Transcript
Speaker: What's it take to found, run, and pass on a successful family business? We'll find out on the next episode of The Market That Moves America. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: Today's podcast is going to focus on the dynamics of family business and how what goes on in a family can make a business soar or sink, and vice versa, how business success can affect how successful a family is.
Speaker: I'm Tom Stewart. I'm the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research outfit studying mid -sized companies, which account for a third of private sector employment and GDP, and the lion's share of economic growth. It is the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and Grant Thornton LLP, Cisco Systems, and Chubb.
Speaker: I'm joined today by John Messervy. John is one of the founders in the family business and family wealth field. He has advised more than 400 high net worth families worldwide on strategy, leadership, succession, next generation development, and conflict resolution.
Speaker: He's interviewed more than 10 ,000 family members, and he's known as the private advisor to America's leading families. His work is at the intersection of family, business, and wealth. And since family businesses account for about 28, 30 % of the middle market, he's at the intersection of an important part of the middle market economy. John, welcome to the Market That Moves America. Thanks, Tom. Good to be with you.
Speaker: John, I gave a nutshell summary of what you do, but open it up a little bit. I mean, there's a wide range of challenge to family businesses. And what are the kinds of issues that you find yourself dealing with? Well, there's a myriad number of issues. And although I expect that no two families are alike or no two businesses are identical, the trends or the themes, let's call it,
Speaker: are similar and those are themes of transparency, getting beyond stuck, themes of capability of the next generation, taking business for granted and really not having a long -term strategy. All of those come into play in our work. When you say getting beyond stuck, what do you mean?
Speaker: Well, all families get stuck at some point, and this is particularly true with families of wealth or high -performing families where money becomes an exponent on almost anything, exaggeration, if you will. And my job, if you would ask me in an elevator, is to get families in business, families of wealth, unstuck.
Speaker: We can get stuck on a myriad number of things, but basically it's when families stop talking about what really matters. That can range from just being nice, and so we can't talk about that, or conflict that is submerged and about to bubble over, that prevents the business from really moving forward.
Speaker: It's a cliche, except that Leo Tolstoy wrote it, that all happy families resemble one another, and each unhappy family is unhappy in its own way. Insofar as that's true of families, is it true of family businesses, too? I mean, if you look at successful family businesses,
Speaker: People focus on the dysfunctional lot, but let's look at the high functioning ones. What do they have in common? Well, the high functioning ones are very good at their ability to tolerate differences, their ability to adapt to changing conditions. The highest performing family businesses take a long term view.
Speaker: And the everyday drama that is incurred by all family members working together really doesn't stick. They can move past that. If they had a motto, it would be, no matter what, we can work it out.
Speaker: And it's interesting when you think about that. I think about families and we all have our experiences of families. And if you think about, we still have family, we'll always be together. We will work it out. We can work that out among ourselves and go on. We'll get through this, I guess. When you add the day -to -day or weekly or quarterly pressures of business,
Speaker: Does that sort of turbocharge the opportunities for the family dynamic to get overwrought, to sort of go wrong, go off the rails? Yes. Well, let's just start with this. Not every family is meant to be in business together. And it's difficult. I mean, just imagine, I would ask your listeners,
Speaker: to think about being in business, if they're not already, with their family, with their mother, with their father and sibling group and their children and who decides the talent base and the career path and the salaries.
Speaker: and the strategies and the risk while families have different tolerances for risk and the rights of ownership and who wants to be liquefied and who wants to leave the family business with stock ownership options and what are the tax considerations. I mean it's an overwhelming set of issues that you really need great advisors to weave through because it's a complex matter.
Speaker: I'm gonna guess from that, obviously you're one of those great advisors, but I'm gonna guess from that that one of the things that can go wrong is that a family patriarch or matriarch or whatever it is the steering committee doesn't recognize that need for advisors and thinks we can do it all ourselves. Well, that takes many forms. One is stereotypically the, you know, the strong willed entrepreneur, male or female, generally male in my experience.
Speaker: who, you know, is basically started out the business and I don't need any help. I can figure it out. And that's pretty much how they've run their whole life. Children acquiesce to that and then get in the driver's seat and find out a whole new set of challenges that never were addressed. All the way over to the other side where families, let me say they, um,
Speaker: There are things they cannot talk about. One of the first things I do when I meet with a family is I interview everyone for a couple hours, each person, and I just hear the straight story. I start with a blank canvas and fill in the story because in every family there's a deal and you have to figure out what the deal is. Give me an example. What are the kinds of deals that you find?
Speaker: Well, two brothers work together and one is checking out of the business but has all the competent offspring or many of the competent offspring and the other has less competent offspring that really have no chance of being in the business from a growth point of view or shouldn't be in there. I call it the litmus test. If their last name wasn't Smith or Jones or whatever, would they have a job here? That's basically when families artificially employ each other.
Speaker: No need for that, that almost always ends up in a car crash badly. But no, there are lots of places where you see the deal. The deal might be, we allow certain types of behavior to occur, even though we know it's not good business practice, that's just the way he or she is. Or people that the company outgrows them. I'll call them baseball. I love baseball. They can't hit the pitching.
Speaker: They might be able to hit a 70, 75 mile an hour fastball, but up in the 80s and 90s, they can't see it. And some people, some businesses are set to be good, solid, 30, 40, $50 million revenue businesses and others move much further up the chain and they can do it. And they do that. They do that when they adapt and when they broaden their talent base. They do that when they add, say,
Speaker: a very competent board of advisors, not necessarily a board of directors, but a board of advisors, people that have been where they're going. That's the governance side, which when you go from an entrepreneurial driven stage one business to adding additional management and growth, which takes a whole other set of talents,
Speaker: to the third stage, I call it with professional management, where you diversify. Most of my clients are in real estate. They're in sophisticated investments. We buy and sell family businesses, et cetera.
Speaker: So one of the things that I think is interesting, if you think about that deal, part of the deal is what dad, if we take that stereotype, what dad expects from the kids, and another is what the kids expect from the business.
Speaker: And I guess in many cases, people don't really talk about it. They just, you know, dad makes some assumptions or the kids make some assumptions and they don't, they need to, they ought to be able to find a way to get more explicit and maybe surface some of those things, even if they're going to be disappointing to one side or the other. Well, exactly. And, you know, most of my work is facilitated communication. As some have said, John, if you weren't in the room, this would have lasted eight minutes.
Speaker: because there are triggers, communication triggers of hot topics in family businesses that really do need to be explored. But setting that aside, you know, you're really, I guess a succession would be a great place to start that discussion. Where when you think about the idea of a father letting go of a business of, we used to call it the mother that nurtures him and the mistress that so excites him. When you think about a father letting go of a business,
Speaker: That's a huge amount of loss. I've seen men and women get checks in nine figures and feel very conflicted about those results. At the other side, the up and coming next generation, the rising generation they call it, some are qualified, some are not ready, so you can't make that judgment yet. But in many families, they're supposed to follow the script.
Speaker: and figuring out what the script is as part of figuring out what the deal is. And that can intersect with some human development issues and family wellness issues of separation, of individuation, of creating your own identity and being more ready at 35 than you were at 25 to take on a business like that. You know, I remember talking to a woman who was working for a family business
Speaker: high -tech industry, where there were three generations of the same family working in the business. Let's call them the grandparents, the parents, and the kids. And the grandparents, who I think still controlled the business, maybe had the biggest voting power at that point, wanted to run the business to maximize profits. And their children, the middle generation, wanted to run the business to maximize the growth of enterprise value.
Speaker: and the youngest generation wanted to try new things. And it took them a long time to figure out that they were actually speaking from their generational. They didn't have a strategic conflict. They had a sort of a generational conflict. It took them a while to understand that each person was actually expressing what you'd naturally expect to hear at their stage of life. And once they understood that, they could actually go and make decisions better.
Speaker: Absolutely. It's actually a great catch. I've not heard that, but it's families have different levels of needs and different levels of risks. And they also offer the family business different levels of talent.
Speaker: And I always like to say, look, let's get the square pegs in the square holes and the round pegs in the round holes. And if they don't fit, it doesn't mean it's a permanent condition. But maybe right now it will be helpful if Jim or Susie or Sally or Bob worked elsewhere outside of the family business and came back. I can't imagine that it's exactly optimal.
Speaker: for someone to only work in their entire working life at one company. I know it's done all the time, but to me personally, I would find that less stimulating than going out in my 20s and working at a number of other firms and bringing that experience and talent back to the family business.
Speaker: You mentioned earlier family businesses that can be pretty happy sort of going along and doing well. Sometimes we call them lifestyle businesses. If you think about the internal and external stressors that can take a company that's going along pretty well, what are the ones that are most pointed in your experience?
Speaker: internal or external. We're going to start with one, start with the other. We've got, we've got a minute. It's a long list. Let me just say, let me just say this. It's critically important for families to trust each other. If you had asked me about one feature, I would say, uh, trust and transparency and transparency builds trust. Um, you know, there's an old line, uh,
Speaker: openness is self -insurance in a due diligence process. You know, let it out. So don't hide it. And the flip side of that is Groucho Marx, right? Are you going to believe me or are you lying in eyes? Well, you know, the stresses are multiple, you know, competition. Right now, I'm seeing a number of families. I don't know quite why this is at this moment, but I have the highest number of families
Speaker: seeking to sell their family business right now. And it's an unusual step. I don't know if it's the adversarial curve going on right now or the world economy or the political drama or whatever, but families are starting to take some chips off the table. The questions they're asking are, how long am I going to live and what's healthcare going to cost? So financial security is always one of those stressors. And I think that there's a more
Speaker: more focused approach on preparing the next generation, getting them a great well -rounded education. Liquidity events, I call them SLE, sudden liquidity events are always fraught with, do we want to demotivate or motivate our next generation? How much does, you know, can dad or mom survive retirement, if you can call it that? I like to use the word transition rather than retirement. All of those are factors that I see. And they're all laid around.
Speaker: This whole idea of communicating well, choosing your words carefully, and some days let it go. Just don't even say it. You don't have to say everything every day. Just some things you just need to just put away. You know, the classic family business succession problem is, I guess, the King Lear problem of waiting until too late.
Speaker: Imagine a sort of a mid -career, mid -life, you know, 45, 55, root good health family executive with a couple of, maybe he or she is, let's give him grown kids, so maybe 50 or 55. What are the,
Speaker: two or three things they ought to be doing right then when transition is the farthest thing from their mind. What are the, you know, what are two bricks or two or three bricks that foundation blocks that they should lay in right in the prime of life to make sure they have a better chance at that transition moment? Well, one is to negotiate the right amount of separateness and the right amount of togetherness. Something that's going on right now in my work is who you marry
Speaker: In that second generation is a major determinant of financial Success down down the line of parenting financial stressors Real or imagined etc. So that's a part of the kind of a far field part of my work But it's very it's very much a part of the active discussions that we have another another issue for the for the 50 late 50s parents, I would say
Speaker: know when to back off and know when to get involved and probably backing off is more commonly the issue than getting too overly involved in your children's life, directing this or that. Over controlling parents are a real problem when it comes time to
Speaker: to move the business along. Next, I would finally just say, take off your family hat and put on a business strategy hat and say, where are you going to be in 20 or 30 years? I had a client come in and they are one of the largest donut producers. And I looked at them, the young 34 -year -old son wanted to be the heir and
Speaker: I said, you know, in 20 years, you're going to be producing two things that very few people are going to want, sugar and gluten. And I don't think they ever thought about it that way. Yeah, that's true. So but I think it's an interesting question when you think about when you when you talk about the difference between being a parent and being a boss. And I guess, to some extent, at least in our heads, as parents, we think
Speaker: The kids are going to have to go and make their own mistakes. They're going to leave the nest. They're going to set up on their own. And so there's a certain handing off of adulthood to them. But the boss may have a harder time, in a sense, handing off to a child than that same person might wearing his or her parent hat.
Speaker: Oh, exactly, Tom. That's a great point. And perennial, perennial issue. You know, remember that a parent from their perspective has seen diapers, has seen grade school photos, has seen, you know, ridiculous. You shouldn't bring them out in the boardroom, right? In high school. Well, well, you know, it's a little bit like Tommy Boy, the movie. You don't come out of school after five years and become the assistant to the president and have an office next to dad. I mean, that's,
Speaker: That's the heart of that movie and almost all of my clients bring up Tommy Boy at one point or another as an example of what they're trying to avoid or what they have to face. I think that the important skill that needs to be added here is that you can't just look at this as a business issue. That having background in family systems in the key phrases of separation, individuation, identity formation,
Speaker: triangulation, understanding how those work, both in generational rivalries, sibling rivalries, which can be managed, but not always eliminated, having a background in communication and conflict resolution. If they were looking for someone to help them, those are the skills that I would look for. They're going to make a lot of money. My clients are the alpha wolves of capitalism. They know how to make money. They're very good at it.
Speaker: It's the family issues that more often than not perplex them. Interesting. And so what I think we're seeing, and I wish we didn't have to wrap this up because I think we could go on and on and on, is that there are really interesting ways in which the ways in which family and business intersect
Speaker: can be both constructive and destructive, and you can get into virtuous and vicious circles on there. And it seems to me that one could do almost a checklist of 10 things public companies can learn from family businesses, and 10 things family businesses can learn from public companies, and come up with some very interesting mirror images, and maybe, John, we ought to come back and have one or both of those conversations.
Speaker: I like that idea and I would be delighted to return. Tom, this has been a great exchange and a very wide ranging and very unique aspect of families and businesses.
Speaker: Well, John, thank you very much. And for more, John Masservi, as he said, is a counselor to more than 400 clients and has interviewed thousands of family business executives and heirs and science and so on and so forth. You can learn more about him.
Speaker: and his work on his website, privatefamilyadvisor .com. And I urge you to check it out. And John, thank you very much for joining us today. And thank you all for listening to The Market That Moves America. Never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts are found. Or you can subscribe and learn more about the National Center for the Middle Market.
Speaker: at our website, which is middlemarketcenter .org. Thanks very much.
