they know the market out there, they know who's buying and they can also assist in that valuation.
Jessica Colby:
And lastly, I'd say an ESOP attorney, which stands for Employee Stock Ownership Program. So again, if this is a potential thought for your business succession plan, checking in with an ESOP attorney is important because they can talk to you about what all is involved in the structure of something like that.
Brendan Freeman:
Wonderful. Well as you said earlier, starting with the end in mind is really critical and what you just outlined were several different ways that you could transition a business. Of course, as we're talking about families and keeping it in the family, valuation's really important. So you want to understand that, but there are other options including selling to a third party through an investment banker, through a broker, and the ESOP option as you outlined. And there's a variety of other options. And so being aware of those options, getting insight from professional advisors who do this all day, every day, it's critical. And so wonderful insights. As we wrap up here, any final thoughts, Jessica? Anything else that you'd want to share with our listeners?
Jessica Colby:
I mean, I would just say wrapping up the way that we've mentioned already, is think about the legacy that you want to leave behind. I think the last thing that business owners want is to have people or family resent them once they're gone. And so you owe it to your family who is then left to run the business perhaps, or figure out how to sell the business, to make this as smooth of a transition as possible. It's already not ... it's a very emotional situation, whether it is incapacity or death. It's a very stressful situation. And so I would just say making sure that you are motivated to leave a great legacy for your family.
Brendan Freeman:
Wonderful. Ryan, what would you add?
Ryan Witt:
Yeah, there's a statistic I mentioned in the article that 42% of family owned businesses don't have a succession plan. And I think the reason why this is a hot topic, why we're talking about it, is to shed some light on that statistic and get some business owners to talk about it and have those conversations, whether it's with their spouse, a business partner, family members who they're selling it to, just have that conversation. It doesn't hurt. And I think good will come out of it.
Brendan Freeman:
Well, well said. There are so many statistics that drive you to think about this more and to communicate about it more and to research it more. There's great individuals that you can go to, whether they're attorneys that we mentioned, CPAs, valuation experts, ESOP attorneys. There's also a wealth of information that's out there, available online. One place I might point our listeners to would be firstbusiness.bank and our resource center where you find podcasts like this, and many other articles, our Enlightened Magazine or Quarterly Market Review, et cetera, that provide great insight as you're struggling with, thinking about, contemplating and communicating with your family about transition and all these issues. So well, I want to thank our guests, Jessica Colby, Ryan Witt, for participating in today's discussion. It's been very insightful. I also want to thank our audience members for listening in.
Brendan Freeman:
For more information just like this, we invite you to visit firstbusiness.bank. This is information that's great for business owners and for investors. We invite you to experience the advantage with first business bank. If there's a way that we can help you, please reach out to us. Thank you.