“Professionalizing” the Family Business

With a pragmatic approach and just the right dose of humor — much of which can be found in his book, “Someday It’ll All be… Whose?” — Dr. Donald J. Jonovic, discussed “Professionalizing” the family business. His comments, before the Family Business Forum members at the Rothman Institute on October 26th, touched on the benefits of an outside advisory board, getting the best from your professional advisors, and employing an open organization policy. He also challenged some old myths and talked about the rights and relationship of in-laws in a family-owned enterprise.

Owners of closely held companies, he said, tend to focus on the short term… dealing with immediate problems/challenges and rewards. But this, he added, is definitely not the way to insure growth and build shareholder value over the long term, whether you pass the business on to the next generation or end up selling it.

Transition, developing management, building a unified shareholder vision, even maintaining sound buy-sell agreements, all of which serve to enhance the long term value of a firm, are processes that require a long range view. It’s all part of “professionalizing” the family business,  according to Jonovic, a lecturer, family business consultant and author of a half dozen books on family business issues.

Family businesses, Jonovic noted, are responsible for more than half the jobs in the U.S. Would GM, IBM and other industry giants like your customers?  “Of course” he told the audience, adding “family businesses represent a commitment, community ties, a staying power. It may be the product, the machines, but the MAIN ASSET, he noted, “rests with the key people. The big question,” he said, “is whether we are managing that asset the best way we can.”

“Professionalizing a successful closely-held company,” Jonovic said, “begins with the ownership.” It’s about “responsibility,” he said, “about how we focus the dream (business) and  nurture its growth so that it will continue to provide ample opportunity for as long as the family stays together… as long as we enjoy it.” The four key elements, he said, are:

  • Defining Future Governance,
  • Managing Ownership
  • Organizing Management and
  • Developing “vision.”

Defining Future Governance. Determining how and where you see yourself and the business in years to come requires an outside perspective and professional advisors.

Once a business moves from the entrepreneurial phase into what he termed “the threshold phase,” the emphasis, he said,  shifts to management, the focus becomes “long term,” and the need for outside advice increases. You need an accountant, an attorney, a financial advisor and “someone to talk to” and that, he noted, is an advisory board. “None of us, internally, know how to handle all of the issues,” Jonovic said.

While most business owners may resist the idea of an outside board of directors, a properly structured board, he said, can help bring about shareholder harmony, effective management and the kind of internal communications needed to eliminate misunderstandings and create a single focus. He attributed the reluctance on the part of most closely-held companies to establish an outside board to what he termed “a strong culture of secrecy and a deep distrust” of what some view as “formalized bureaucracy.” But, he said, running a business involves complex issues. Competent advisors can bring experience and depth of knowledge to unique situations. They can also help keep the long term focus that business owners tend to neglect.

Managing Ownership. The question here, he said, is “whose business is it after all?  There’s your spouse, your children and grandchildren. What happens if you suffer a setback, a disabling illness?  An outside board along with professional advisors, he said, will help you plan and prepare for such contingencies.

They can help insure a smooth transition, affect proper training, help you provide for your financial needs when you retire, see that all buy-sell and other agreements are up to date, and suggest strategies that will keep the business current and growing.

We all have to move out of the way, he said, adding, most of us recognize that. But, we all need something to look forward to, and that takes some planning, he noted. He cited the case of an owner who suddenly decided that he and his wife should spend six months in Florida, that he would check with the office once a day. After two months, Jonovic said, he informed his wife they were packing up and going home. “I talked to the kids,” he told her, “and they need me.”  Funny, his wife had just talked to the kids as well, and she found that “the kids”  were doing just fine, business was good and they never sounded happier, Jonovic said. “You call it semi-retirement, I call it screwing up the business,” he added.

Fact is, “do we really become increasingly competent as we get older?,” he asked the audience. “Think about it,” he said, “were you not at your best when you were too stupid to know any better; wasn’t that when you weren’t afraid to take risks?”  You may be smarter, but age makes you more cautious, he noted. Growing a business involves risk. Still, you just don’t turn over the company to the next generation without making sure they understand the business and have been properly trained, he added.

Effective Management. The quality of management, Jonovic said, is the bedrock of shareholder value. You need to identify goals and establish objectives — obvious value levers, he said, which may be lacking in closely-held companies. An outside board along with professional advisors can offer the kind of help and expertise needed to develop an ongoing, formalized process of performance evaluation, proper compensation procedures and effective motivation to professionalize the business and increase shareholder value.

Advisors, he said, can help business owners develop a bonus system clearly tied to performance (not to the individual’s but that of the firm). They can also explore options, such as phantom stocks which offer ownership-like rewards. Minority ownership when properly structured, he said, has many benefits. Outside shareholders have a different view which can add/enhance the business. “Shareholder value,” he added, “is best built when shareholders share both the upside and the downside.”

Organizing Management. Communication is the key. Understanding the different points of view, Jonovic noted, is particularly important in the closely-held company because “shareholder value” often has as many meanings as there are shareholders. You need to eliminate misunderstandings, manage the diverse views so that the business may benefit from the vast richness of opinions, participants were told.

He advocated an “open” organization policy, one where key management and employees know what’s happening in a company. People who see themselves as a part of it will pull together during down times to turn things around, according to Jonovic. Asked if there wasn’t a risk in revealing too much to outsiders. There’s always a risk, Jonovic replied, but the benefits far outweigh any risks.

He also urged owners to let the upcoming generation assume responsibility, initiate and oversee projects. You’re not giving up control, he told the owners, you’re ensuring the future of the business.

He cautioned owners not to exclude in-laws. They are not outsiders. Aside from being the most objective, they may be the second most powerful people in the business, he noted, exerting influence on neutral ground, not in the presence of the owner.

Developing Vision. The fundamental objective of business ownership is the building of shareholder value, which means increasing cash flow, expanding profits, building equity and adding to the market value of the business. “We’re all looking to make money,” he said. Entrepreneurs and founders, Jonovic noted, may do a good job of building value for themselves and their partners by combining talent and energy with the leverage of a short term, reactive focus.

But, as the business grows, becomes more successful, the issues become more complex. Outside threats increase and solutions take more time to implement and show results. Professionalizing the business by properly utilizing outside advisors will help you plan and develop the kind of strategies needed to expand the firm’s vision and ensure its future growth. He called it a commitment to success over the long term.