Depending on one’s age, Fun with Dick and Jane might ring a bell as the 1977 American comedy film, or as the ubiquitous reading primer first published in the 1930’s. The later, the iconic Dick and Jane series was initially geared towards early childhood readers, but over the years new editions were released appropriate for readers through grade nine. The idea was that as the series readers moved from grade to grade, so too would its beloved characters. As learning theories evolved, Dick and Jane fell from popularity as teaching tools and became mid-century American collectors’ items instead.

It has been said of parenting that though childhood ends, parenting never does. We trusted advisors have often encountered an aging patriarch or matriarch of a family business struggling with the decision about what to do with the business. Often the struggle has to do with the fact that though the parent has capable adult children involved in the business, the parent questions whether young Dick or Jane has the right skills to succeed the parent.

Because of the gravity of such a decision on the family, combined with the human tendency to avoid having difficult conversations with loved ones, the parent often grapples with the issue privately for years without seeking help or taking action. Inevitably the parent comes to a point where he or she no longer has the health, interest, or energy to continue to operate the business; and, believing there to be no practical alternative, the family business is sold.

The tragedy of such situations is not that the business is sold. It is that the parent-owner believed there to be no practical alternative.Yet, there is.

Typically, these businesses have been run as lifestyle companies dependent on the founder, where the primary objective has been to maximize annual distributions to the family. There is little distinction drawn economically in such businesses between family and business. The parents with whom I have these conversations are still critically essential to the operation of their businesses, and always have been, even if, late in career, only in the role of family peacekeeper.

The Army of One manner in which these entrepreneurs began and grew their businesses becomes strengthened like a muscle. Over the years they have been rewarded economically and celebrated culturally through their use of this muscle. Reliance on this muscle, now second nature, is the only way they know how to operate.

As every muscle has its limit, however, so too does a style of management which is dependent upon any one individual. The answer to the parent’s dilemma is that it is time to exercise a new muscle. That muscle is governance.

Governance is an orderly system of rules, practices and processes by which a company is directed and stakeholders make their voices heard. In a family business, it is a process which respects, as separate entities: family, ownership, leadership, and management. Leadership in the form of a board of directors or non-fiduciary council of advisors includes non-family members with complementary, synergistic skills and experience. Executive management may, or may not, include family, depending upon what leadership believes is in the best interest of the business. Rather than continuing to operate as a lifestyle business, ownership’s mission, through the exercise of governance and organization, is to build enterprise value.

Most family-owned businesses in the situation described above do not know what’s needed and, even if they have an idea intellectually, they have no idea how to achieve such systems of governance practically, because such systems, such behavior, have never been modeled for them. So they sell—often at below market multiples—and in the case of a sale to private equity, precisely because the business is lacking organization and governance.

Most often, if these family businesses are to be successful in adopting effective systems of governance, a catalyst is needed. Typically, the catalyst comes in the form of professionals who are able to help educate the family in the importance of such systems, gradually adopt such systems in manner sensitive to the particular family circumstance, and most importantly, model the use of these systems.

Here, the trusted advisor has opportunity to add significant value as educator and facilitator. Done successfully, rather than having the client sell in haste, racing to get out of Dodge, the family will come to have choices about what they do with their most valuable asset. And with time, the parents may be found boasting to their friends about Having Fun with Dick and Jane in the family business.

Until next time …
Peace,
The Owl

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