EC_FamilyBusiness_W200Editor’s Note: This is a series of three articles by Ed Callahan, all focused on family businesses.

Family Businesses

Family dynamics can complicate the issues that a business faces. Each stage of a family business brings its own unique challenges to running the business. Whether the original founder (controlling owner) is faced with succession issues, or a sibling partnership is sorting out roles and responsibilities, or a cousins consortium is grappling with the question of who should be in, or own a part of, the business—these are always challenging issues to deal with.

Taguiri and Davis provided us the Three-Circle System for considering the interdependence of all the moving parts in a family business.

EC_FamBiz1_3circleModelFamilyBizThere are the seven zones of intersection found in The Three Circles. Two articles on the blog were my sources. The graphic is taken from an article titled The Family Business and The Three-Circle System. The description of the zones is taken from an article titled Three Circles To Draw Out The Issues. I modified the descriptions a bit.
  1. Family member, shareholder, working in the company, typically the CEO/Owner, majority shareholder
  2. Family member, non-shareholder, working in the company
  3. Share holder, non-family member, working in the company
  4. Family member, shareholder, outside the company
  5. Family member, non-shareholder, not working in the company
  6. Employee, non-shareholder, non-family member
  7. Financial partner
It is very useful to identify where all interested parties exist in the diagram,- including family members, investors and leadership team members. This diagram is descriptive, not prescriptive. Dealing with the varying needs and points of view is the next challenge. Clients use EOS to help themselves grapple with these issues. 

Accountability for Owners

EC_FamBiz2_OperatorOne of the biggest challenges faced by owner-operators is accepting that they are accountable in a detailed way for the success of their business. Too often the default behavior and underlying belief system is “Hey, I created this business; I get to run it any way I want and no one can tell me what to do, or what to pay myself, or anything else for that matter!” At the end of the day, those are true statements. No one can dispute them.

Yet an owner-operator who wants work-life balance, who wants a team of leaders who care about the company as much as he or she does, must define the responsibilities of each management seat in the company, including the one they occupy. This brings clarity and excellence in execution. Businesses that operate on EOS accomplish this clarity by creating an Accountability Chart for each unique seat in their business.

Letting go of the vine [management responsibilities and authority] is a real challenge, particularly if family members are involved, but the results are worth it.

A significant additional challenge for a non life-style business owner-operator is deciding what to pay themselves.  The best practice is for the owner-operator to break the compensation into two pieces – salary + operating bonus vs periodic distribution to owner(s) of retained earnings. In other words, compensation for what they do in the business vs compensation for their ownership. The latter is written about by lots of experts. EOS proposes that the former  should be based upon industry and company standards for the seat the owner-operator occupies. There is public data available about what the CEO/COOs of companies of certain sizes in certain industries earn on average. The same is true for CFO’s, VPs of Sales, and most other positions.

To be as successful as you want to be, as an owner-operator you owe it to yourself to be transparent about what you are responsible for in your business and expect, and allow, your management team to help you hold yourself accountable. And for non life style businesses, paying yourself for the value you add to the business is the right thing to do. The results are worth it.

Book Review: “Dance in the End Zone”

EC_FamBiz3_Dance-in-the-End-ZoneDance in the End Zone by Patrick Ungashick was recommended to me by the CEO of one of the more than 30% of my clients which are family businesses. It is a business owner’s exit planning playbook. You can buy it on Amazon. It takes it name from what is believed to be the first end zone dance by Elmo Wright, a wide receiver for the Kansas City Chiefs, on November 18, 1983.

The concept is simple. Every business owner accepts the fact that he or she will one day not be running the business they started. They may not like to think about it, but they accept the inevitability. So Ungashick challenges us all to think about planning for that day such that you may dance in the end zone too. Ungashick posits that most owners (and some advisors) confuse the concepts of succession and exit planning. He clarifies that succession planning focuses on meeting the needs of the business while exit planning aims to meet the needs of the owner. A significant distinction!

It is a very practical book which provides “plays” for every type of owner, more than sixty of them. Ungashick suggests that all owners fall into one of four categories:
  1. Passers – owners who want to have a family member succeed them one day.
  2. Outies – owners who believe their business can be sold to an independent 3rd party.
  3. Innies – owners who believe one or more trusted employees will own & run the business one day.
  4. Squeezers – owners who don’t fit in the above categories and believe they will shut their business down one day.
Whichever category you fall into, Ungashick makes a compelling argument, with true to life stories that you can relate to, that you are far better off planning your exit now rather than putting it off. He also provides specific plays which help each type of owner.

One really valuable nugget of advice from the author is to focus on not what you think the business is worth (almost always over valued by the owner) but rather what you will need from the business upon your exit. He calls this your Exit Magic Number. Knowing this enables you to potentially deal effectively with the three challenges to any exit; Ungashick calls them The Three T’stiming, terms and taxes.

This can be a sobering book but I believe that all business owners will benefit from reading it and be prompted to take at least a few steps now which will help them exit, whenever that occurs.

Implementing EOS in your company will help you with many of the challenges and prescriptions that Ungashick reveals in the book.

More by Ed Callahan

Republished with the Author's Permission

Originally published in between 2012 and 2013
More by Ed Callahan