About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called The Value Advantage™ that helps in exit planning, value building and financial management.
About the Guest
Wayne Rivers is the co-founder and President of The Family Business Institute, Inc. that has been around for over 28 years. He is an author of four books on family business and has been quoted in many articles for large publications like Forbes, Fortune, BusinessWeek, Entrepreneur, The New York Times, and Washington Post. Wayne is also a Wall Street Journal panelist, a speaker, and has appeared on the Today Show, CNN, MSNBC, and CNBC.
Needless to say, he really knows his stuff! In his 28 years at The Family Business Institute, Wayne has worked with many families in all kinds of situations. On the podcast, he tells us stories of different encounters he has had with families over the years. His main goals are business prosperity and family harmony for all of his family business clients. The biggest question they have to answer first is, are you a business family or a family business?
If you listen, you will learn:
- The difference between family business or business family
- How to prosper in a family business and also have family harmony
- How to avoid complacency in your business
- The importance of reinventing your business
- Significance of bringing in good, outside talent and how to do it
- Importance of modelling out your financials to make decisions
- Defining roles, responsibilities, and compensation in family businesses
- Key elements of a good buy-sell agreement
Full Transcript
Ryan: Welcome to Life After Business The Podcast where I bring you all the information you need to exit your company and explore what life can be like on the other side. This is Ryan Tansom, your host, and I hope you enjoy this episode.
Welcome back to Life After Business Podcast. Today’s guest's name is Wayne Rivers. Man, did I absolutely have a blast talking to Wayne. Wayne is the CEO and founder of The Family Business Institute that’s been around for 28 years and holy cow did I wish I would’ve talked to him back when we owned our family business because his wisdom is deep and wide and the stories he has and shares with us today are just hilarious, but also filled with tons of practical information about how to keep business prosperity and family harmony inside multiple generational businesses. Because the biggest question that successful family businesses answer is are you a business first family, or a family business?
Along with owning The Family Business Institute, Wayne is author to four different books. The latest one which is called Our Family Business Crisis and How It Makes Us Stronger . He appears on the Today show CNN, MSNBC, CNBC, Business Week, he’s quartered in the Wall Street Journal. I was extremely happy to have him on the show. Super lucky to dive into his knowledge. Without further ado, I really hope you enjoy this interview with Wayne.
This episode of Life After Business is sponsored by The Value Advantage. The Value Advantage is a platform delivered via peer groups and/or one-on-one to help you build a valuable company that can thrive without you while putting an exit plan in place so you have the options to sell when you want, to who you want, for how much you want. You’re able to manage the business by the numbers, work in the business as much or as little as you want and you fully understand how the business impacts your personal financials. If you want to know more, check out the show notes or the website.
Good morning, Wayne. How are you doing?
Wayne: I’m fine, Ryan. How are you?
Ryan: Doing good. I’m looking forward to our conversation. You’ve got a lot of experience and exposure to the family business world which is where I came from. I want to dive into your expertise and some of the stories that you’ve got. Before you do that, for our listeners, can you give them a little bit of a backstory on why you started The Family Business Institute and exactly what you guys do?
Wayne: Sure. Our origin story is that I was a banker and I got into financial planning. Banks do good things for family businesses and financial planners do good things for family businesses. I kept asking people, why didn’t they implement the plans that they had paid for? It came down to my son and daughter aren’t getting along very well in the business and I might just be better off selling it outside the family. Or I can’t get along with my sibling and we don’t agree on the future of where the company is headed, I’m just so frustrated. I don’t see any point doing this elaborate planning that you laid out.
50% or 60% of the plans paid for by clients just went unimplemented. I was thinking, wow, that’s frustrating for me, but it surely must be frustrating for them because they paid for an elaborate plan, don’t get any value out of it.
I started thinking about it. I was like, really, maybe the opportunity is to do more stuff along the lines of communication and helping to structure their roles and responsibilities and accountability in the business and planning for the future of the business, aligning people’s visions for the future, etc. We stumbled into it and at the time, there really wasn’t a whole lot going on. This is 28 years ago. There wasn’t a whole lot going on in the family business space. We were one of the first pygmies in the jungle, so to speak. It’s still not a very well-developed industry, but we were among the first consulting firms. We probably made a lot of mistakes and we probably screwed up as many people as we helped but we learned a lot of things. Today, we tend to not screw up very much. Our main deliverables are succession planning.
It used to be all planning between moms and dads and children when the World War II Generation was getting out. Now we’re getting to the point where most of our assignments are with sibling teams that are trying to transition to generation three or maybe even four. The World War II Generation has retired off and died off and now their kids are at retiring age. It’s always about where is the family business going to go next? Is it going to stay in the family, is the family tree going to continue to multiply and we went from 2 shareholders to 8 to 36. Is that going to be the case in the future? All those decisions have to get made at some point. We help people draw order from chaos and keep the family together.
Really we want two things. Just like our clients, we want business prosperity and family harmony. How hard can it be?
Ryan: Unfortunately for everybody, that’s actually a lot more difficult.
Wayne: I was kind of joking.
Ryan: I know. It’s totally sarcasm and I actually wanted to hear the stats from you. There’s a lot of these common stats about successful generational transfers in the stats. I was assuming those are probably top of mind for you. Can you clarify some of those for us?
Wayne: Yeah. I’m not sure I’ll get them right. It used to be something like 70% fail between G1 and G2 transition, and then 12% make it between G2 and G3, 4% make it G3 to G4. I think those are fairly close. I used to think those statistics were just a bunch of gabble to go. I thought they were made up and fake by lawyers and CPAs and financial planners and helping professions who want family businesses to transition. They want to get that contract to do that business. I thought it was just a bunch of made up crap.
Interesting thing happened, we were moving. We bought a new building and we are moving from our own place to our new place. I said to my assistant, “Man, we’ve got a lot of paper going back to the 80s in these files and we really shouldn’t move it. Can you go through and sort out what we need to keep and what we need to save?” She came back to me and she said, “I took a stab at it, but you’re the only one who knows what we’re going to need to save from these files.” I thought well, I’ll go in there and spend a couple hours cleaning out the file cabinets. I was in there for four days. I wasn’t too happy about it but somebody had to do it.
Four days I’ve been there and I’m back in time and remembering when I was a young man calling on these family businesses and man, they were bulletproof, Ryan. They were printing money, they had it going on. You couldn’t tell them anything. They had figured out all the secrets of life and all the secrets of business and a lot of those files I was putting my hands on in 2015, those companies are not around anymore.
Ryan: Crazy. I bet.
Wayne: They had it going on. Some of these guys were really successful. I remember calling on a guy. He was the founder of the business. He was only about 58 or 60 and their fleet of company cars were Mercedes and Lexus and Jaguars. I’ve never seen that before. I thought, oh my gosh! These people must be killing it. They’re gone. That business is gone now. I couldn’t tell you the exact reason. I was going through those files and it just dawned on me, those statistics are right. Those statistics, they’re daunting and scary, but they’re probably right.
A lot of family businesses don’t transition inside of a family for a real good reason. Maybe they sell the company, maybe the next generation of kids are off the charts smart and they become Harvard professors. Maybe there’s legit reasons why they don’t succeed but they just don’t. They rock it up over a period of years, they plateau, and they die. Just like that curve you learned in business school. The half-life for these family businesses might be 15 to 25 years. Creating any sustainable business, you read this articles about the turnover and the Fortune 500. How many of the original Fortune 500 companies are still in the Fortune 500? It’s like 10 or 11.
Ryan: That’s crazier, actually. I just saw the stat on that from this book called Exponential Organizations where there used to be a longer lifespan, but now with all the technology, the average span is 7-15 years.
Wayne: Isn’t that crazy? All these disruptive technologies mean that Google enters the Fortune 500 and Singer Sawing Machine which used to be the biggest company on Earth is a goner. Family businesses are the same way. It is unbelievably hard to sustain excellence. How many teams have repeated as NBA champion or World Series Champion or Super Bowl Champion in the last few decades? It’s a precious few.
Pat Riley, who used to coach the Lakers and now is with the Miami Heat, he said it’s the disease of too much. You have an incredible season, it all comes together, you win a championship, it feels great. Everybody says, “Oh my God. Since I was a little kid, I wanted to reach this pinnacle and now I’ve done it.” Mentally, they deck out a little bit and also they get more endorsements. They get more fame, more people want to take them out to dinner. All of a sudden, they take their eye off the ball a little bit. Maybe they want more money because Kobe was getting too much and I’m not getting enough.
In the next season, it’s really, really insanely hard to repeat. The same things that happens in basketball, the same things that happens in Fortune 500 happens to family businesses. In my weekly blog, we rail about complacency all the time. Even now, we run into businesses that they just want to hear the sounds of their own voices and they’re enjoying amazing success and they’re making millions of dollars each year. You can just see the seeds of complacency. A business’ destruction is sewn, today, with those seeds of complacency because it’s so unbelievably hard to sustain anything over long periods of time.
Ryan: I totally agree with you. Because you always have to be changing and adapting and I want to ask you, what are the successful ones doing, but before you answer that, I think it might be tied into this vision of how do you avoid that complacency. Is there a major correlation between the two?
Wayne: Yeah. The vision needs to be at least updated, if not revamped entirely, every few years. It ties into the question you ask, how do you sustain it? The way you do that, you have to reinvent two things. You have to reinvent the business every so often because if you were in the Buggy Whip business, you might have been the Buggy Whip Manufacturer in the world in 1890 but by 1910, you were having a hard time. You’ve got to adapt the business.
In fact I read a study just a couple of years ago about family businesses and these were super successful family businesses. I’m going to probably say this wrong but they were ones that had been around for at least 100 years and had net worth of over $200 million dollars US, this was the cream of the crop. The article pointed out that of the say 50 companies that met these incredibly rigorous criteria, 26 still own their legacy business. That was the point they made. What I saw though was the reverse of that. 24, a half. 26 versus 24, that’s half. Half had gotten out of the legacy business. How about that?
In the South East here in America, the textile industry was so mighty at one time. People’s families survived for two or three generations with these massive plants, cranking out socks and underwear and shirts and everything else. Man, they’re gone. 90%, maybe more, are gone now. Those people didn’t reinvent. They clung to the legacy business too long.
You’ve got to reinvent but the second component of that is so important. It’s the most important thing that I could share with family businesses, is you’re in a people business. Even if you’re in the IT business, you’re still in the people business. If you’re not out there creating a new vision, reinventing your company and then attracting the best people all the time, you’re not going to make it.
Ryan: One of the challenges that I had with my dad when we owned our business. I 100% agree with you. You constantly have to be changing and I’m more into that world where I love change all the time, maybe to my fault at some points. How do you take the owner or the founder, it may be the first gen, who has a crazy passion for usually whatever it is that they do?
For example, my dad owned a copier business and I got involved and I’m like, those are kind of boring but there’s this great huge business and I like the people, we are reinventing to become an IT service provider but doing that together to re-establish that vision while understanding that this is a huge asset. It was such a challenge because it’s like it’s not just your vision anymore. How do you facilitate that because that was such a huge point of tension for us?
Wayne: Ironically, we do this exercise where the large copier company in the last 10 years and it was very difficult. The founder was still around, very much detached from the business but still very much interested in controlling things. The way he did that is he controlled the money. He controlled all the money. He delegated pretty much everything else, sales, operation, service, everything else but he clung to the money. Money talks and you know what walks.
What we did, because his daughters who were very talented young women, and ambitious young women. They were really struggling with that over this exact issue you point out. We brought in the mix the top 10 non-family employees. We had the head of sales, the controller, several of the top sales people, several of the top people, a couple of staff people that ran the service side, and then some of the key managers, the brightest of the various location managers. We started from scratch.
I kind of tricked the guy in a way. It’s kind of an underhanded tactic but I asked him, his name was Keith. I said, “Keith, if you drop dead, if you got struck by lightning, tell me exactly and tell your girls exactly what you would like to have happen? What would be your drop dead advice for rallying and preserving the business and keeping it moving?” He said, “I would call in these people, Jane and Sally and everybody else. I would do this, this and this.”
He went on for about 30 minutes with a very solid outline of a plan. I said, “Hey, that is really well thought. What are we waiting for? Why should we wait for you to die which might happen next year or 27 years from now? Why don’t we go ahead and put that plan in place now and get Jane and Sally, just like you said, and begin to think about sales over here, and distribution over here, and customer service over there. Why don’t we go ahead and do that?” He looked at me, he gave me the stink eye.
Ryan: It was his idea, right?
Wayne: It was his idea, yeah. And the girls were excited about it and we really created a terrific high energy team. One of the things his dad had pulled back is nobody from the home office had been out to the field offices in person, in seven years. We created a new business plan, and they were going to go out hit the highest spots of the business plan with all the offices. The people in the field offices were so happy, to see somebody from corporate, like “Oh my gosh! This is great!” It really created a lot of momentum and enthusiasm and improved morale in the company for a while. It worked so well, I think they quit doing it.
Ryan: Alright. He saw the results and they’re just going to continue…
Wayne: I did a push up today, no need to exercise about it tomorrow.
Ryan: I love your push to action but what happens in these businesses, the industries evolve, so the vision will have to continue to change and reinvent yourself. What happens if the first gen or the people that control the money don’t want to change? We’re around the example of the copier world, talk about the industry that’s changing every single day.
There was this guy locally, he will never sell software, manage print or IT services ever until he dies. It’s like, okay, guess what, you’re in the floppy disk business now. I was not involved in that business but my dad and I tried to figure out how do we invent and curate a vision together. If the first generation is not on board with that, how do you work through that?
Wayne: The best explanation that I’ve ever heard was a guy who’s dead, like the first example with Keith that talked about his dad controlled the money even though he was really not a factor in the operations of the business anymore. His son who was actually pretty successful at growing the business, in spite of his dad’s reluctance to change. He said, “I feel like I’m playing poker with a guy. We’ve got a deck of 52 cards and he’s got 51 of them.”
I thought that was a good analogy and he said, “The only card I can play, and this is a tramp card now. The only card I can play is I can put my keys on the table on my dad’s desk and I can say, okay, you want to control it? Go ahead, it’s all yours.” He said, “But I’m not willing to do that.” That’s really the thing, Ryan, unless that succeeding generation is willing to put all their cards on the table and put the keys on dad’s desk and turn everything in and walk away from it. They have no chance of getting anything changed.
You can lead that senior generation horse to water but you cannot make them drink. I’ve been thinking about this for 28 years, you cannot help someone who doesn’t want help. You cannot change someone who doesn’t want to change, you cannot reason with an unreasonable person.
There is no way to force someone who controls the business, whether it’s ownership where they control by money or they control by fear and intimidation. There is no way to get them to do something that they don’t want to do. I tricked this one guy, I didn’t feel good about it, since it was his idea, he had to go along and he did.
I remember one guy wouldn’t do any work and we were talking to him. The dad was about 80, son was about 53 or 54. The son was really frustrated and he called us one day. He said, “Can you come see me ASAP. My dad has had a change of heart.” The change of heart happened because he was at home at night, relaxing in his palatial home on the golf course, and there was this loud noise and a helicopter landed on the lawn next door. They pulled his golf buddy out of the house on a stretcher and flew him to the hospital because he’d suffered a major stroke or heart attack or something. My guy woke up the next day thinking, holy crap! That could’ve been me. He went to his son, he said, “I’ve been thinking about it and you’re right, we need to do X, Y and Z.”
That’s what it took. It wasn’t anything the son said, it wasn’t anything that we did, it wasn’t anything that anybody could control, except what the old man controlled between his two ears. He get scared and the fear, the emotion, that powerful emotion, fear, caused him to say, “We really do need to plan for the future of the business because that might have been me on that stretcher.”
Ryan: It’s unfortunate because being the second generation and having that experience, I tried to quit three different times. I was definitely way younger and probably more on the asshole side of how I delivered my message. You don’t want to wait for that. I want to participate, and these second generations, the people that have to work 10 times harder than everybody else to earn their keep and then to run into that stone wall, it was so frustrating. If you got a younger parent, what do you do? Just wait it out 30 years until his friend dies? It’s just unfortunate that something like that got to drive it.
Wayne: When I think about our clients over 28 years, three of our most successful clients, I can give you the particulars on each one of them without mentioning any names or company names or anything else obviously. One guy, literally he got in an argument with his dad one day and his dad stood up from behind his desk and ripped the shirt off him. He just grabbed the front of the shirt and tore the buttons off and tore the shirt to shreds while my guy was standing there. In fact, he quit twice. The dad begged him to come back, he’s a gifted business man.
The company was about $2 million dollars gross sales at that time. Finally, my guy said, “Look dad, you’re getting up there and let us next generation, me and my three brothers, buy you out.” Dad didn’t want to do it, didn’t want to do it, finally, just realized it was the only way to go.
He came to the closing table, let’s say the price of the business was one time’s gross sales was $2 million and at the last minute he said, “Nope. I want $4 million.” My guy said, “This is bad but I see the potential here.” He said, “Okay, $4 million.” The lawyer redid everything and they came back the next week and they were going to sign the papers. Dad said, “Nope, I want $8 million.” Obviously, having a change of heart.
My guy worked it out and said, “I see the potential here.” He knew the numbers, he paid $8 million over time to his dad and now the business is, that’s been a long time ago now. Probably 25, 30 years, they net $8 million in profit every year, in fact they net some years a whole lot more than that. He made the right choice. He overpaid for the business but he saw the potential and he knew he could do it. He did, he’s a gifted business man. That’s example one.
Another example, a guy out West. His dad was an alcoholic, he’s got $10 million in sales and this guy more or less forced his dad out. Usually, the senior generation bullies the younger generation. This guy bullied his father right out of the business. Now, that business which was $10 million in sales on dad’s watch, it’s more like a billion in sales on next generation’s watch. I got two examples of that, actually.
My only point is that these three guys, every single one of them quit. They quit and walked away, until things got so bad their dad said, you’ve got to come back. Okay, I’ll come back under these conditions. You’ve got to be willing to quit, you’ve got to be willing to stay quit. What that means is you better have your resume updated, you better have your CV ready to rock and roll, you better know what the market place is out there for somebody with your skills and talents.
In other words, if you’re going to quit something, you don’t want to move all the furniture out of your house on the front lawn unless you got new furniture to replace it. If you’re depending on a business for your livelihood, and you want to quit because you’re miserable, because the first generation won’t make any changes, my God, you better have your next career lined up because somebody’s going to put groceries on the table.
Ryan: The problem that I had when I was going through that situation is all the connections that I want to reach out to get the job that I wanted to get would’ve raised red flags all over the place. I felt completely trapped when I was going through that.
Wayne: Sometimes you can use an intermediary, if you got a trusted advisor that has some ethical requirement to keep things quiet, a lawyer or CPA or somebody, maybe even a minister who can reach out in the business world. In fact, you could do that. Say you have a buddy who’s a lawyer that you really trust. You could say I want to take all the names of my CV and I want you to send them to these specific companies that I know. Just inquire whether they have openings or interest in someone with this particular set of skills and talents.
That would be a time-consuming and even expensive way to do it. But if you feel trapped, obviously, the place your mind goes is you’ve got to find a way to get out of that trap. Sometimes you need to spend a little money and little elbow grease to make it work.
Ryan: This is a good segue into an article you wrote lately and I think a lot of businesses have tried to attempt and we did too and I handle it in a unique situation, but bringing in other individuals into the business on the executive team whether it’s to run or to get involved. How would people even start tackling, bringing outsiders into the business like that?
Wayne: That was an article I wrote. That was a Wall Street Journal article that I just have to be quoted in. To me, if you’re not bringing in talents, why aren’t you? If you’re not looking for help, whether it’s sales talent or operations talent or financial talent, if you’re not looking for super talented people to help you and your dad and what other family members might be there, then you’re already going in the wrong direction.
Some of the most successful family businesses we know of have really been good at finding that bridge management. You got dad who’s 70 and next generation who’s 40, you can’t transplant all of dad’s knowledge and contacts from his brain to yours. Maybe you do need a 50 year old guy and they were a full 55 guy in there. To work for 5 or 10 years, to do two things, number one, groom the next generation and the things they need to know to successfully run the business. Different business and a different future, really.
Get between dad and that next generation a little bit, provide that balance point. Somebody that has enough success in his career and enough confidence, just say, no wait a minute dad. You’re being a little harsh here. You’re asking for a little too much, you’re putting a little too much pressure on the next gen, your expectations are not realistic, you can’t get $8 million for a company worth only $2 million. That could be an adviser, could be your lawyer or CPA or someone from the family business institute, we would love that. We roll up our sleeves and get in the middle of those fights all the time. If you’re not looking for talent and specifically if you’re looking for bridge management talent, it’s out there.
Having said that, most of these companies that have bridge management, they’ve had to go to the well two or three to four times before they make it work. It’s a learning curve on both sides. Most people don’t even have this, they don’t even create a job description, they don’t even create a scope of authority. They just say, hey, Steve Jones over here has a lot of talents, let’s get him on board. What will he do when he gets here? I don’t know but he’s talented. Let’s just get it.
Ryan: What he’ll do is he’ll actually come in, we’re going to overpay him so that way we don’t have to fight as much.
Wayne: Yeah, yeah. Just stupid crap like that.
One of our clients just hired a business development director and I was like, okay great, what are you going to have him do and he said, “I don’t know. I just thought we needed a business development director.” You got a six-figure guy on the payroll and no mandate. They really just hadn’t strategized what even does a business development director do.
The problem that all family business leaders have is lack of time. We don’t have time to plan. I literally have people say, “We don’t have time to plan.” I was like, wait a minute, why don’t you go tell your customers that? Go tell you customers that you’re so busy that you don’t have time to plan because they’re going to be interested in hearing that.
How are you going to deliver and service my copiers if you don’t have time to plan how that’s going to happen? How do I know you’re going to be here five years from now for service purposes if you don’t know how to plan? Seriously, I can’t believe those words ever come out of family business leader’s mouths, but they do. Time is the great constraint because people that start businesses are so passionate and they’re involved in every aspect of the business and they’ve got a thumb on the financial side, they’ve got a thumb on operation side, a thumb on the sales side. Some might mow the lawn after 5:00 PM. They just can’t help themselves, they’re high energy and they value doing much, much more than thinking.
At some point in the lifespan of a business, once a business gets to be a certain size, once it’s bigger than just a one person lifestyle business, then you’ve got to sit back and push your chair away from that desk and think because if you’re not thinking, your competition is. You’ve got to figure out how you’re going to go to that next plateau, otherwise you’ll get stuck in the same place and it’s kind of tough.
Ryan: I totally believe that bringing the outside is really good help because right before we sold a couple of years, we have built this executive team that was amazing. We did go to the well a couple of times and had some super big failures. I think there’s a combination of things that we could’ve done differently. I’m curious on what you see as super successful.
The people that you want, how do you explain to them the situation that they’re getting into from the family dynamics because they have to have an understanding of that because that’s part of the job description? But then also, how do you financially make everybody on the same page where, there’s this one person, this is right as I started the business where there was this gal that was going to be the possible president. All I thought of it from a second generation is here goes my chance to potentially buy the business.
How do you financially get the compensation where this person has probably really qualified one equity or one something and you see it as a threat to you as the second generation? Two questions I guess, how do you financially set that up where everybody is in line and then how do you vet the psychographics and psychology dynamics of the family when you’re hiring that person?
Wayne: The first part to me is financial modelling. You got to make sure you can afford this person because I have seen people over extend. In fact I did it early on, before I was quite as sophisticated about financial modelling. You’ve got to make sure you can afford that next piece of equipment or that next super talented executive before you go out on that land.
I’m amazed continually at family businesses that have no forecasting capability. Their CPA gives, so here it is August, and hopefully everybody’s got their 12/31 financials from 2016 now. The CPA comes in and he says, “You got a good year and you got this much tax and thank you very much.” What I want to know is okay, that’s the past, baby. What about the future?
It is amazing, most people really don’t sit down and model out their finances. If we do grow at this rate, what is that going to do to our balance sheet and are we going to screw up our loan covenants with the bank? They just don’t know how to model anything. They go to their CPA and they say, “Can you help me with this forecasting because I really need to model out the future?” The CPA gives them a blank stare. I get paid for history, I get paid for putting the right number, the right box for the tax return, I don’t get paid for modelling the future. I really don’t know how to. 99% do not know how to, it is shocking. It’s amazing.
You need figure it out on your own, it’s not that damn complicated, really. Or you go out and find some 29 year old recent MBA graduate, they could do it in their spare time. It’s really not rocket science. In fact, you can buy a software that does it for you.
Anyhow, all those alternatives are out there. Find out if you can pay for the person first and then you better have a job description, you better have some limits of authority and things like that because if I’m a new person coming into a family business, I know I might be walking into a bus sometimes. I want to know where my authority really is, can I fire people? Can I hire according to this business plan? Where is the business plan? Is that something black and white or is that something I need to be working on as a part of my chart?
Define the role, define the responsibilities, define the accountability, define the compensation. Think it through, give yourself 6 months or 12 months to really think it through and then go out, look for somebody. With the understanding you might have to try it once or twice to get it right.
What was the second part of the question? I forget.
Ryan: No, I think you answered both of them. It’s really just understanding that they can work in the family dynamics. It’s really challenging like okay, how do you do with the bickering and bantering or like this is not Target Corp where you got very…
Wayne: Keep in mind that any successful executive in any industry have been through a lot of bickering and bantering. It maybe not with the intensity level that a family business gets into.
Ryan: Ripping off shirts and stuff?
Wayne: Yeah, exactly. Oh boy, we had fist fights and even gun play in our family businesses. It’s pretty exciting stuff. If you can find someone who has run a family business previously, they will already have those scars, they already know. They’re out there, there are people that almost specialize.
One of our consultants ran three different family business before he found us. He was that bridge manager and he would stay for x-number of years and turn the company around then make it successful and profitable then he would run off into the sunset with a big bonus and take a little time off with the kids, which is a good lifestyle.
Ryan: The next question was really part of the question, the financials. Other than the big salary, whatever it might be, a lot of people that we were looking for on that executive piece, I heard one gentleman that was like, “Hey there’s three legs in the stool, there is cash, there is bonuses and then there is equity.” If anybody knows their stuff, they should have some sort of tenacity to ask for something like that. What are the structures that you’ve seen to accommodate for that?
Wayne: That’s a perfectly reasonable ask. It doesn’t mean every family business should consider it but it is perfectly reasonable to ask. I would say the family needs to make the decision, are we a business family or a family business? By definition, a family business is going to stay in one family in terms of ownership and outsiders are probably not going bill out to have the right to equity.
A business family on the other hand makes decisions based on what’s best for the business and sometimes, outsiders owning stock can fit into that mold. By the way, another statistic shows that people that make that objective decision to be a business family create $6 of net worth for every $1 of net worth made by family businesses.
That to me is a deal maker right there. When I saw that, I was like, okay, forget about it. Mom, sorry. We’re not going to hire your drug addicted son just so he’ll have a place to go during the day. Uh-uh, no. We’re not going to do that anymore. Suppose that you decide that you’re a family business and shares are only going to be available to the family, that’s okay too. You could set it up, you can even give direct ownership for a period of time.
When any business has multiple owners, if you don’t have a seriously terrific 21st century buy-sell agreement, you’re going to find yourself in trouble at some point. But that’s a great tool because suppose you do have a talented non family person that comes aboard for a period of let’s say eight years, that buy-sell agreement could be adapted and that person can become a party to it. It says, great, you’re going to come aboard, the value of the stock is this today, here’s our valuation formula.
And then look, when you’ve done a good job, that stock is worth 2x. Therefore, you get this many dollars because you moved it from 1x to 2x. But that point, the buy-sell contract requires that the shares come back into the family. You’re really not out anything or you’re out a lot of money, potentially, but the shares stay within the family.
That would’ve maybe stalled your concern where this person wanted equity and you think, holy moly, this guy’s really taken equity that ought to be mine one day. That really won’t be an issue if you got a good buy-sell arrangement or phantom stock arrangement which is the same thing, just without direct ownership of shares.
Ryan: What you just said, it’s all coming from the financials and coming from data. If you have a way to value the business right now and it’s all based on value growth, then, who cares? Because if the growth wouldn’t happen otherwise, and it’s done by sweat equity and you can give them some bonuses like phantom stock, like you said, it all make sense based on the numbers.
Wayne: Yeah, that’s right. The whole thing in business is win-win. If somebody’s moved the needle significantly, and maybe he has to grow it 3x. We did that here and we brought in a guy, we spoke at [00:38:44], here are your targets and [00:38:47].
Ryan: That’s awesome. You had mentioned the 21st century buyers, so I agree.
What are some of the criteria that people have that are doing really, really successful buy-sell agreements?
Wayne: We’ve seen a bunch of [00:39:00] over the years, that’s for sure. I think there’s about 35 elements to buyer-seller agreement now, not at all applied to every single family business but they’re all to be considered. All of them cover death, when you think about the 4Ds right away. There’s Death, Disability, Divorce and Disenchantment. A buy-sell agreement should cover all of those things. If I’m a shareholder and I’d become disabled and I can no longer contribute, at some point, we assume the business is growing, should I continue to enjoy the appreciation? What happens to my salary and all that kind of stuff? That all should be decided.
But there are other funny things too. Initially happens, suppose a brother and the sister own a business 50/50. It’s a capital intensive business and they go to the bank and they say, “We really need to borrow about $5 million here.” The bank said, “Sure, no problem. Here’s your resolution, get your sister to sign it.” And then sister said, “Oh no. No, I’m not pledging my personal assets. No way, forget about it.” What’s the brother going to do? He’s the operator of the business. The sister says, “What’s going to happen to my S Distributions?” And he said, “We’re probably going to have to curtail S Distributions or we pay back this land.” She said, “Hell no. That’s a big lifestyle issue for me.” They’re basically spending that quarter million dollars a year they were getting free and clear, after tax part.
One of the provisions is if we borrow money, who’s going to guarantee it and if you’re not willing to step up and guarantee the debt that the business might necessarily need to operate, then why should you participate in the appreciations or the distributions or anything else? That prevents inactive shareholders from whip sawing active shareholders over an issue like that.
That sounds like a stupid thing but that actually came up 20+ years ago with the brother and sister, so we’ve included it in our buy-sell agreements ever since then. What happens if you got 5 or 10 shareholders in your family business and 62% or 65% want to go ahead with an initiative but you can’t quite get over that 2/3 majority requirement, is there a drag along clause?
Ryan: Elaborate on that, would you?
Wayne: Sometimes, we put in drag along clauses. If we got lots and lots of shareholders. Simple majority is okay for some decisions, depending on what they are 51%, some decisions might require supermajority of 67% or even 75%. What if you’re really close to that 67%, you’re at 65%, you can’t quite get over the hump. Can the majority, the 65%, require that the other 35% move along? In some cases, we require that they have. Especially if we’ve got a whole bunch of inactive shareholders and only a handful of active shareholders.
There’s lots of things that you can think about, but really we’re interested in two things. We’re interested in business success and family harmony. It’s unfair over long periods of time for minorities to have veto power over family business majorities. That’s why we write buy-sell agreements that way on occasion. We don’t write it, we’re not attorneys but we tell the attorneys how to write them.
Ryan: You were mentioning active versus inactive. I think that’s super common situation where you’ve got active versus inactive, so how are you dealing with the voting and the decision making with that situation? One step further, how are you splitting off the conversations around the family estate versus sweat equity? I think those are probably two different topics.
Wayne: Active versus inactive shouldn’t come up too much. People get really confused, they confuse ownership with employment. Let’s say that I have a brother that owns some shares in a family business, can he walk through the back door and tell an employee to go take out the garbage? Or to tell an employee to quit doing Task A and go over there and do Task B because in his mind, he’s an owner. He thinks something ought to be done differently.
Let me ask you a similar question. If I walked through the door of a General Electric Plant, I bet [00:43:13] in shares in General Electric [00:43:15] IRA or 401A or something. If I walk in the door, am I going to talk to the employees as if I know how to direct them? Hell no! Not in a million years! Why would a shareholder in a family business walk through the back door?
This actually happened once. A family business had a big blow up because the 17 year old, recent high school graduate had come aboard, and he did own shares and they were very busy, they’re in their busy season and he grabs a couple of guys off a job site and has his come mow the lawn at his trailer. That’s a true story. He clearly did not understand the boundary between owning shares on the one side and working in the business at a low level. He was an entry level employee. He is basically taking guys at his level and I can go mow the grass as an owner.
Part of that is education, what do active shareholders do? Because they’re employees. Once those boundaries are clear, and the authority of the active shareholders is clear. If I’m the president of that company, I can hire and fire, I can bind this for certain obligations including financial obligations, I can do X,Y and X.
As long as I am hitting my targets, as long as I’m getting near the targets and within a 90% or 95% of the target in the business plan, the inactive shareholders shouldn’t say jack for the most part except to the annual shareholders meeting or the quarterly shareholders meeting, whatever we do, how will we commentate. They don’t really have much to say.
The first part’s education. What owners do and what do employees do. And then family employees have certain rights and privileges. Owners have rights and privileges too but they’re few and far between. If I run this business properly and I hit the target in the business plan, then you’re going to get a big ass check. One day, we have this buy-sell agreement, you’re eligible to sell your shares and cash out for a big chunk of money if you want to.
There really shouldn’t be a lot of issues, there are, but there shouldn’t be a lot of issues between active and inactive shareholders if you have your governance squared away and if you have your boundaries crystal clear. Some others require a reeducation, people forget. But it’s okay to be reminded once in awhile.
Ryan: As you shift the transition, there’s this big topic that I have run into with clients of mine or people have talked to of control versus ownership and the financial rewards of both. I think control, ownership and financial rewards get really muddy together. How do you separate those?
Wayne: I don’t even know if I understand the question, who controls the business?
Ryan: All the people that I know that own this, the first gen, they just control.
Wayne: They want to control everything.
Ryan: And control the money like you had said. Then you’ve got control but then, when you’re getting into family businesses like this and their net worth, asset preservation is so much more important than being bull headed to keep everything on your name so that way you have to just have a $200,000 premium insurance policy to cover the taxes. There is intelligent ways to transfer non-voting shares or equity and all that stuff. I think there is the business owner can have control and or financial rewards that don’t impact their life but can shift the stuff to create this infrastructure. Does that make sense? Is that a little bit clear?
Wayne: Yeah, there’s a lot of ways. You’re right, that first generation is usually very, very, very, very controlling and I’ve got a great story about that. There was a guy that ran a funeral home in Tennessee, he’s dead now. In the winter time, people will get the sniffles or maybe even the flu and he controlled the Kleenex. If you had a cold, you had to go into the boss’s office and ask for some Kleenex. Depending on how he judges the severity of your cold, he’d give you two or three sheets of Kleenex. That’s how much he wants to control the expenses of his business and that’s one kind of idiot level we’re talking to. That is a true story.
Ryan: Why would anybody work for someone like that?
Wayne: The people there work for him. The lowest of the low, they’re people that have been beaten up in life so many times. One more beating isn’t going to hurt them. You’re right, you can’t attract great employees if you’re an asshole. And that’s basically the way that guy was behaving.
They do want to control everything. How many pencils you have on your desk, you don’t need a new stapler this year, you can have one next year. That level of control that founders want is really quite insane but their identity is so tied up in the business, they almost can’t help themselves. It gets a little better as the generations go along.
If you think about those founders, many of them, me included, grew up really poor. They never had anything before so this is a new thing, it’s so much like an NBA Player, he’s a kid, he grows up in a single parent household and they’re dirt poor and all of a sudden he goes to college for a couple of years and maybe gets a little money into the table, but not a great deal and all of a sudden, he’s a gazillionaire and he’s getting paid $20 million a year to play basketball. He doesn’t know what the heck to do with that wealth, he’s never experienced it before.
Family business leaders are the same way, especially founders, they’re not used to being wealthy. This is a fairly recent occurrence in their life. And certainly they don’t think of themselves as wealthy that’s why they’re such hoarders.
Next generation, it gets a little easier, they grew up in a nice house and maybe country club membership and all. It gets easier as time goes on psychologically. I think maybe people identify with the business a little bit less.
Ryan: When you think about going back to your point, they might not think of themselves as wealthy, we were in that situation where technically your asset is worth a lot of money but you’re literally cash poor. As you’re living off of salaries or distributions or whatever, but then there’s this ownership issue. Technically, on paper, you’re going to owe the government a lot of money if you were to die. The way that I described it, I might be wrong, whoever knows but the way I’ve been articulating it is you got a foot in the cash flow current present tense bucket and then a foot in the whole overall family estate wealth and how do you mitigate?
Wayne: Schizophrenic, isn’t it? On the one end, you’re trying to make all the money you can but on the other end, you’re trying to minimize all that money so you don’t have to pay tax. I think it’s idiotic for the tax tail to wag the dog. So many family business leaders are obsessed with not paying tax. I think that is idiotic.
I knew a guy once, he is a car dealer. Really successful guy and he said he had three sets of books. One for him that actually told him how the business was doing, one for the bank that showed enough numbers to make sure the covenants were met, and then he had another set that he gave to Uncle Sam because he didn’t want to pay tax.
And he said the happiest day of his life was when he said we’re just going to keep true numbers from now on. It just simplified the heck out of things. He paid a lot of tax but just trying to keep up which are the real numbers, it drives you nuts. The tax tail shouldn’t wag the dog.
Second piece of that is unless you’re worth $50 million, $100 million, you shouldn’t pay any tax. To me, the estate tax is voluntary. There are ways for you to keep control of that business you love so much without paying any tax. It’s really absurd that people get so wrapped up around the tax axel because ultimately, you’re not going to have to pay any tax. What’s the unified credit now? $11 million and with discounts? You can probably be worth $20 million and not pay a nickel of tax.
Do you know how many family business people are genuinely worth $20 million? Not that damn many. They just get all worried about nothing, basically. The guy with the Kleenex? You wouldn’t believe how much money they spent on estate planning attorneys to protect an estate that wasn’t even worth $5 million. Unified credit would have exempted them from any tax, and yet they had paid tens of thousands, maybe a hundred thousand to lawyers over the year to make sure that estate was small enough to not pay any taxes. I’m at the point there, I made myself mad. That was such an absurd situation.
Ryan: It is. People screw their books up to avoid that tax. You can’t tell the health of the business which by the way should any those 4Ds happen and potentially you have to have a fire sale, your books look like shit, no one’s going to pay anything for it.
Wayne: That’s right. That exact thing has happened to a buddy of mine. He works with a whole bunch of auto repair businesses, and those guys will take cash under the table. They’ll say, so now, “I’m 65 years old, and it’s time to sell my business.” And my neighbor comes along and wants to buy it. He looks at the books and then “Hey, you’re not making any money.” “Yeah, but I’m taking $75,000 a year under the table.”
Ryan: Great. Don’t tell me that because I don’t want to talk to the IRS and I don’t want to go to jail.
Wayne: Yes, that’s exactly right. But on the other hand, why would I believe that? All you’re trying to do is drive the price up and I’m not going to pay for something that I can’t see or I can’t touch. You tell me this money disappeared, you’re an idiot because you just screwed yourself. I hope you enjoyed not paying tax because you just hosed yourself at age 65 and now you can’t sell your business, you fucking idiot.
Ryan: I love it. I totally agree, I literally had this guy, he wanted to buy this cabinet manufacturer and the guy told him. He said, “I want that $8 million for it because I take $300,000 in cash a year.” He was such a concern. Dude, do not touch that. You’re going to believe him and first of all you’re going to partner with these other idiots that actually knew that?
Wayne: I’d say a perfect world is if I take your under the table money until you get to be 55 and get 10 years of good, solid financials underneath you after that. Because if you want to sell it, you better be able to document the real numbers, otherwise you’re going to murder yourself in sale time.
Ryan: I completely agree with you. Let’s say the handful families that are in that bigger estate net worth besides of the business and a lot of real estate and stuff such like that. Again, then you are dealing with estate tax problems and it can get pretty significant. But the ownership versus control, I’ve been trying to explain this to a few of our clients where you can start discounting and giving it to your kids, the non-voting shares, that way it’s not part of your estate but you still control and have all the financials at your disposal. There’s no reason to pick at it and keep it on your name.
Wayne: Just switch voting to non-voting stock. Boom! Done. Wham! That doesn’t cost you anything. It’s not even a recapitalization. If you’re an S Company, you have voting shares and non-voting shares. You just preserved control and now you can move all these non-voting shares out and pay no tax. It’s simple. Honestly, people get so crazed about taxes. Literally, no one should pay taxes up to some huge incredible net worth. We can show you on one piece of paper exactly what to do and you take that one piece of paper to your lawyer, boom! You’re fixed. Lawyers don’t want you to do that.
Ryan: Because then it would only take half hour and not ten hours.
Wayne: It’s the Wizard of Oz. They don’t want you to see behind the curtain. They want to charge you $15,000 for the illegal documents, which is fine. I got no problem with people making money. I believe in keeping it simple. I’m not even an attorney. Just knowing the basics of the rules, how hard can it be?
Ryan: Right. That’s exactly what we want to do, can you please just draft it up?
Wayne, I really appreciate the conversations. I wish I would’ve met you a long time ago while we owned our business because we were bat shit crazy in a lot of different problems. My dad and I are still best friends, so I’m very fortunate for coming out that hole with a good relationship. If there’s any of the different topics that we talked about that you want to highlight, what would it be?
Wayne: People. Whether you want to be a $100 million business or $1 million business, go out and get the best people you can. Treat them with love and kindness because they just make your life so much better. Being a skin flint, and we’ve seen a lot of people this way, they just don’t want to pay the people. I pay my people outrageous sums and I’m so happy because they take the slings and arrows and I don’t have to. Maybe I could’ve made more money personally but I’m so happy to share it with these other people because they make my life better. If you can have that balance between a great life and also making a pretty handsome living, boy, why would you take it?
Ryan: I couldn’t have said anything better than that. That was great wisdom and it is true. It is so true. We went through three horrible IT Directors, as we’re building out our Outsource IT. Finally, paid a huge recruiting fee, got this guy in and literally, my life changed in one day.
Wayne: I’m telling you, it makes all the difference in the world. Good people just make all your dreams come true and bad people create their own set of nightmares. It makes your life harder and then they add fuel to that gasoline fire.
Ryan: Wayne, what’s the best way for our listeners to get in touch with you?
Wayne: It’s [email protected].
Ryan: Thank you so much for coming on the show.
Wayne: Awesome! Thanks for having me, Ryan. I enjoyed it.