Offer Family-Business Solutions

EXECUTIVE SUMMARY

MILLIONS OF BABY BOOMERS who own businesses will approach retirement during the next decade. They will need help with the 10 key issues that affect management and succession. THE MYRIAD FAMILY-BUSINESS CONSULTING opportunities include improving organization design, creating greater operational efficiency, developing effective leadership, organizing fair compensation plans, unblocking communication, streamlining customer service, developing risk management and succession plans and modernizing how the businesses are run. CPAs CAN ASSIST FAMILY-OWNER clients in disentangling the emotional from the concrete. On-the-job family problems fade when business issues are dealt with effectively. MANAGEMENT IS ALL ABOUT RESOURCE allocation. To learn where management should focus, a CPA can perform a simple 20/80 analysis (to find the 20% of the business’s customers that generates 80% of its revenues). The 20/80 principle can be used to analyze a number of situations. ALL EMPLOYEES IN A FAMILY BUSINESS must see the pay structure as fair and their compensation as adequate and appropriate. Help clients formulate a plan based on clear job definitions and performance criteria. GOOD LEADERSHIP BREEDS UNDERSTANDING, confidence and motivation, and it assures equitable treatment for all, including nonrelative employee managers or skilled technicians. It will help ease the companies’ succession process, too.

ROBERT B. SCOTT Jr., CPA, is a professor of management at the Gabelli School of Business at Roger Williams University in Bristol, Rhode Island, and a longtime practice strategy and growth consultant. He is a member of the AICPA, the Institute of Management Consultants and the Rhode Island Society of CPAs.

t doesn’t matter who Mom liked best—it’s the company’s bottom line that counts. When principals in family-run entities are too close to see the divide between operational problems that are strictly business and those rooted in family dynamics, CPAs often are in a unique position to help.	A Not-So-Poor Prognosis A family business has a 3% to 5% chance of surviving four generations. That’s the same chance of survival General Electric has. Source: From “Understanding Family Business Survival Statistics,” by Craig Aronoff.

Not long ago, while on sabbatical, I had an opportunity to discuss management problems with 20 private-business owners and professionals—among them a financial planner, investment adviser, merchant, attorney, manufacturer, engineer, import/export broker, spirits distributor and CEO of a food manufacturer. The group said 10 vital issues affect management of businesses of all types. Although personal relationships in private businesses are not the source of such issues, they can aggravate them. As intimate witnesses to clients’ businesses, CPAs are in a position to help owners disentangle emotional baggage from concrete operational challenges. Deal with the management issues, group members say, and on-the-job family problems fade. Here are the fertile consulting areas these issues offer.

THE TOP 10 ISSUES
The 10 management areas in which family-owner clients often need help include

1. Growth planning. Many owner entrepreneurs produce and sell products or services with relative ease but lack the skills to pursue a long-term growth plan. An older generation that takes pride in “teaching the kids the business” in effect may be training them to do what no longer works. To help family-run companies overcome this myopia and figure out ways to move forward, CPAs should recommend strategic and operations planning. In brief, strategic planning asks and answers these questions: Who are we? Where are we headed? What is our game plan? (For more on planning procedures, see “ Strategic Planners Lead the Pack, ” JofA, Dec.01, page 26.) Then operations planning anticipates the “fulfillment” details of sourcing (ways to get raw materials), staffing (ways to get and keep good help) and process and output (ways to produce the final product efficiently).

Practitioners can help to raise issues, identify resources and monitor progress. One tip for a consulting CPA is to start by applying the 20/80 rule. Also known as Pareto’s law, it holds that 80% of a business’s revenues comes from 20% of its customers. Identify the handful of customers or markets that accounts for it. Pick out the small group of products or services that does the same. Pinpoint the expense categories and inventory items that consume cash. Ultimately, management is all about resource allocation. A 20/80 analysis tells managers where to focus.

2. Organization design. Entrepreneurs build companies without blueprints, and it shows. Owners can draw on CPAs’ experience and objectivity to organize companywide performance benchmarks. The key is to identify and define tasks, group tasks into jobs, jobs into departments and link departments through a logical system of communication, reporting and control. (For more on performance measurement, see “ Help Clients Take Measure, ” JofA, Jun.02, page 53.)

Careful organization design makes evaluation and promotion decisions easier and more appropriate. Such impartiality is particularly beneficial when employees are family members. Advise employer-owners to define roles and assign jobs carefully, delegating authority along with assigning accountability and separating responsibilities. Suggest that clients define their managers’ jobs in terms of results to be achieved, instead of a list of responsibilities. Then it becomes easier to evaluate businesswide performance, staffing needs and other resources in terms of those target results.

3. Operational effectiveness and efficiency. A company’s credibility, both within the business and among customers, lenders and vendors, depends on management skills. CPAs—by paying attention to the flow of cash through the entity—routinely push clients to adhere to efficient operating standards. For example, CPAs can implement financial and operational analysis (such as return on assets at current values) to improve the bottom line through better asset use. Successor management may relocate a business out of appreciated real estate. Relating facilities costs to company processes can have substantial bottom-line impact. Regular training in accounting, marketing, customer service and production keeps coordination of front- and back-office functions efficient.

CPAs can suggest that clients periodically consider outsourcing various functions or, conversely, bringing outsourced functions back in-house if it’s more cost-effective for that business. Advances in technology keep altering the economies of scale, and the right answers may have changed; often it takes a CPA to know for sure. Such professional intervention can reduce friction in family-run companies.

4. Leadership/management. Solid plans and capable personnel accomplish little without the inspiration of effective leadership, or management, at all levels. Good leadership breeds understanding, confidence and motivation, and it assures equitable treatment for all, including employee managers or skilled technicians who may be key elements of a company’s success. Years ago, at a business whose family owners were blind to the merits of their other workers, I saw two managers leave, start a company—and drive their former employer out of business. Company owners own their business, but they don’t own their employees (relatives included), customers or suppliers; it is an important distinction.

Persuade clients to engage you to meet annually with key managers to compile a list of critical issues, identified anonymously. Leadership issues usually surface, especially in family-run companies. CPAs can help point out where owners need to focus resources to reward experienced personnel and give them a voice in operational decisions.

5. Compensation. Nothing measures equitable treatment as surely as the distribution of income and wealth in a successful business. Public corporations use incentive pay and stock awards to recognize achievement; private companies usually do not. Some small business owners take a zero-sum view of compensation, mistakenly believing that paying more to staff will result in a smaller share for themselves. They are penny-wise, pound-foolish. Good incentive plans don’t work that way (see “ Pay Your Staff for Performance ,” JofA, Dec.00, page 63).

Because of a tendency of family-run entities to base relatives’ salaries on personal considerations, it can be a challenge to reform their compensation structure. The key is to remind them it’s better for business if all employees in family-run companies perceive the pay structure as fair and their compensation as adequate and appropriate. CPAs can help clients formulate a plan based on clear job definitions and performance criteria. One approach to this issue is to

Identify the top five performance measures critical to each client business.

Identify the manager (including nonrelatives) best able to effect each performance goal.

Suggest performance-based compensation, rather than discretionary bonuses, for such managers.

6. Communication. The potential for poor communication is staggering when a company is staffed by an owner’s relatives and friends, some authorities say. Clear communication is vital to a healthy, functioning business, and CPAs—who may visit the premises frequently—often are among the first to notice when it’s lacking. If a client needs help in this area, offer guidance.

Some CPA consultants suggest overlapping “councils” of owners, directors, managers and family-member employees to discuss technical, organizational and personal issues in private businesses (see “ The CPA as Family Adviser ,” JofA, May97, page 42). Invite your client to discuss how he or she wants to manage these intertwined interests. Locate professional resources—such as specialized consultants that identify and remedy communication problems—that are available in your area (see “ Family Business Resources ”). Let owners know that skilled mediation is available. Sometimes, that’s enough.

7. Customer service. Every business should learn more about its customers. One of the CPA profession’s primary thrusts is to encourage sound management practices, and improving customer service is the essence of sound management. Good customer service generates repeat business and free, word-of-mouth advertising. CPAs can organize customer surveys or help clients obtain consultants that perform mystery shopping and similar tests to let companies see themselves as customers see them.

Customer service is fragile in family companies. The founder, perhaps of humble origin and appreciative of customers, may pass the business to offspring who take a great deal for granted and haven’t developed sensitivity to the people who buy from them. When a first-generation merchant or entrepreneur is succeeded by second- generation managers and third-generation executives, failure often is right around the corner. Remind owners about the fundamental relationship between a business and its clientele and suggest compiling a brief daily summary of customer service activity. Analyze it for recurring problems, applying the 20/80 rule. Apprise owners and key managers of the resulting information.

8. Risk management/succession planning. Loss of a key player can destroy a private business if there’s a sudden death or disability. Family-run businesses are especially vulnerable because their succession candidates are internal. Surviving family members who are unprepared often have trouble retaining employees, customers or suppliers. A business that took decades to build can disintegrate within months. A good CPA business adviser keeps raising the issue of leadership risk until owners decide to take action.

Limiting the risk of leadership loss requires strategic planning and includes cross-training, analysis of factors specific to that business, insurance, estate planning and back-up and buy/sell agreements. Help clients formulate a succession plan. Find an appropriate time and ask owner-managers, “What if you were gone tomorrow? How would the business survive? Who would protect your heirs?” There’s no easy way to raise this issue—just do it. (For more on risk management, see “ A Road Map to Risk Management, ” JofA, Dec.01, page 65.)

9. Management and ownership transition. CPAs bring technical support, experience and impartiality to both management- and ownership-succession situations, and they are key players in sale transactions. Management succession is an ongoing process at any business, and all managers deserve opportunities for growth and autonomy. Ownership succession is unique to private businesses and most challenging in family-run enterprises.

Often trusted by multiple generations, CPAs are well positioned to advise members of family-owned businesses in transition. Advise your clients to pay attention to timing the transfer of ownership to the younger generation. Owners of family-run businesses often hand off management gradually, retaining some ownership control until death. This usually means the younger generation doesn’t get authority soon enough to learn through mistakes. Transferring ownership too soon—that is, without sharing a foundation in how the business works—can be a mistake, too.

The average family-owned business doesn’t survive the second generation; suggest that owners at least consider whether they want to sell their business rather than pass it on. Selling the business releases family equity and frees young family members to follow their individual dreams. (For more on estate planning issues, see “ Preserving the Family Legacy ,” JofA, Mar.02, page 34.)

10. Global perspective. CPAs monitor and interpret many vital economic and regulatory matters. The days when company owners could thrive by providing products or services to a stable customer base while remaining insulated from external pressures are gone. Many keys to the future are unfamiliar to clients. CPAs, who typically stay abreast of technology and business trends in connection with their own professional activities, can point them out.

Survival in the 21st century means adopting new technology and adjusting to continual change. The evolution of a global marketplace driven by technology has shortened product life cycles, revolutionized marketing and distribution, and eliminated traditional functions and organizations. Private businesses, especially family-owned, have to adjust to these and other worldwide developments. Businesses that stick to what worked for Dad or Granddad and maintain the status quo may be headed toward an early demise.

One way to help clients keep abreast of current attitudes is to have your firm sponsor an annual global outlook workshop or luncheon in connection with a nearby university. You invite your clients and their friends and share or cover the cost. Usually, the university can handle the content and logistics.

THEY’LL NEED HELP
CPAs are equipped to help private business owners and managers prepare for the future by raising important client issues, identifying resources and overseeing progress. The myriad consulting opportunities include improving organization design, creating greater operational efficiency, developing effective leadership, organizing fair compensation plans, unblocking communication, streamlining customer service, and developing risk management and succession plans. Leading a succession planning team for a private business client means coordinating legal, banking, insurance and consulting services with powerful networking benefits for your own practice. Millions of baby boomers will approach retirement during the next decade; many are business owners. Provide valuable, objective services in management planning and ownership transition. The market should be huge.

My longtime client and friend, Joseph Derba, CPA, put his finger on it several years ago in a typically candid quote in The Wall Street Journal. “Everybody thinks CPAs are very boring people,” Derba said. “But the more successful ones are those who don’t fit that stereotype.” Derba should know. He is the least typical CPA I know and one of the most successful.

Most CPAs see themselves as providers of technical services. Derba sees himself as a CFO shared by a group of dynamic clients. He is a problem-solving advocate and troubleshooter. He finds ways to accomplish his clients’ important business objectives. Derba’s approach frees his entrepreneurial clients to do what they do best. But he didn’t start out this way.

When Derba started his first firm in 1973, he intended to do cost accounting and management consulting work. A classic bootstrapper, he borrowed office space from a client and set up shop with near-zero overhead. Derba & Co. succeeded far beyond his expectations. In 1988, he sold most of the original business to a key employee and started a second firm to concentrate more narrowly on financial and business consulting. The second firm prospered as well. In 1997 Derba merged his firm with another regional CPA firm, and he has focused exclusively on consulting work ever since.

A former division controller for a large manufacturing company, Derba believes that consulting services are the most valuable to management. “Consulting facilitates client success,” he says. “It’s the most interesting and useful service a CPA can provide them with.”

Derba says many, if not most, successful business owners are natural entrepreneurs. “CPAs need to understand entrepreneurial people,” he says, “and use that knowledge to provide services they truly need to complement their natural gifts.”

Regarding family-owned businesses, Derba says: “Don’t get into the middle of a dispute between parent and child or between siblings. Stick to what you know. Help them grow their profitable product lines and eliminate the unprofitable ones. Stress good hiring, efficient operations, sensible financing, effective management. The rest should take care of itself. If it doesn’t, there’s not much you can do.”