April 18, 2018
Inheritance. What are the most common problems and how to solve them?

Without knowing, it may seem that a “family business consultant” is something between a lifestyle trainer and a psychologist. But what does this profession really mean? Is a family business consultant the one who reminds businessmen that we are all human, and we are all going to die?

I will admit that my profession is usually a surprise to others.

Perhaps the most important thing is that I help people understand the situation and highlight different roles. I always repeat that in terms of business, the family cannot be forgotten. Otherwise, you are losing a very important perspective.

About 40 years ago , a research examining family business began in the United States. It is common for a family to contact a psychotherapist in the event of a crisis of relations in the United States. The study showed that many problems in the family are related to business.

Over the past decades, thousands of diverse family business studies have been conducted. These studies have confirmed that family business are better managed in the long term than non-family businesses. An interface has been found between the prosperity of the business and good relations in the family.

It is very important to understand that family members are different. It’s common practice to assume that all family members are equal, and that is true when we’re talking about family relationships. However, such an ambiguous situation often cause difficulties and confusion for parents, mothers, children when working together in a business. The business environment is rational rather than emotional. And here we achieve a very important transformation – business transfer, inheritance.

Just 3 percent of all family businesses in the world have surpassed three generations. This is because many family businesses do not survive this transformation. The prevailing view is that business succession is something very technical, so psychological aspects of inheritance, models of behavior in the family, which, incidentally, are also dictated by business, are not evaluated.

I am not a therapist who deals with therapeutic advice, I perceive my role as a person who reveals the complexity of this process. I help create the structure of the business transfer, in which this complexity is evident.

I had a case in one family where the children argued over shares. One of the children was the CEO, his brother and sister did not want to participate in business. The mother, who held 55 percent of the shares desired to divide all shares equally among the children. It’s natural, motherly. Looking from the perspective of the family, all three children are equal. However, the brother, CEO, he runs the business, he is responsible for his employees, and he would become dependent on his brother and sister who are not involved in the business and do not understand certain matters. So we had to deconstruct the problem. I offered them to step back, look at the problem from different perspectives. One of them is the property, the economic outlook: whether money is important. The other is control. If you are a shareholder, you have the right to vote. If you do not want the right to vote (most do not want to bestow voting rights to people who are not involved in business), how do you control the business? We began to discuss this topic with the family. I spoke with two children – the sister and the brother who runs the business. The second brother did not participate in our conversation. By the way, he is dependent on the sister. When I spoke with them, I had in mind economic and control perspectives. The sister told that she would not mind if the brother who runs the business had 55 percent, and she and her other brother had 45 percent of the shares. She would be happy with that. The mother was very surprised by this daughter’s answer. She did not even think about the possibility that her children would not share equally. But if they all had the same amount of shares, and only one does all the work, is that right? And the mother understood that. She just saw that her children can agree. This is my main job – I help people talk about sensitive and complex things, showing different personal interests, different positions.

In other words, is it a problem-solving business?

Yes, sometimes I help solve problems, but mostly I am involved in preventing them.In most cases, I just suggest that an entrepreneur is not just a businessman, he’s a family member.Traditionally, a lawyer, attorney or counselor is programmed to help their clients solve problems. In the family business counseling practice it is not good to start from the problem. It’s better to start with the family, business and property alignment. For example, every family has to decide if they want all children to be shareholders or only those who are involved in the business.People do not know that they need to make that decision, especially if it’s only the first generation. In many cases, the decision of succession is done by the parents and that creates a problem. After all, we are talking about children who are already 30, 40 or even 50 years old. This is the age when children take responsibility for their actions themselves, but their parents still do not trust them. And someone needs to show the parents that they do not trust their already grown children.Parents need to talk with their children and include them in the process of implementing the agreements in order to avoid future problems. Very often, parents, especially those who like to dominate, feel they know better what their children need. They impose structures, telling them to behave in a certain way. Children do not want to follow those orders. When the parents die, their children no longer have a behavior algorithm that the parents conveniently installed. For parents it’s hard to understand that.

If I understand correctly, it is key to not seperate the business from the family. And this is a common mistake made by entrepreneurs. They think business is business and family is family. And they try to avoid such a thing as a family business until problems arise.

First, they do not understand that family and business often overlaps. Second, they do not communicate. In a family business, private life can not be separated from work. If your son or daughter works in the business and you sit together at the breakfast table, it’s clear that you will talk about business. Very often the family breakfast table is where the most important decisions are made. How many problems can rise if one family member was absent at that moment and parents did not tell him what was going on?

You mentioned a very important thing – the family constitution. What is it?

The family constitution is a set of agreements laying down family business rules. It starts with setting a goal: what is the goal of our family business (in a multi-generation perspective). What choices do we need to make in order to achieve that goal: in perspective of control and ownership. How much will third parties be permitted to participate in business and its ownership. And, of course, how will the family be integrated into the business: will every member have a set number of shares? Or only those who are directly involved in the business? And why? All of these answers should be written. But the most important thing here is not the page of paper we have when the meetings are over. The most important thing here is that family members communicate about the important issues. The purpose of the family constitution is to prevent conflicts. Many businesses fail for one reason – conflicts in the family.

Is the family constitution more or less a verbal consensus or written document?  

A written document signed legally is equivalent to such documents as a shareholder agreement. If the family constitution is treated as a legal document, then you are avoiding unnecessary conversations in the future. The family constitution is one of the preventive measures.

Do you have any standard procedure that you apply to your business, or is each case unique?

Each family is unique, like every business. No matter what we are talking about – the family constitution or the plan of inheritance – we must bear in mind that after five years the circumstances, opinions, health of the family members will change – the situation will be different. If we already have a family constitution, it’s much easier to discuss what needs to be changed. Nobody remembers what was said five years ago, so having a written document makes it easier to remember and agree. One thing in this process can be standardized – a questionnaire. A different one for the family constitution, another if it‘s a plan of inheritance. When planning inheritance, we first of all talk with all the people who are involved in the process. We usually film the conversation. We try to undersand the ambitions of peoplea and the motives behind them. Many sons have the ambition to follow the footsteps of their father just because they are afraid to disappoint them – this is not a good motive to participate in the business.  If twenty years ago I decided to take part in business just because I did not want to disappoint my father, it probably won‘t go well neighter for me, nor for my business. That’s why it’s very important for people to talk about it. And – face to face. If the interview would involve parents, the heir would not say how he feels and we would not find out the true situation. So, we ask them about their ambitions,  what are they thinking about co-operating with their brothers and sisters, we ask their opinion of the property, personal relationships, and what will a their spouse say if they have to dedicate 60-70 hours a week to the business. Do they want it themselves? One will say he/she will listen to their spouse and the other will not. These differences are not bad. It‘s bad to not talk about them.

When we talk about Lithuania – where private property is something to twenty years old, what would be your message to those who will face these problems?

 

  • Business transfer to the new generation is not a simple task.
  • Insufficiently evaluated complexity of inheritance planning is the main cause of the collapse of the family business.
  • Changes in the family and changes in business are very interconnected.

 

Everything is clear and simple if it’s the first generation of business. The business owner is a father or mother, one leader who controls everything. After the death of this leader, the shares go to several children, with a lot of interests and different stories. Everything becomes very complicated.

 

We think that we have a questions and answers period in Lithuania. This is probably a very difficult time for many families in our country.

It depends on your approach. If we think that the inheritance process is something very simple, we can form a plan within a week. However, my experience shows that a good plan for succession requires 5 to 10 years. After all, it’s not only about the property, but also about control, leadership. Parents usually tend to keep control in their hands until the very end.

It seems that family business has a lot of psychological factors. Is it not easier for a business to be organized on a different basis, for example – an open joint-stock company. Isn’t a family business an outdated business form?

Think about what happened after the last global economic crisis. I believe that many businesses began to take example from the family business model. In the long run, it is characterized as having greater sustainability and vitality. Of course, family business were also hit by the crisis, but the usual companies fell down much faster.

Almost 70% of all business in the world is classified as family business. And this number does not fall. Studies show that family businesses are doing better in financial terms. Of course, it is more complicated because it has additional dimensions, such as a family. This dimension also needs to be learnt to manage, which is not easy. However, with a small amount of external assistance, using certain instruments, for example through the creation of a family constitution, it is possible to achieve balance between family and business interests, personal choices, family values.

I know that there is a family business in the Netherlands with more than 400 family members that take part in the business. They are both business players and owners. The business is counting it’s 19th generation, if I’m not mistaken.

There is no best option, or one model. One family can have strong Christian values, and the other chooses to follow business rules. These differences need to be respected. That’s why I always tell my colleagues that the counselor can not make a choice – it must be done by the family itself. And we have to respect that choice.

When you think about world-class family business –  Mars, BMW, or Wall-Mart comes to mind. Are they the example of good family business?

Companies like McDonald’s, BMW, IKEA are family businesses operating in the second, third or more generations. These are families who have already learned (in some cases, learnt it the hard way) to become professional companies and manage the company by creating a family management structure. If you are a growing company and, at the same time, a growing family, and more and more family members have to be included in the business, it is already necessary to set up a family council. This council talks to the board of directors and the supervisory board. In this case, the ones managing the business do not interact with all family members. If some family members want to know what’s going on in the business, they address their questions to the family council, which later on pass them to the corporate governance structure. This helps avoid a lot of misunderstandings and unpleasant situations.

Would you support the idea that even experienced family-based companies may face major problems if they do not regularly review this question? Let’s say the Tata Group has had huge inheritance problems.

Yes. IKEA has had similar inheritance problems. The challenges are the same, they are faced all around the world, and do not depend on the size of the business. Only long-standing majors could tell what they learned from their mistakes.

There are also moments when a family has to decide to sell a business. And it’s not easy, especially if it’s already, let’s say, in the nineteenth or twentieth generation.

 

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