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Why Fresh Eyes Are Key for Family Businesses

Why Fresh Eyes Are Key for Family Businesses

Finding the right outside advisers is crucial for a family business, which needs help with business and legal strategies and navigating family dynamics.

Every family business is different, yet they all share many of the same challenges. And most of those challenges fall under one category: the future.

With headquarters in North Mankato, Coughlan Cos. has passed through many futures since its founding in 1885. It began as a quarry and mining company, and became well-known for operating the Mankato region’s Kasota limestone quarries. But the business has continually evolved.

These days, Coughlan Cos. has two main lines: mining and processing sand for use in the oil and gas industry, and producing children’s books and what company president Bob Coughlan calls “educational technologies.” The generation before him became involved in insurance, banking and real estate development. “And I did none of that,” notes Coughlan, who represents the founding family’s fourth generation.

Now he’s preparing his daughters—Katherine, 32, and Maerin, 26—to take the reins of the business.

“We need to assign their roles in the business” and how they work with the management team, Coughlan says of his daughters. For all of his talents as a business manager, he knew this was not a project he could take on by himself. “It’s really hard as a family to know the best practices around governance and respectful treatment of family members and non-family members,” Coughlan says.

He knew where to get help. Last year, he contacted Sara Stern, whom he had met when she was director of the Family Business Center at the University of St. Thomas. Stern, who created Family Business Minnesota, helped Coughlan establish his ownership structure and build his family council.

Not all family businesses are so well prepared. Many family-owned companies prefer to keep business issues in the family. But in the words of more than one family business consultant, family leaders “often don’t know what they don’t know.” According to Stern, who operates her own consulting practice, many family business leaders “have a sense that they’ve figured it all out.” Many also believe that their privacy is at risk if they bring in other people. But that kind of thinking can also put the business at risk.

Even if they know that they need more help and information than their accountant or their attorney can provide, they don’t always know where to turn. There are all sorts of considerations: governance, corporate structure, business management, taxes, leadership succession and conflict resolution, among others. That’s why taking the time to find the right outside help is crucial. The future of the business—not to mention that of the family—is at stake.

Passing on the legacy

The future can be hard on a family business. “About a third of family businesses transition to the second generation,” notes Jon Keimig, Stern’s successor as director of the St. Thomas Family Business Center. Of the 70 percent that fail to transition successfully, 85 percent of those are due to problems of communication or trust, or a lack of preparation of the next generation.

Coughlan wants his daughters to be fully prepared. He argues that an advisory council could help the business continue more smoothly into the next generation. The council would be responsible for hiring board members—and the board, of course, hires members of the management team. With a new generation of family ownership—and those family members’ roles in business yet to be clarified—“governance is of extreme importance,” Coughlan says. But the council’s principal purpose “is getting alignment on where we want to go with the company,” he says. Without that alignment, he adds, “it’s easy to deteriorate into dysfunctionality.”

During her career, Stern has seen many examples of such dysfunctionality—and helped family businesses repair them. In 2016, she hung out her own shingle as a family business consultant. Her St. Paul-based firm, Family Business Minnesota, focuses on succession planning in all of its aspects.

Stern’s approach focuses on what she calls “the three circles”—family, business and ownership. While the three typically overlap, they also are distinct. Not recognizing those distinctions often can cause headaches and heartaches for families.

“To me, the role of the owners is to make sure opportunities are maximized for the family and for the business,” Stern says. Her work focuses on the business and ownership circles. “On the business side, I help them get really clear about where they’re going with their business—their vision.” Stern seeks to make sure that everyone understands that vision and supports it.

For instance, some businesses might want to focus on improving the organization to make transition easier. Others might want to expand the business to accommodate the growing number of family members who want to work there. Then there’s the problem of a new generation with a very different idea of the future of the business. Indeed, that next generation might be more interested in selling it than running it. Those kinds of issues are very hard to work out without an outside consultant, Stern says.

When a family business looks for outside guidance, it tends to tap one of three professionals: an accountant, an attorney or a banker. When it comes to plotting out a company’s future, the family needs more than one.

The team approach

When Matt Shea, a principal with Minneapolis-based law firm Gray Plant Mooty, works with family businesses, he typically assembles teams of professionals that can include corporate attorneys, bankers, CPAs and financial planners, among others. “If we’re going to work out a succession plan, we really need all of the team members,” he says. Such interconnection can be crucial; as Shea notes, “estate planning and succession planning go hand in hand.” The team might also include a family business counselor who can help manage conflict and similar interpersonal challenges.

One particularly major challenge in succession planning, Shea says, is having a clear idea of where the business and its leaders want to go. “Is the goal to grow the business so we can sell it to a third party?” he says. “Is that the best way to give the family financial stability? Is the goal to bring all the members of the family into the fold? Then the next question is, do those family members want that?” Or might the objective be to sell the business to its employees via an employee stock ownership program? All these options have different tax consequences. All told, he says, “you really need to put thought into some sort of plan for the future of the business.”

When it comes to succession planning, there are many different solutions, Shea says. To find the right one, you need to step back and identify what the business goals are. A solution works “only if it’s aligned with the family and the business goals,” he says. In his own practice, he has seen succession planning that “hasn’t gone as well as the patriarch or matriarch had hoped” because the implementation didn’t match the goals.

Particularly for larger family concerns, succession and management strategies can become remarkably complex. Such a business might want to tap one of the larger professional services firms. Case in point: Ernst & Young (EY), which offers assurance, tax, transaction and advisory services.

“We’re better known in Minneapolis for our work in big public companies,” says Anne McDonald, a partner in Minneapolis who co-leads EY’s private client services in the Upper Midwest. “But we also love working for private companies, and particularly with family-owned businesses.” EY provides what might be considered a big-picture approach, including not only tax planning and risk management, but also help in setting up a corporate entity that can take advantage of, say, the new laws under the recent federal tax package.

“Taxes are a big part of a family business’s expenditures,” notes Steve Harpole, an EY partner in St. Louis who co-leads private client services in the Upper Midwest region. That includes not only the day-to-day aspect, but also the ways a family can pass the business on to the next generation in a tax-effective manner.

Harpole distinguishes the type of business-management guidance EY offers with the kind of “soft” skills that many family business counselors offer. These counselors help family members work through conflict and issues that might have more to do with psychology than business management. In other words, a family business that realizes it needs some guidance should have a reasonably clear idea of what kind of help is warranted. Even determining that might require an outsider’s analysis.

To help these family-run companies find assistance, the University of St. Thomas Family Business Center has an online list of advisers based in Minnesota, with specialized experience and training related to family business issues. Those include attorneys with specialties in estate planning, as well as financial advisers that can draw up buy/sell agreements and ESOPs. Then there are the psychologists, legal mediators, coaches and others who can help families in a business work through their conflicts and succession issues.

Finding good help

To find the right outside guidance, consultants suggest that company-owning families talk to other families they know that are running businesses, particularly comparable ones. Then it’s time to perform due diligence. Stern suggests asking questions such as: “What is your experience working with family businesses? What is your philosophy?”

Asking such questions can save a business a lot of trouble. “There are people I know who almost always try to talk a family business owner into not giving or selling it to the next generation,” Stern says. “For some family businesses, that’s not a good match.”

And a cultural match is essential. “It goes back to family values,” says Keimig of the University of St. Thomas. “To make an adviser relationship work, the family should have a vision of what it wants to be.” That goes beyond the goals of a business. As Keimig observes, family businesses are often deeply involved in their community and have numerous philanthropic goals. The family should make it clear to a potential adviser that those values are intertwined with the bottom line.

McDonald notes that EY gets some family business clients via word-of-mouth referrals. “That’s a great strategy, but I wouldn’t stop there,” she says. “The people you’re working with have to be a good fit for your culture and your family,” she says. “So that may take some time.”

McDonald also believes that “family businesses make an assumption about a price point. Don’t assume that a firm is too expensive.” Clearly, she’s addressing those who think her big-name firm would blow the consultancy budget.

But she also argues that family businesses “should think not only about the fit for where they’re at this moment, but also five, 10, 15 years out, depending upon their long-range plan.” She maintains that they should consider whether a potential advisory firm “can support them on that journey.”

EY has surveyed its family business clients to uncover what makes them able to continue generation after generation. “What we overwhelmingly find is that the governance of that business is key,” Harpole says. “Most of those companies have over the years gone to the point of an advisory board or a formal board.”

Bob Coughlan isn’t working with EY, but he is thinking long term. His vision is to establish an advisory board that can help his daughters oversee the family business while letting its well-established management team run it and avoid the temptation to “meddle in the day-to-day activities of the company.”

At the same time, Coughlan wants to make sure that his daughters are thinking long term, too. In the realm of instructional content for elementary schools, you’re always forced to innovate, he says.

Coughlan Cos.’ Capstone division built myON, a personalized reading curriculum for the K-12 market. Last year, Capstone received an offer it couldn’t refuse, and sold myON to California-based private equity firm Francisco Partners. Coughlan’s daughters will also need to be open to the next myON. In other words, open to the future.

 

Gene Rebeck is a Duluth-based freelance journalist who writes monthly for Twin Cities Business.