Podcast: The Real Deal on Succession Planning, an Interview with Carrie Hall and James Bly

By Ryan Tansom
Published: January 4, 2018 | Last updated: March 21, 2024
Key Takeaways

In this podcast with Carrie Hall and James Bly, we explore the 30-13-3 rule of succession planning and the best ways to ensure a successful transition.



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

Carrie Hall

As the EY Americas Family Business Leader, Carrie leads the EY network of professionals that provide holistic services to family business, family offices and their shareholders throughout North, Central and South America. An assurance partner of Ernst & Young LLP, with over 30 years of experience, she has been published in national and global publications including The Wall Street Journal, New York Times, Harvard Business Review, Fortune and Financial Times. She led EY’s efforts to conduct and publish a first-of-its-kind global survey of the world’s largest family businesses in collaboration with Kennesaw State University.


James Bly

As a leader of EY’s national Family Enterprise Business Services practice, Jim has 35 years of experience working with enterprising families to grow larger, more valuable businesses; secure growth capital for their business while maintaining control; successfully transition businesses from older to younger generations; and obtain liquidity, when needed, for shareholders. Jim has also been instrumental in developing EY’s proprietary tools and methodologies used to help enterprising families grow, finance, transition and monetize their private operating businesses.

If you listen, you will learn:

  • The backgrounds of both Carrie and Jim and how they led them to Ernst & Young.
  • Some of the facts surrounding the transfer of family businesses to the second and third generations.
  • Some of the milestones that successful family businesses reach before and during transitions.
  • The importance of transferring business vision and how families manage it through the generations with governance models.
  • How to address the financial reporting as the business grows and changes through the decades.
  • How to analyze and identify the gaps between the different skill sets represented by subsequent generations, as well as tips on working around these gaps.
  • Some thoughts on structuring the actual transfers.
  • Considerations for splitting the estate and the wages when skill sets are disparate and responsibilities are intertwined.
  • One of the key differences in terms of governance between businesses with successful generational transfers and those that do not succeed with transfers.
  • Why a framework for decision-making is vital.

Full Transcript

Announcer: 00:00:09 Welcome to the Life After Business the podcast where your host Ryan Tansom brings you all the information you need to exit your company and explore what life can be like on the other side.


Ryan Tansom: 00:00:19 Welcome back to the Life After Business podcast, this is episode 74. Have you ever heard of the daunting stats about a successful family business transition? The one that goes around in today's market is the 30-13-3 rule where 30 percent of companies successfully passed to the second generation of the family, 13 percent to the third and 3 percent to the fourth. A lot of people use this stat to show how dire it is to have a family business and how unsuccessful the transitions are. But what is really interesting about today's episode is that we discuss how these stats show and prove that family businesses actually have a longer success rate and longevity than the normal non-family business and companies that are out there. We have on the show today Carrie Hall who leads the family business center of the U.S. for Ernst and Young and James Bly who had a family business consulting firm and sold to EY and now runs their family enterprise business services.

Ryan Tansom: 00:01:14 And today they share with us what some of the most successful family businesses do to increase their longevity and success during a transfer to the next generation of management and family. So if you're stuck in a family business and are looking for some gold nuggets on how to move forward, you'll enjoy this episode because they give a lot of practical ways to look help understand what the resources that are available to you and how to at least begin the conversations. So without further ado I really hope you enjoy the episode with Carrie and James.


Announcer: 00:01:45 This episode of Life After Business is brought to you by Solidity Financial's growth and exit planning. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your time frame to the right buyer at the price you want.

Ryan Tansom: 00:02:08 Carrie and Jim, thank you for coming on the show today.

Carrie Hall: 00:02:08 Pleasure to be here, thank you for having us.

James Bly: 00:02:08 You're welcome, Ryan.

Ryan Tansom: 00:02:15 So well for our listeners. You know we were just kind of chatting a little bit about the family business realm and the specialties that you guys have and I'm really excited to have you on the show because I think intergenerational transfers with family businesses is a huge topic and we can't jam everything into the show today. But I think for listeners to give them a little bit of insight into each of you guys' backgrounds and then how you ended up at EY. Can you kind of- maybe Carrie you kind of kick it off and give your background and then Jim you can follow her?

Carrie Hall: 00:02:51 Perfect, so as you said, I'm Carrie Hall. I am a partner with EY and the Americas leader of our family business network and the network consists of EY professionals in all of our service lines who use globally integrated methodologies we have counterparts in all areas of the world focusing on family businesses so something we can do together and really our mission is to help families in their businesses as they set their strategies and achieve their goals. They're often oriented towards growth, but not exclusively. Got into it just right out of school joined EY and started working on family businesses day one and has been a segment that I have specialized in for just over 30 years now and I'm extremely passionate about. I'm really excited to be talking with you about it today.

James Bly: 00:03:38 And Ryan my name is James Bly and I'm the executive director with EY's family enterprise business services which they had acquired during this past year from you know from us. I was one of the founders of a practice starting in 1982 that built a unique model to assist families who were interested in growing larger more valuable businesses not only during the course of one generation but also in many instances transitioning them from one generation to the next. And so I've had 35 years of practice experience and I'm now pleased to be part of the EY team that is providing services to families that own larger private middle-market companies.

Ryan Tansom: 00:04:25 Well, I'm so excited to have you two on. Because being from you know coming from a family business and I know there's a lot of family business listeners and you know I think there's something unique about all of us who like to play in the world of the crazy dynamics of family businesses because it's an interesting thing where you're wearing all these different hats as a family member and a business owner and employees and board members and all that. So

Ryan Tansom: 00:04:46 so I think you know with the amount of years of experience we have with you two are going to build a dive into some of the most challenging questions I think a lot of family owners have and one of the ones that I want to kind of kick it off with is- I'm sure you guys have a little bit more of the facts but there's the facts of how successful it is for- of the transition from first gen to second gen and into third gen. You know maybe you know the- key it up to one of you two to give us some insights on the facts that are out there and the whole family business marketplace some of the you know the general outlines of what we're kind of looking at.

Carrie Hall: 00:05:24 Sure, I'd be happy to go first. Talking about some of the statistics related to family businesses and there's a common one that's quoted that varies just a little bit but it usually is like a 30-13-3 survival ratio. Where 30 percent of the firms survive from the first or second generation, 13 lasts the third generation and only 3 survive beyond the fourth generation. And they're talked about in terms that sometimes are negative or pessimistic, but they're actually great statistics and they show that family businesses last longer than non-family businesses. There's been some research done that if you look at the average lifespan of a company that listed in the S&P 500 index of leading U.S. companies the average lifespan has decreased by more than 50 years in the last century from 67 years in 1920 to just 15 years today.

Carrie Hall: 00:06:13 And if you consider that family businesses then are going in larger proportion so the next generation it's actually their longer life [unclear]. If you look at Japan, there are more than 20,000 companies over 100 years old. [Ryan interjects: Holy cow.] Yeah, and a handful that are more than a thousand years old and the oldest of which is believed to be a hotel founded in 705, which is the oldest company in the world. And so those that have studied this longevity have concluded that you know they survived so long because they're small mostly family-run and because they focus on things that aren't necessarily tied to making a profit. So it's really about family values and things that are coming in and causing them to be so long-lived [unclear]. And

Carrie Hall: 00:06:59 I think also sometimes it's not right to look at a single operating company when you're measuring success of family business because there are times that it makes the best business sense to exit an operating company perhaps to sell it to someone who can take it and take it beyond where the current family can. Maybe it's a rebalancing the portfolio or wanting to go into a different business or it could just simply be time for that business to die and to make that decision should be considered a success as opposed to a business failure of some sort.

Ryan Tansom: 00:07:30 Yeah that's really interesting. I mean I I actually heard that stat too because it was the S&P 500 and how- how long those companies are living there and an amazing amount of how many are disappearing through mergers, acquisitions or death or- The fact you put it in a different light, Carrie, I think is really interesting and maybe we can kind of peel that back a little bit. What are they doing? What are these successful businesses and families doing that is helping them? Because you've mentioned that it's not just about the profits per se but it's more about the family and the culture. Kind of outline some of them main milestones and things that they're doing that are helping with the longevity.

James Bly: 00:08:13 Well, Ryan I think… Let me take this question and actually pick up for a moment with where Carrie had left off relative to the success rate transition from between generations. Most of the work that we do is focused on upper middle-market family-controlled businesses and in the United States roughly 6,300 of those that have between 100 million to over 3 billion dollars of annual revenue or sales. And what you find interestingly at the upper end of the market is that over 80 percent of those businesses are second through seventh generation companies as opposed to first generation companies. So unlike the broader group of family businesses that would be smaller. Not surprisingly at the upper end you have many that have gone- they have grown larger more valuable companies but also have successfully transitioned those from one generation to the next. In fact our practice… we've represented families out to one that's 15th generation at this point in time, as an example.

James Bly: 00:09:27 But one of the words I'm using here is transition as opposed to the word transfer because what you find if you really examine these- the families that are successful in moving from one generation to the next is it typically takes eight to 15 years to fully transition control, oversight and executive management from an older to younger generation.

James Bly: 00:09:51 And that's also why we refer to a generational transition as a process not a plan because implementation typically requires multiple people in steps over a number of years. That's also the reason that we emphasize when thinking about generational transition the focus must be on preparing the next generation for the business of tomorrow not the business of today.

Ryan Tansom: 00:10:20 That's an interesting comment, James, because I you know I don't want to skip ahead a little bit, but I think one of the things that you mentioned which is transfer- I mean well it is a process that's the transferring of the business of tomorrow so you know understanding how to transfer that vision creation is something that I've struggled with and I've seen our clients struggle with where you know it isn't what it used to be and how do you move forward and maybe… do you want to elaborate how the business owners and the families manage the vision piece of that? And I don't want to go too far ahead but because you brought it up.

James Bly: 00:11:01 Well you… Carrie, if you don't mind I'll respond to this initially here. You and when you say "vision" – and you know, Ryan, oftentimes you hear words – "vision", "strategy", "mission", "values", you know, etc. – and sometimes those are tossed out almost interchangeably and sometimes it isn't clear whether there's let's say consistent terminology that is applied.

James Bly: 00:11:31 But a we think of vision and the word strategy is more or less synonymous. It's the view of where are we going in the future it doesn't necessarily address how we go- how we're going to get there (that's the mission) but the vision or the strategy is where do we go from here? And what our experience is that there are several different types of governance and management models for multigenerational family-controlled businesses. And so as part of that transition from one generation to the next the governance model and the management model needs to be considered. And how the future vision or strategy for the business is determined would in large part depend upon the governance model that's been chosen in some instances, as an example. It's the CEO's responsibility working with members of his executive team to set the strategy and the CEO and team develop the strategy.

James Bly: 00:12:38 They come to the board of directors and they present their vision for the future of the business to the board and the board either approves funding for it or they don't. But you also find in many other situations and we think you, with- More and more of the multigenerational businesses that those companies as part of the boards or the governance structure actually will organize strategy committees which will work with the CEO and the executive team on the development of the strategy and or monitoring the implementation strategy. And so in most instances, how the vision for the future is developed is a combination between a subcommittee of the board strategy committee and the CEO and the executive team.

Ryan Tansom: 00:13:33 That's… It's interesting because I mean that makes so- that makes sense. And I'm curious, James or Carrie, how difficult is it to get there? Because you know and you know when you've successfully gotten to the second, third, fourth, fifth, sixth, seventh generation, I think you have to have that governance model. But you know how often do either of you guys see that that's not in place and that that has to be created because I know for example I've got a few people that I know where their midmarket companies but it's you know self-run and there is maybe not a governance model or a board that is there yet and it's kind of you know senior versus Junior and you know conflicting ideas of where they want to take the company and with different risk tolerance and different visions and different experiences. I mean how difficult or what are some of the steps that you've seen to help implement something like that?

James Bly: 00:14:26 Carrie, do you want to take that question or would you like to take that question would you like me to?

Carrie Hall: 00:14:28 Let me just say that the scenario you just described where you've got senior and junior and there's starting to be some conflict and maybe different directions is an excellent time to bring on board and getting another group in there who has the experience, the interest and the oversight ability to help shape the family, take some of the emotion out of some of the decisions and really serve as a good sounding board and augmentation of the skill set that currently exists within the company clearly a board is a best practice. And there can be a lot of catalysts for someone deciding it's time, but if they start to get large and have divergent interests in the family again it's an excellent time to bring one on.

Ryan Tansom: 00:15:09 Well yeah I feel that it's taking the emotion out I think is the biggest challenge that maybe the successful companies have figured out a way to do that. I mean, either of you have any examples about the easiest way to take the emotion out of these decisions and how to actually make it about the business and not about the family dynamics?

James Bly: 00:15:29 I think that's where the word 'process' comes in because you know to the extent that if you think about what makes most businesses successful in the first place they have a lot of processes that they develop over time that can range from customer relationship management processes to innovation processes to operational processes you know et cetera. And the growth and development of a business requires a process as well and usually to the extent that you, as part of the process, you know you are you are developing better data you know with regard to – that can be internal data or external data – to better understand the context in which the business is operating and you can compartmentalize things typically in three areas. You know one would be what we refer to as growth and competitive factors and it can range you know, Ryan, from changing economic environment to two how strong the company's external research is, the rate of industry consolidation or change that's occurring,

James Bly: 00:16:54 how effective their growth strategy has been over the past maybe five or six years. Get a sense of the how aggressive their competitors are, whether there's change in customer preferences. Certainly the impact of things like technology and business model disruptions or even with some businesses they may suffer from a lack of innovation. So those would be growth and competitive factors. And while there can be no say variances of maybe qualitative view about those things in most instances you can pull data together that gives you better quantitative analytics that can be applied to help separate fact from fluff or emotion. But then there's also two other categories here that the other important category is that growing businesses need capital to support their growth.

James Bly: 00:17:50 And of course historically we've many instances that had more businesses impacted by changing conditions in the capital markets. Industries fall out of favor with banks or lenders. The conditions in the capital markets can change. They sometimes end up with therefore capital providers that are not aligned with the long-term objectives of the business owners. Some companies are stuck with a burdensome cost of capital etc. So they [Ryan interjects: Been there!] Right? So so the capital funding factors are important and then that also one of the things that's clear is that if everyone at the moment is doing a good job working together you've got your growth and competitive factor straight you've got the right capital structure in place and you're got to be building a larger more valuable business looking out over an eight or 10 or 15 year period of time. You need to think through whether the intent is to preferably hold or pass that that business into the next generation.

James Bly: 00:19:02 And if in fact the leaning or the preference among most, not always all, but the most of the shareholders would be to successfully transition a growing and profitable business into the next generation. Then the third leg of the stool is there's a number of transition and continuity factors that need to be addressed. It can be you know unclear strategy at the ownership level. It could be weak succession management. There might be the governance structure that has worked in a given generation most instances would need to change going into the next generation. There could be conflicts about risk among the shareholders, unprepared heirs, et cetera. So this is what we found is that in fact we have a generational transition risk assessment survey which is highly effective tools for family controlled businesses to take and use to kind of gauge in some of these key areas

James Bly: 00:20:11 how well prepared their business might be. By using a survey tool of that sort it could also take some of the emotion out of decision making because the survey tool has been based upon sort of demonstrated best practices with some of these large, successful, multigenerational businesses. I hope that helps answer your question.

Ryan Tansom: 00:20:29 No, I think it does. And you know I think the first two are really interesting because those are outside factors and then you have all the internal factors which you know I think all those get mixed up sometimes, so clarifying the different the different buckets is important before you can even address them. [James interjects: it is]. Otherwise it's difficult to understand what you're talking about whether it's… because we had- our business was a copier and managed I.T. business and it was- the industry was changing, the pricing was changing, but that also impacted our internal communication of what we wanted to do. And it's it's interesting because I think it's a good way to focus in on exactly what it is that you're trying to accomplish. Question for you, Carrie, because I know you… I don't know if you started out as a CPA or are you still a CPA and I think you know the financials of the businesses and I'm kind of curious on both you guys perspective on this but how- you know the business might be ready, but how do you start addressing the financials and the maturity of the financial reporting when it's going from maybe like a middle-market lifestyle business of a lot of fun, cool stuff to having the clarity of that data to be able to actually address any of these? I mean, Carrie, do you have any kind of insight on how you have watched the evolution of the financials of the family business like that?

James Bly: 00:21:46 So to answer your question yes I am a CPA and I'm still a practicing as an auditor as well. So. [unclear] really it's a growth in sophistication as the companies grow. It's a separation of personal from corporate as part of a good governance. It's setting your internal controls with the financial reporting. It could be hiring more external expertise that it's just kind of a stair step as the complexity of the business warrants and the size and scale of the business warrants. If you had external parties involved in various aspects perhaps in lending or other arrangements, there's another level of sophistication that that brings on as well. Ryan, is that answering…

Ryan Tansom: 00:22:32 Yeah. Yeah it's just it's so- because I mean I've heard stories like of you know the 80 year old owner who hasn't shown his 55 year old son the financials yet. [Carrie interjects: That's a different question: Why?] Well I think it's it's all intertwined so I think it's you know it's trying to get the mental readiness of the original founders or the family members to trust in somehow with the trust in the financials and in the decision making there's so many of these different parts of I think maybe my question is is because all of those things are so intertwined like you know starting that process because the financials are different than the strategy different than the roles and responsibilities. But I see a lot with our clients and people I've interviewed or you know in our old situation that it's trying to unwind all of those and address all those differently and the financials always end up being a piece of that because there's a lifestyle and a control that's tied to that which then kind of ripples all the different behaviors so I think I don't know if I confused you more or more just tryin to say you know I don't know if there's a way that you start going through that because it's difficult to start.

Carrie Hall: 00:23:46 I heard a few things there. Let me offer a couple perspectives and I'm sure that Jim has some as well. I think that transparency was one thing that I heard you got the 80 year old holding all things close to the vest. It's not a very good strategy if you're hoping that someone is going to be your successor in the business because really you can't start too young in my opinion in grooming a successor or a successors or a pool of people from whom to choose within the family and part of that is absolutely understanding and having respect for the financial situation of both the business and the family so that you're learning what that means and how to be good stewards. Financial literacy is extremely important and needs to be built into the education curriculum of a young family member or business-owning family member. Just like other aspects of education as well as what it means to be a good shareholder and other aspects of education.

Carrie Hall: 00:24:42 And then good communication needs to take place as well. There needs to be clear communication as to what the expectations are, what the desires are, particularly as someone is nearing the point of time in which they are looking to perhaps slow down or exit the business. It's really common. Out of SGF, we had a panel of next gen members there and one of the things they talked about the most was they wished that the prior generation had shared more with them and told them more about their vision. In some cases, they were gone at this point; it was too late, they couldn't ask the questions they wanted to ask. So it's really important to be able to have an open and candid dialogue.

James Bly: 00:25:21 Ryan, and what we've learned is that it is that there are roughly 11 categories to gather what we refer to as facts and issues because deep perspectives both say within the family or within the boardroom or within the executive team or within the organization the perspectives on these 11 facts and issue categories ultimately influence the view in terms of the critical questions that need to be asked. On matters relating to where do we go from here or how are we go to do it. This is it. And by using the same facts and issues methodology it's a great way to put a process in place. It's a great way to take a lot of the emotion out of the decision making it and those 11 issues I can run through here quickly.

James Bly: 00:26:21 The first is understanding the company's core market and then the second is the company's business model and its economic model. The third is the company's value proposition. You know, why do people want to do business with the company? Who its customers are. It's surprising how many companies don't fully know their customers because they don't- then also can't really analyze who additional customers might might be. The fifth area is a good handle on the competitive landscape. Many companies aren't even clear on their competitors much less who owns the competitors, how the competitors were capitalized, etc. Then into the sixth category: it's understanding the organizational capabilities which sometimes actually can be mapped on a resource-basis with an organization. Then of course the operational capabilities is next. Personnel and talent is right behind that.

James Bly: 00:27:29 The financial management and control systems would be next. And the last two categories. The one would be- the tenth would be the companies that's called technology or domain expertise. In the final one is risk management that people feel when they think of risk types think well that's how do we protect ourselves from the sky falling. But the fact of the matter is that there can be risks on the way up you know how do you fill orders? How do you control growth as much as risk on the way down? So those are the 11 categories where if you then begin pulling together the view on facts and issues that would be each one of those categories, that ultimately is what drives the dialogue to address issues such as the ones we're talking about here today.

Ryan Tansom: 00:28:21 Well it's interesting because I think you know by breaking them into different chunks like that and having a process around each of them because you don't have to transfer. It's not like you're just transferring all of you immediately tomorrow to someone else so you can… I'm assuming you're approaching all these different categories in different ways that you're transitioning the decisions and the visions and the responsibilities and each of these different things. Is there a certain area that you usually start first as you're kind of looking at where they look… at where they are in all these different areas?

James Bly: 00:28:54 We usually start with where the principal owners or principal decision makers, you know feel the major issues are the pain points and the difficulties that they're having with moving forward for one reason or the other in all of these things are ultimately tied together. In fact in many instances you know what you find is that is it because they're stuck on one or two things they're also missing some others. And that helps you again put this process in place. But you know if you if you think of corporate development best practices you know once you have let's say reasonable clarity in terms of the facts and issues then if you think of the corporate development practices there are roughly 10 building blocks for corporate development. Those range from you know organizational design and culture and effectiveness and changes that might be needed there

James Bly: 00:29:54 to things such as the capital structure, external research, acquisitions and divestitures, et cetera. I won't bore you going through another list here today but by having clarity with regard to the facts and issues and then understanding that there's 10 fundamental corporate development building blocks that can be used in whole or part at a given phase or life cycle point for a business. You can do a really great job of effectively moving the needle, to aligning view, reducing conflict and propelling business growth.

Ryan Tansom: 00:30:31 So then how are you if you're if you're doing that which makes it a lot of sense you're kind of breaking it down into the fundamentals. How do you what do you know how or what do you do when you're analyzing these different 11 categories and the building blocks identify the gaps between the different skill sets because you usually can't replicate yourself. So if I'm passing it on to the second generation there's usually going to be lots of gaps whether it's financial. Out of those 11 there might be different capabilities that you know my son or daughter might have that I don't have or you know all these different things. How do you recalibrate how to fill in the gaps and how to eliminate the egos and potentially bring in outside people? I mean what are the easiest ways to eliminate the egos in that situation?

James Bly: 00:31:18 Eliminate the egos. Not always easy. I mean it can- and I've found that the more factually-based you can become, the more dispassionate people can be with regard to understanding the situation. And it really does help to diffuse the impact of egos as part of decision making. We all have egos and most of us like to be right, few of us like to be wrong. And yet at to the extent that you can reach at least a consensus view not necessarily everybody agreeing but the bulk of the people involved in reaching consensus view with regard to facts and issues and which are the building blocks need to be applied almost fall into order almost magically.

Ryan Tansom: 00:32:09 So then how do you deal with bringing other. Let's dive a little bit deeper into this and the technical stuff, so as you're kind of going through this and you're identifying some gaps in everything. What do you see in how these deals are actually structured. You know maybe you know Carrie or James give a little bit of an example. How do you transfer the roles and responsibilities. And then also how was that structured? Is it through gifting? Bonus programs? Is it through leverage? You know because the way that I've described it is some of our clients or I've heard other people describe it as you kind of got the equity situation where you're actually getting involved that way but then that doesn't necessarily have to be in parallel with the roles and responsibilities and all these other different factors. How are you, you know, mirroring those or align all those together?

James Bly: 00:33:01 Well you first need to understand the organization that exists today how it's how it's controlled and what the background and experience is not just the CEO, but professional advisors, board members. Sometimes you've got non-family executives in many answers in place, et cetera. And you need to examine how in essence effective the current organization is at running today's business. And then as you begin to think about tomorrow's business you begin to think about or design the organization of tomorrow. And that gets you into the skill or experience gaps that might need to be filled. It gets into people development etc. Because in businesses you usually don't succeed and they don't typically grow to be larger or more valuable to the extent that there's no change in the organizational design. And so by somewhat like building a home you know where you try to make your mistakes on paper through drawings and renderings and CAD models etc. and the same

James Bly: 00:34:28 to with the organization. And by doing that you know one of the words that is often misused we feel is succession planning. And succession planning technically means is finding tomorrow's replacement for the given person organization who has a certain set of skills and end in some instances that's what's needed. But in most instances what you need to address is what we refer to as succession management which is understanding the future organization, the future skills that will be needed. And not surprisingly you know if you've had a CEO who's done a great job of building a larger more valuable business over the last 35 years it's not inconceivable that to extend the growth of that business to tackle other challenges during the next 25. It could be different skills than what has brought along the last three decades. And so that that needs to be modeled out.

Ryan Tansom: 00:35:30 Well it's interesting. I mean you're you're you're kind of taking the words away from "we're replacing you" to like it's almost like an S-curve in my head as you know as you kind of got that you're just doubling down and reinventing what you're going to be doing in the future but you're not necessarily having to replace anybody. It's just like recalibrating how the whole structure is worded. [Jim interjects: Right.] So it may be a question for you, Carrie, because you know when you're looking at let's say you know you've got this situation kind of lined up and you're figuring out where the roles and responsibilities are. You know do you have any examples on how these deals are actually structured from like the financial buy-in from the from the second generation? And so that's the first question then maybe we can tee that up to follow that would be kind of the action versus non-active kids because this whole equity buying in and I think it gets really muddy. So I don't know what are your experiences and how people usually go about doing this that you see that has really successfully worked and then how do you deal with the active versus non-active kids.

Carrie Hall: 00:36:34 So as much as I want to speak, I have to say I think Jim is probably better suited to talk about structures.

James Bly: 00:36:40 Well actually it is interesting because this is a great question. And my experience Ryan is that it never seems to be quite as clear as active versus not active. In a first go at a second generation family, obviously the first generation you've got an active shareholder because if we didn't have an active family member there wouldn't be a business in the first place, right?

James Bly: 00:37:19 And often if there are a number of children or siblings, you find some who might be more interested or are more active than others. But you know we've had we've had a good good number of first generation entrepreneurs who had only one child. And frankly some of the more successful transitions between first and second generation has been if there is only one child because there's no sibling rivalry in those situations. But even as you move into the second or third or fourth or fifth generation and even though statistically then there would be fewer lineal descendants who would either have the interest or competency or skill sets that might be required.

James Bly: 00:38:07 It doesn't necessarily force people into an active versus not active camp because what you find especially is the businesses are growing and also importantly when you look at you know 80 percent of the middle market family controlled businesses in the United States are located within a one hour drive of 36 smaller cities. So it's places like Pittsburgh and Indianapolis, Cincinnati, et cetera. And as you take an hour's drive outside of any of those cities, you're pretty quickly in a small town or a rural area and that that's where most of these businesses are located. What you find is the- as long as the businesses are growing and profitable, the owners do tend to operate these businesses at some level with a purpose beyond profit and in that- not only do they try to be consciously good employers, but they frequently do things such as build community centers, support the churches in the schools and the hospitals and the Little League teams et cetera.

James Bly: 00:39:14 And so what you find with a number of these families is that there's different ways that owners can be active. You know some some of the family members would end up being senior executives in the company or maybe managers in the business. Some of the families have employment policies and career development programs where younger family members who are interested would come in as an employee and would work their way up. You've got others who've had success with their careers outside of the business but they might be a board member or some can be professional advisers. Many of the larger families have family offices or family foundations with some of the multigenerational out into the third fourth generation. You get into family councils and or people who are kind of active owners or on ownership boards with some of these businesses. So we find that in most instances it isn't purely active versus not active. There can be a range of important roles that don't always necessarily being the person running the business or even having an interest to doing that.

Ryan Tansom: 00:40:30 And I totally agree with everything you said, too, and honesty probably a very healthy family business has a lot of those different dynamics in it because it is a lot of the purpose over profit intertwined at the community and the employees and the families and stuff you know one of the things that I've seen it's been a challenge or I've personally experienced it.

Ryan Tansom: 00:40:50 How do you know in that scenario. Let's say you've got you know the second generation who's got a CEO that's going to be taking over as you know growing the family business and doubles the size of the business. So you've got the CEO salary and distributions. And then you've also got all these other people that are you know organizing organizing Little League games.

Ryan Tansom: 00:41:11 You know just obviously to make it a very dramatic difference in how to split the estate versus the sweat equity– or you know the salary and the wages and then. So that's you know that's tied into what happens if that CEO doubles the company, who gets the benefit? Because that's where the estate and the company and the rolls and salaries all kind of get intertwined you know? How do you unwind that to make it very fair for everybody whatever role they want to take?

James Bly: 00:41:42 Well I think that's where a fair and informed process comes in. And because I think the issue is you know someone is making a contribution to enhance the value of the business maybe beyond what an average owner or shareholder might be doing. And if you think about it first and foremost from the standpoint of a family where there are no owners who are in the executive suite and there's a good number of those out there, and in those instances a number of those executives will have been incentive-based compensation. That's not always shares. Sometimes it's options sometimes it's phantom shares etc. But generally speaking, whether it's a family member that is in the know a key leadership seat or a non-family member there's ways to fairly compensate them for what they're doing in terms of running the business or minding the store on behalf of the owner's.

James Bly: 00:42:59 And so too I mean if you have a family member who is in charge of community relations, if you have a family member who is representing the family in the business in terms of you know their philanthropic activities or their social capital or well-doing et cetera, there are ways to appropriately compensate you know such individuals for what they're doing and in many instances of course it would be the key leaders that are driving equity value creation because let's face it, a successful, profitable and growing family-controlled business is sort of the goose that lays the golden eggs and the health of the goose is important. So yeah.

Ryan Tansom: 00:43:48 So everybody should want that to happen because it actually benefits everybody.

James Bly: 00:43:48 It does.

Ryan Tansom: 00:43:54 So I mean what I'm hearing is that you know just really having the clarity and treating the family business as a normal business without family members and then leaving the family members with the right roles responsibilities and skill sets into the right things and having the normal compensation structures even if they weren't family members and just having it very clear is kind of what I gathered from that right.

James Bly: 00:44:17 That's actually one of the one of the key reasons that you find that the big differences between these successful multigenerational family businesses and other companies are the key difference is that most of these families put what we referred to as parallel governance systems in place. And what they actually do is they split governance between what we refer to as Business Governance vs. Owner Governance and on the business governance side. The objective there is to give the people who generally have the ownership stakes and that the can be shareholders trustees beneficiaries etc. But the business government has the responsibilities to give the people of ownership stake give them operational competence that you know somebody is minding the store that that goose is laying the golden eggs is being well cared for and will be healthy into the future. The other side and the Owner's Governance side the key there is to is to build human capital and emotional development among the owners today and future owners and their influencers so that you can have you know group learning you can have preparation for good stewardship, cooperation.

James Bly: 00:45:49 And you can ultimately in that way have a better consensus over the direction that would be provided by the owners or shareholders to the board and all of those things tie into what we refer to as patient capital. So what you find is that with these parallel governance systems you've got an effort on the owners side to build patient capital into the future and on the business side you have an effort to instill operational competence in the owners.

Ryan Tansom: 00:46:21 Yeah I think that's I mean beautiful way of looking at it. What are the different ways that you've seen that things will go south fast because I think that obviously it happens. So you know what are some of the biggest roadblocks that are very difficult to overcome that are not looking towards the benefit of the businessmen? Now, I don't know if you see a common theme among the ones that actually end up having to just sell it outright because of the situations.

James Bly: 00:47:00 The most common theme is to is to not put adequate time into these things that we're discussing today. You know it it never ceases to amaze me at how many very successful founders or CEOs or next generation leaders… You know we're working with some right now their fourth generation.

James Bly: 00:47:19 But candidly they haven't put as much time or effort into these things as an example of their father grandfather had done. And so it isn't it isn't always just a first generation go into second which you find is the one of the biggest reasons one of the biggest causes for failure is that the people who have driven success during the current generation act as if things will just take care of themselves. You know one of the big problems that I've experienced in my own life as well, candidly, is it sometimes hard to imagine a world of which we're not part of. And so it being be able to put again process in place recognize that doing it right oftentimes takes you know eight to 10 to 12 to fifteen years. And that is that without an organized process without time going into it… look that these businesses wouldn't typically as I've already mentioned be profitable.

James Bly: 00:48:25 Somebody had put a lot of time into it to processes and did the same thing has to occur on planning for the future of the transition the business and if not more likely than not it's going to fail it's going to be a takeover candidate for someone then.

Ryan Tansom: 00:48:25 Carrie, is there anything- Go ahead.

Carrie Hall: 00:48:46 I was just going to add something. That when you think about this preparation, it isn't just focused on that also the family that we've been talking about as well and we've found through research that the largest oldest most profitable family businesses they have a dual focus on the business family is not one at the expense of the other. And that strong family really and that cohesive family really is a benefit when some adversity is there and a family needs to then reach a decision in a cooperative manner about something of strategic importance and because they lay background work they clarified their mission. They have good communication skills. They're familiar with what's going on in the business world. Good governance practices. It really gives them a leg up whether it's the unexpected need for successor because there's been some event or something derogatory has happened in the business that's causing a real crisis there and the family has to rally around together to meet that need. So I just can't over emphasize the importance of focusing on not only the business proactively and it's good governance but the family as well.

Ryan Tansom: 00:49:56 Well it's got to be interest. I mean every business where you once you have your. It's interesting because it's so tied into the family where you know you've got a core mission vision core values the kind of stuff where if you don't have that as a family when a challenge arises where you've got to deal with it or sell a piece of the business or buy something… How do you- if you don't have a framework of how you're going to make that decision you're going to have to do it on the spot which I'm assuming just you know that the tension the turmoil arises out of not having clarity of what you're trying to accomplish.

Carrie Hall: 00:50:27 And can literally at that point tear families apart unfortunately which then leads to disbanding the business.

Ryan Tansom: 00:50:38 It's interesting I had this kind of harsh talk and as we were sitting at dinner he goes oh because we were kind of working through some of the stuff and he goes literally sometimes it's easier just to die than deal with this.

Ryan Tansom: 00:50:49 Is there anything that you've seen with all your years experience that you saw something and you… is there a couple common themes? You said you know if they would have just done these things you probably would have made it and you know maybe they didn't because they were and were able to overcome it?

Carrie Hall: 00:51:07 I think it's common to see particularly when it's a very high growth company and a lot of that has been on the business to really to focus on that and those that seem to have the best transitions are those who really defined who's responsible for succession who's responsible for the strategy and often that's going to be the board of directors. They really focus on the next generation and communicating with them and getting them ready to step in as appropriate if that indeed is what they want to do in the business or just to be a good shareholder today.

Ryan Tansom: 00:51:47 What are some of the things that you two have seen… I know you've come from different practices and you've probably exper- you've probably addressed the situation differently really. What are the ways that you've helped prep the next generation or you've seen people that have really successfully groomed those next generation? Other

Ryan Tansom: 00:52:00 than like I was just dragged into bank meetings when I was 21. That was just that. I just sat there going OK I have no idea what they're talking about but I'm soaking it up. Other than doing that are there certain things and processes or things that you've done for the next generation as you have prepped them to take on the responsibility that they're about to experience?

Carrie Hall: 00:52:19 I'll tell you that the ones that do it really well they start very early, so being dragged into this meeting was good. There might have been opportunities earlier on, but there are families that have curriculum that are designed to start at preschool age and go up to the most senior members of a family with age-appropriate learning about the family business and means, helping identify a peer group with other business-owning families is a really good support system. Teaching financial literacy what we've already talked about family meetings and board meetings when they're ready for those are really good avenues too. And EY specifically does have a program called the EY next gen program.

Carrie Hall: 00:53:01 It is a global program where we take young members of business-owning families, divide them into three age and experience levels and provide content at top tier universities around the globe. For one week periods at a time they are taught by top tier academics, by EY professionals, by business leaders family business leaders and at the conclusion of the one week program, they are part of an alumni group. It's about 600 strong right now that provides a support system and continued mentorship and peer support of each other.

Carrie Hall: 00:53:36 And we have found that it's been really successful and helpful both from the families that are sending these young men and women into the program. And then the attendees themselves to have a better appreciation of what it means to be part of a business-owning family, clarify in their minds what they want their role to be and develop their personal path.

Ryan Tansom: 00:53:59 Right thing is just fantastic because of the challenges of you having that next generation and getting the right expectations then the communication becomes a whole heck of a lot easier because I mean everything from down from the financials and how to do certain things. There was this one conversation where you know I think there's a misperception from the you know the second generation or whatever the next generation is a lot of times where oh you know mom and dad make a pile of money and then they don't know what phantom income is and they have no idea like the risk in all these different things so when you start to pull it back to go oh my gosh maybe meaning mom are dad not… You know, maybe on paper they're worth a lot of money, but this is not as luscious as it looked originally. So you're just writing the expectations versus saying, "hey I deserve a bunch of this, even though I don't know what this is."

Carrie Hall: 00:54:49 I think you're right on. As the family grows and the pie gets split into smaller pieces that dependency has to change. So it is really important to understand the limitations at an early age and not have that great dependency on the business because those dividends are coming at the expense of the investment in the company. And again part of that is in strategy and family understanding of what they want the business to mean to the family. There are some that don't take a dime out of the business but they want to be the business to be family-owned forever.

Ryan Tansom: 00:55:21 Right. There is a story there is a friend of mine who owns a firm down in Texas. They work with minimum net worth of 25 million dollar families. And there was a gentleman I can't remember exactly what the business was but I want to say it was retail like twelve hundred stores. And the kid all the kids wanted the money. And he's like we'd have to sell everything. Again, you're just like… and again that was the example of the 55 year old an 80 year old where it's just not an awareness of the whole environment. So you can't actually have a productive conversation because of how disjointed the expectations are.

Carrie Hall: 00:55:21 Education and communication. It's hard to start too early.

Ryan Tansom: 00:56:02 So as we're kind of wrapping up, James and Carrie, is you know or something that each of you want to highlight that we've discussed or maybe add to in order to you know leave our listeners with?

James Bly: 00:56:16 As I've mentioned a number of times, I think it's a matter of understanding the whole process methodology that a number of these successful families have used to support both the growth and development and financing of their companies but also the generational transition. And ultimately Ryan if you read the books published on the subject, you'll find that there's no magic bullet. You know there's no one formula that applies to everyone or any given business. And so it's a matter of coming up- but ultimately a formulation of one. There's no there's never two businesses are exactly the same. Never two groups of owners the same balance sheets you know etc. If you can start with a framework of basically understanding the tools and methodologies and processes that the families that have demonstrated competency and growing larger businesses and transitioning them have used that. Then you take the facts of your situation and look at it. You need context. You find that you could very patiently design a formula that will work great for your business and will be based upon these best practices. And that typically can produce tremendous results.

Ryan Tansom: 00:56:16 I love it. How about you, Carrie?

Carrie Hall: 00:57:45 Yeah I would just add on that I agree with all of that. I would say also don't forget to focus on the family. At the same time making sure that you are devoting an equal attention to that as well. And don't be afraid to ask for outside assistance as well. Particularly as you grow that can be a board of directors board of advisers, non-family executive members. Surrounding yourself with people who have different skills sets, different views can only expand your thought we don't know where it went. As far as new business opportunities and new opportunities for the family as well.

Ryan Tansom: 00:58:23 I was thinking I would almost reiterate that it's almost a must. If you're going to actually do it successfully because you know you got to get the third party perspective instead of having it just be you versus me or them or something. It's more about the process and getting someone that's not emotionally tied to the goose than the egg. [Carrie interjects: I agree.] Well thank you so much for coming on the show. What is the best way for listeners to get in touch with each of you?

Carrie Hall: 00:58:44 I would say email for me and it's Carrie dot Hall at EY dot com. That's C A R R I E dot H A LL dot E Y dot com.

James Bly: 00:58:44 And mine's James Bly, it's James dot Bly, b l y dot com.

Ryan Tansom: 00:59:00 Thank you so much for coming on the show.

James Bly: 00:59:02 You're welcome. Thanks for having us, enjoyed the chat today.


Ryan Tansom: 00:59:06 Thanks for sticking in there till the end of the episode. I really hope you enjoyed the show with Carrie and James and for my three top takeaways of the interview with James and Carrie are the first one that you can't start too young and I really learned this the really great way because of the opportunity that my dad gave me in the family business. I mean like we had mentioned in the episode. I had no idea what was going on 21, 22 years old getting thrown into bank meetings, the CPA meetings and you just you have no choice besides to be a sponge. And so it might not be right for your kids or the next generation within your family but really being conscious of when and how you bring your kids in and what exposure you give to them. What I found was interesting is how Carrie mentioned that there are some companies and family businesses out there that will even send their kids and put that in part of the school curriculum which really shows a proactive nature of the foresight that some of these owners are having when looking at how to transition to the next family member and the next generation.

Ryan Tansom: 01:00:11 The second takeaway that I had is that process eliminates emotions if data becomes a third party or the enemy then it allows you to become team members with the person sitting next to you whether it is a family member or even just another manager whoever it is data and process will allow people to get above their emotions and look at this situation objectively. Hopefully that is and be able to process the problem together as a team and trying to figure out the best outcome that is best for themselves and for the business. The Third takeaway that I had was design the organization of tomorrow.

Ryan Tansom: 01:00:47 I think this is a challenge that a lot of people have. I had it, a lot of our clients have it and I know a lot of family businesses have it that because there is a monumental change in evolution that the company has to have and sometimes the business owners have a hard time letting go. So if youre the generation thats got to transfer to the next one really thinking about the freedom or the ability to let that next generation be as creative as they can be within boundaries to build the company that will strive and thrive in tomorrows marketplace because all industries are changing so in order to survive youre going to have to have that company and the infrastructure evolve to the needs of your future customers. I really hope you enjoyed the episode with Kerry and James. If you've got time go on iTunes and give the show a rating. I would really greatly appreciate it. And until next week.

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Written by Ryan Tansom

Ryan Tansom

Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.

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