October 2016 eNewsletter
Larry Grypp, President of the Goering Center
Work-life balance. We hear that everywhere. Sometimes as an aspiration, sometimes an admonition, sometimes a lament.
Clay Mathile, the legendary CEO of Iams and founder of leadership institute Aileron, spoke last fall at a Goering Center luncheon and was asked by an audience member how one can maintain work-life balance in a world where the boundaries between the two seem all but erased, if not even penalized.
“At any one time, you don’t,” he replied, perhaps as a surprise to most of the audience. His point was that life -- whether business or personal -- is inherently imbalanced. To seek a moderated, balanced life amid all that turmoil is to miss the greater opportunity to simply be intentional and fully committed in the moment to what is needed.
And you can’t plan for that.
While we can accept there are a wide swath of opinions on this, the reality remains that technology, the pace and globalization of business, and even the changing nature of what constitutes family or personal time has placed new pressures on our ability to keep family and business in their respective boxes.
Interestingly, there is something about the nature of family businesses that might allow us to relax a bit on this felt tension, and even use it to an advantage.
The family enterprise is most often threaded through the daily routines of the family itself. For some first-generation businesses, they were often founded after the dinner dishes were cleared from the table. Creating and growing the business was one of those natural rhythms of the family culture. As well, introducing family members into the business was often done at a very personal, parental level -- and in some cases seen as just as much a part of focused, intentional parenting as would be going fishing or camping.
In many ways, nothing quite forges trust and the anchoring of family values than when the heart of the family’s fortune and future are so obviously at stake. To have such harmony between what the business means to the family and what the family means to the business may be the greatest balance of all.
Unity Needs a Compelling Path Forward
Scott Liston, Strategic Advisory Principal of MLA Companies
Like anything else, a family owned business can either serve as the source of unity to the family, or it can lead to the devastation of whatever unity was left. Unfortunately, the business news is full of the latter and becoming the former is a matter of careful strategy, planning, and execution. Certainly, letting these issues “take care of themselves” is only asking for trouble, and not just business trouble, but relational trouble that may exist well beyond the life of your business.
One of the keys to unity is to provide the family with a compelling path forward.
The Generational Shift
The challenges noted above often first arrive when there is a transition of leadership from one executive to the next, made even more difficult when that next executive is the next generation. By moving the leadership from one generation to another, often a new relational dynamic surrounds that executive including siblings, cousins, aunts and uncles.
So not only does that new executive face the natural pressures of getting their arms around the operation, building trust among employees, and attempting to fill what are often very large shoes, they then face the scrutiny and sometimes jealousy of this new family dynamic.
Outside Board – a Solution?
An outside board of advisors or directors, especially if they have the trust of all generations, may help to smooth the waters of these often tumultuous times in a business. But a board performs best when it is responding to the path forward for the business developed by the CEO and his or her team. This responsibility cannot be turned over to the board.
Setting the Course
The beginning of unity is almost always the setting of a plan. Leaders must lead and that looks like more than saying “let’s go there.” Rather it looks like both setting the direction and then planning how to get there.
While many may think this is a given, far too often, families get caught in the middle of bickering over who is in charge rather than where they are going. CEOs often get trapped in debating where they are going for too long, rather than setting a course and then planning how they will get there. In both cases, this leaves the door open for everyone to be a critic and no one to help pull the organization in a unified direction. It too often leads to a defeated CEO, demoralized family, and a diminished business.
The old saying goes “when you don’t know where you are going, any road will take you there.” But a good leader knows that it’s not enough to just know where you are going, you must have a map, a plan, a path to get there.
The Compelling Path Forward
Here are some principles that are helpful in preparing a compelling path forward:
- Don’t let great be the enemy of good. Yes, I know most of us, as executives, want perfection. But the worse plan is a plan never executed. With execution, you will get important, necessary, and actionable feedback both from the family but more importantly from the market. Moving is better than sitting. So build as good a plan as possible and start executing, then be prepared to keep working both on and in the plan.
- Leadership creates unity. Often we are tempted to think that if we try to keep everyone happy, unity will follow. Most often, the exact opposite is true. That is not to say you should not empathetically listen to each stakeholder, but if you wait for unity, it will never come. Use the compelling path to call them to follow you.
- Involvement creates unity. You don’t have to put the plan together by yourself. Invite the input of your team to build team commitment and alignment to the plan.
- Communication creates unity. Put the plan in writing and then share it with those who need to know: the management team, the board, and the employees. Of course you will have to adjust as you go, but you will earn respect for committing to a plan and being willing to be accountable to how it’s going as you work the plan.
- Execution principles create unity. Have you ever gotten in a car and you knew the person driving didn’t know where they were going? Everyone may have agreed on where they were going, but if the driver didn’t know how to get there, you likely went just about crazy. If you merely suggest a path forward and don’t show everyone you have the map to get there, they are likely to get out of your proverbial car as quickly as they can. Use action plans that are tied to projections and budgets to align the execution of the organization to the strategy. Allow your team to own and deliver their parts of the plan.
- Paint the picture. Show your followers the benefits of your destination. It may come in profit, growth, equity liquidity, or general health of the company.
- Celebrate the journey. With a compelling path forward, you agree on where you are going, your followers have confidence you know how to get there, and you can enjoy the journey.
There is no substitute for a compelling path forward. Planning and execution are keys to family unity in business.
Employee Ownership: Is an ESOP Right for Your Company?
The Benefits of ESOPs
“ESOPs can be a great way to help incentivize employees through participation of company ownership, with potentially no out of pocket costs to the employees, while also creating a market for private company stock,” says Mills Snell, a partner at Pendleton Street Advisors, a business advisory firm dedicated to helping owners transition their business.
For a business owner, being able to avoid or defer capital-gain taxes is another major benefit. “Strong tax incentives that help moderate large capital gains tax consequences help steer many founders and entrepreneurs towards ESOPs,” explains Mills. Loren Rodgers, the Executive Director of the National Center for Employee Ownership, says that ESOPs are unique in how they allow organizations to borrow money. “The ESOP borrows cash, which it uses to buy company shares or shares from existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible.”
Enhancing Company Culture
Kris Maynard, Chairman and CEO of Essential Ingredients, a private company that distributes chemicals for the personal care, household and industrial cleaner, cosmetic, and other industries, recently implemented an ESOP program. Kris shares that implementing an ESOP was appealing because of the opportunity to enhance his company’s culture. “For me and my partners, an ESOP was the best option for us as it was the only way we could ensure that our culture and our people would survive an ownership transition,” he says.
“We had been approached by many Private Equity Groups and competitors to buy the company and many of them promised that they would keep our culture/staff in place, but we knew that once we sold, things change and there would be nothing we could do to prevent them from doing what they needed to do to meet their goals, which are heavily profit motivated.”
Kris says that management recognized the need for a profitable and sustainable business, but that they were also committed to supporting culture and staff for the long-term. “There are certainly short-term measures folks can take to boost profits…but these are not sustainable options for a solid business. The ESOP route allowed us to transition the business over time to the people who helped us build the business, and ensure that our culture was magnified in the process by rewarding every employee with a degree of ownership.”
Essential Ingredients' story is common. Loren says that many ESOP companies find that the payoff to engaging the workforce is even higher for them than for other companies. "Everyone wants informed, engaged, innovative employees," says Loren, "but the data show that all of those practices are especially effective in employee-owned companies. There's a synergistic effect between employee-ownership and engagement." He cites data showing the employee owned companies with high levels of employee engagement have higher rates of sales growth, employment growth, and productivity, as well as lower turnover.
"It just makes sense. When employees benefit from making the company stronger by owning shares, they have a reason to be better stewards of the company's success."
“Not a Silver Bullet”
Tax benefits are a major advantage of ESOPs, but Mills warns that ESOPs must be carried out very carefully to ensure that costs are mitigated, and strict ERISA regulations are adhered to. “While an ESOP can create liquidity for an owner that is otherwise heavily concentrated in the business, it can also potentially defer an owner’s overall timeline for exiting the company because either they, or the ESOP, will substantially guarantee the liabilities associated with the change in ownership- either through bank financing or the owner holding a seller’s note.”
Loren says that the results of a 2015 survey of ESOP transactions showed that more than two-thirds of the transactions used a loan, sometimes from an outsider, sometimes seller-financed, and often both. The survey also shows that transactions are getting more expensive, in part, he thinks, because companies are conforming to new expectations from the Department of Labor. Before 2013, 23 percent of transactions reported in the survey had costs more than $200,000, while 32 percent transactions in or after 2013 cost that much, he says.
If an owner is looking to be financially independent from the business, they should know that it is a long process—one that can take years. The company will often need to take on debt in order to begin the ESOP, and a thorough analysis must be conducted to ensure that the company can sustain the debt associated with that level of recapitalization. “This analysis would also help [an owner] look ahead to make sure that the ESOP and company can afford to buy out employees as they retire and need to turn their stock into cash. This is an often overlooked detail, but it is crucial since many companies have a workforce that will retire in waves and could create cash crunches,” explains Mills.
“A common misconception about ESOPs is that they are a silver bullet, of sorts. Again, ESOPs can be an effective tool, but owners must be careful to not assume that it is a ‘one size fits all’ tool.”
Mills emphasizes that choosing an ESOP is a significantly longer-term process than selling the business to an outside buyer. “Owners must understand that they will be involved and even on the hook for several more years, so depending on their succession goals and plans, this should be considered.”
A Good Fit For Your Company?
An ESOP may be a good fit for an owner that wants to stay involved in the business for quite some time. It also keeps owners financially tied to the business for several years. “The owner should not be looking for a quick sale or a way to completely remove themselves from the business. They also are typically thinking about employee engagement and participation in the business long before they are contemplating their own retirement. If an owner isn’t sharing financial information, key decision making, and some strategic direction with employees to start with, then an ESOP is going to be a big change, all at one time,” says Mills.
Kris also believes founders or owners need to consider the motivation for adopting an ESOP. “A business owner will most likely get a higher price for the sale from an outside buyer and implementing an ESOP is expensive and time consuming—about 1.5 percent of deal value in expenses, in our case.” Kris says the motivation can include protecting and enhancing the culture, rewarding the employees, and providing a path forward for a longer term passing of the baton.
Take Advantage of Your Advisors
If and when a company is interested, having well qualified advisors in the process is critical. “Many folks will try to pinch pennies in the process, but from what I have heard, you will pay up front for quality or on the back-end in potential penalties with the Department of Labor, so my advice is to select a solid group of advisors to walk down the path with you.”
An ESOP is one option for some businesses, but it is not the only option or only way to transition a business or to evolve ownership of the business. “After taking a look at all your options, it is important to get unbiased advice about the feasibility of and ESOP for one’s specific set of circumstances,” Mills says.
“Make sure that you understand the incentives your advisor has, and if possible, talk to someone who understands ESOPs, but has more than one tool in their tool belt when it comes to business succession planning.”