MBJ Table of Experts: A Conversation on Family-Owned Businesses

Joanna Crangle/MBJ: Based on experience in your industries, how do the needs of family-owned businesses differ from your traditional business clients? 

Jay Healy: The net worth of a family that owns a business is often high but concentrated. That means that they need a different set of planning strategies than non-business owners who are generally saving for retirement and getting traditional financial planning advice.

We often say to business owners: You may have $1 million in your retirement account, but you need $20-million advice.  The reality is that they don’t often realize how complicated their situation is or how sophisticated the planning can be until we start asking questions and bringing strategies to the table.


Crangle: What are some of the biggest struggles within family-owned businesses?

Healy: Just the name “family business” illustrates that there’s high risk and high reward for both the family and the business. This is something other families don’t have to deal with. Families that want to go down this path are either going to hit the ball out of the park, or they’re going to wish they hadn’t played the game.  

It also depends, to some extent, on what generation we’re talking about. Some family businesses are still founder-controlled, some are sibling partnerships, some are cousin consortiums with third-generation ownership. The larger the family gets, the more likely you’re going to have issues around employment and ownership. It’s the governance of those issues, the strategies behind dealing with them, and the long-term vision of the family that can minimize those risks and maximize the reward.


Crangle: What are some of the challenges when transitioning a family-owned business with millennials? 

Healy: The culture of the millennial generation may be well suited for good succession planning because they want engagement and responsibility. They want to be influential and that sets them up to step into leadership roles.  They do need training, education, and a clear career path. They need the “guard rails” that any family member working in the business on the path to leadership and ownership needs. But a lot of what they bring to the table, as far as their expectations, lines up well with that. 

One of the biggest risks is not transitioning leadership early enough to make it be effective.  No family member wants to be a 65-year-old employee with no ownership or responsibility. But if you can get them on that career path, so they can accomplish some of those goals in their 30s, 40s, and 50s, I think everybody can be happy.


Crangle: What do you think is the apprehension in owners not wanting to put people in place to take over the business?

Healy: A lot of founders identify with their business. But if they are thoughtful and think about the long-term success of the family, they can step back and think: Would they be prouder of running the business they built or transitioning that leadership to the next generation and watching that generation thrive? If that’s their long-term vision and they can communicate it effectively to the rest of the family, that sets the stage for long-term success.


Crangle: Are family business owners more risk averse than some of their publicly traded counterparts that have a different kind of financial backing? 

Healy: I think it’s the opposite. They certainly don’t have to publish quarterly reports with the SEC, so their willingness to take risks that may hurt their P&L in the short term but benefit in long term, is a unique capability of a privately owned business.  Many owners are highly motivated and want to continue their trajectory of success. I think they have more of an appetite for risk than you might see elsewhere.


Crangle: What are some of the challenges with family members who are actively working in the company and those who aren’t?

Healy: The separation of employment and ownership is very important. A family should set clear expectations for career paths, and have fair pay for both the family and non-family members. I’ve seen businesses that have spiraled downhill because they paid all the family too much and, ultimately, they couldn’t make the business work because everybody was living on a salary that wasn’t sustainable.  That’s digging yourself into a hole that’s hard to get out of.


Crangle: How can businesses set the stage for a culture of planning and communication?

Healy: I like the term governance, which is just a framework for making important decisions. Some of the most successful multigenerational family businesses have strong governance and that governance often starts with values and culture : What matters to the family; what is the history; how do we communicate that in a way that engages and encourages not only the family but for the whole company? 

A well-defined and communicated culture makes decision making easier because those decisions have to be aligned with that culture. 

Families need to think about ownership transition between generations; how they’ll handle in-laws as employees; marriage; divorce—all these things need to be policy based. If you have good governance with a good board of directors and good values and culture, you can come up with answers to questions before they get asked and apply them fairly to every branch of the family tree. And, having that documented and ready to go before you have to deal with these issues in an emotional, in-the-moment way, is very valuable. 


Crangle: What advice would you give to owners to help them avoid these challenges?

Healy: Recognize that what has worked well in the past may not work well going forward, so being forward-looking and willing to evolve the business is important.  If you can do that with the right people around your table, then you are more likely to succeed. 


Crangle: What are some nuances to consider with family-owned businesses vs. traditional businesses?

Healy: Every business owner is going to exit their business—whether it’s intentional or not and whether it’s due to death, disability, or ownership transition. And that ownership transition can be internal or external, private equity or going public. You just need to know what all those options look like. You need to cover the risks of the things you don’t want to happen and strategically think about the things you do want to happen. 

When we think about helping a business owner transition out of their business, there’s three legs of the stool. One is setting up the actual transaction of the business so it’s successful for them. Maybe their goal is getting the highest price, or they care about who they transition ownership to, or it’s about tax efficiency, or family legacy. They need to make sure that the transaction aligns with their objectives. 

The second leg is their personal finance—making sure that whatever decisions they make on the business end appropriately support the family. The third leg is about transitioning to “life after business” which can be very complex and emotional. It takes some thought because otherwise they may find themselves in a gap, where they used to be identified as the business owner and now they’re not. Having a thoughtful approach to that transition out of business is a part of the equation. 


Crangle: What are some challenges that businesses run into when the next generation isn’t prepared to take over the business?

Healy: One of the biggest challenges comes from elevating someone into a leadership role who isn’t prepared.  That can ruin the culture of the business because everyone around who’s not a family member is watching. They’re going to judge the family based on that transition of leadership.

If you want your son or daughter to rise into that leadership position, it’s hugely important to have a long-term plan to make sure it’s successful and they have credibility. Successful family businesses have plenty of resources. They can send the second and third generations on a career path outside the business, and then bring them back in. They can send them to MBA programs that focus on family businesses. They can have a personal business coach or mentor work with them. There’s all sorts of things they can do to help it be successful. 


Crangle: Is Memphis a market that is supportive and accessible for family-owned businesses?

Healy: To me, Memphis feels like an entrepreneurial city. It feels like there are a lot of businesses and startups that have become successful.


Crangle: What should family-owned business be mindful of over the next 5–10 years?

Healy: PWC did a survey about family-owned businesses. One of the things that stood out to me was that 70% of family-owned businesses say that their culture gives them a competitive advantage.  So that focus on culture is important. Another interesting point in that survey was that families are more and more concerned that their business is vulnerable to digital disruption as everything moves to the cloud. So, coming to terms with the fact that the business model that made them successful up until now may not be the one that makes them successful going forward needs to be considered.


Crangle: Final thoughts or advice?

Healy: Work on the business, not just in the business. Bring the best resources to the table, think as strategically as possible, and develop the governance you need to make good long-term decisions. 


This article first appeared, in its entirety, in the Memphis Business Journal.


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