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.
Practitioners offering consulting
should comply with the AICPA statement on
standards for consulting services as well
as with the independence standards, rules
and regulations issued by the AICPA, state
boards of accountancy, state CPA societies
and regulatory agencies.
|
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.
Family Business
Resources
CPAs can suggest that owners
consider joining a family firm association
in their area and attending some of its
seminars and workshops. One professional
organization the author recommends is the
Family Firm Institute in Boston.
Family Firm Institute 221 N.
Beacon St. , Boston, MA 02135-1943
617-789-4200
www.ffi.org
Magazines
Family Business Magazine
P.O. Box 41966, Philadelphia,
PA 19101-1966 215-567-3200
www.familybusinessmagazine.com
| Books
Consulting to Family Businesses:
Contracting, Assessment, and
Implementation, by W. Gibb Dyer,
Jane Hilburt-Davis (2002)
Jossey-Bass/Wiley 605 Third
Avenue New York, NY 10158
The Family Business Compensation
Handbook, edited by Barbara
Spector (2001) Family Business
Publishing P.O. Box 41966
Philadelphia, PA 19101-1966
Keep the Family Baggage Out of the
Family Business, by Quentin J.
Fleming (2000) Fireside/Simon
& Schuster 1230 Rockefeller
Center New York, NY 10020
Working with Family Businesses: A
Guide for Professionals, by David
Bork, Dennis T. Jaffe, Sam H. Lane,
Leslie Dashew and Quentin G. Heisler
(1995) Jossey-Bass/Wiley 605
Third Avenue New York, NY 10158
|
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. |