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CIBC’s Commercial Banking podcast series, Conversations in Commercial Banking, understands that your business is a living, breathing entity in need of nurturing to continue to grow. Whether you’re looking to navigate a tough economy, tap into current industry trends or identify key tools to take you to the next level, our team of experts are here to equip you with the information you need to make your vision a reality.
Announcer:
Welcome to Conversations in Commercial Banking, a podcast series dedicated to the pressing financial topics facing middle market business leaders today. We bring in experts from all facets of our North American institution to provide actionable insights that help you navigate today's environment. Our discussions include industry trends, strategies to identify and manage risk, and unlocking opportunities for growth, all with the purpose of helping you realize your ambitions. And now for this week's episode.
Brian Greenblatt:
Hello, I'm Brian Greenblatt and I'm pleased to be your host today. I lead commercial middle market banking for CIBC US, and I welcome you to CIBC's newest podcast, Conversations in Commercial Banking. For today's episode, the third in our privately held series, we will explore the dynamics that come with family businesses and discuss how to preserve family harmony when approaching potentially polarizing business decisions. Joining me today is Caroline McKay, senior wealth strategist here at CIBC. Caroline, welcome and thank you for joining us today.
Caroline Mckay:
Thank you for having me, Brian. I'm happy to be here.
Brian Greenblatt:
So I want to start off, as we think about family-owned businesses, I always think about it as the business world and the family world and there's... Can you talk about how we think about those two different worlds and the family dynamics involved in those two?
Caroline Mckay:
Yes, absolutely. And I think as anybody who is part of a family knows, there's a lot of dynamics that are involved with just being part of a family. And then when you combine that with business, you often, at times, run into a collision. But oftentimes, we think about a family business as having two operating systems, there's the business system and then the family system. And usually, oftentimes, especially at the beginning of businesses, those operating systems are sort of on parallel tracks. And so the business system, if we think about it, is this operating system is built on an environment of competitive markets, potentially tough financial environments. They have to negotiate complex business issues to succeed and to grow. And essentially, the business is a system where excellence and hard work and oftentimes risk are rewarded and possibly imperative to the survival of the business. That's how it's been built and grown. Where the family system, thinking about the family dynamics, is often really different in that it places nurturing, education, inclusion above all else.
So you have these sort of parallel tracks. And then at times, especially when we're starting to think about business transitions, and oftentimes that's when, depending on what generation we are in the family business, that means maybe a new stage of the business or a new generation coming into the business. And that's where those tracks can often collide. So for example, maybe the next generation expects to work in the business, whether they're qualified to do so or not. And those family members entered the business, we're prioritizing that family system over the business system. So that's often a complication or something, and we talk about business transition, that needs to be focused. And we need families to really see those operating systems and agree that there needs to be a level of collaboration, accountability, and not let those two systems bleed into each other too much. Don't bring all the business stuff happening to every family reunion, and don't bring squabbles between siblings into the business. We need to try to learn to keep those separate as much as we can.
Brian Greenblatt:
So when you think about that, then, both have their own dynamics, both have their own positives and negatives. How do you keep that working in harmony in some way? So when you think about the squabbles, are there ways of building internal systems within the company that sort of manage between that, using outside advisors, et cetera?
Caroline Mckay:
Absolutely. Really, everything that we're talking about today is heavily customized per family. But there are things we've learned in the process of our roles and just in general looking at research and studies on family businesses. So again, we think about these two different operating systems. And from that, you can kind of tease out different types of how businesses end up running and transitioning. So you might have a business that we call more of a business-focused business, which is really going to put the business, in many cases, before the family. And that's not so to speak to say that's a bad thing. That's more that we're going to prioritize the best interest of the business and make decisions about the business to further the company goals over putting the family first.
So in that type of business, you may see that there are more outside advisors. Maybe there's not the whole family involved in the day-to-day running of the business. Maybe you do have to be super qualified, or maybe there's a requirement that the family members have to work at other companies and gain expertise and experience before they can come into the business. That it's just not a green light that, because you're part of the family, you get to work in the business. Oftentimes, that may mean too that you have independent boards or you, again, are relying on outside consultants or more managers in the business who are not part of the family so that there's more of a balance for the business itself. Whereas a family-focused business is one that does oftentimes prioritize the family above the business interest.
So you may see that everybody in the family can work at the business, regardless of whether they have the technical expertise or have shown that they're competent to be in those roles. And that can lead to a lot of tensions with other employees in terms of also the overall success of the business if you don't have the best people and the best jobs that are suited for them. And also, you may see that more money is coming out of the business to support the family versus being reinvested for the business's benefit. So I think we find, and I think a lot of research shows that businesses that are more business-focused and try to tease out the family dynamics a bit often are going to be more successful. Not always, but that's the trend.
Brian Greenblatt:
No, that makes a lot of sense. Let's shift a little bit of a gear then and talk about depending on the generation of the company and where the owners fit today. Talk a bit about how wealth affects family businesses. Again, I'm going to say parent's attitude, but it may not be a parent, it could be an uncle, but the attitude of the leadership team and then each successive generation. How does wealth affect those dynamics? We've talked a lot about the business system and the family system, but now how does wealth affect how the business is running and working?
Caroline Mckay:
Yeah. And again, I think when we're talking about especially longstanding businesses, it really can depend on the generation and how long the business is in place. If I think back or go back, oftentimes with, not new businesses, but businesses that maybe are just finishing the first generation, so we're in the founder's generation. The founder's experience could be really different than the next generation and future generations' experience because the founder, this wealth often may have been built by that founder and that business. And so the founder over time has seen maybe not a ton of wealth at the beginning. And as the wealth grows, that wealth is growing because of their sacrifice, their perseverance, their dedication to the business.
Whereas the next and succeeding generations may have only known wealth their whole life. And they may look at the family business very differently than the founder. The founder probably had to take a lot of risks and wasn't so used to the wealth that there wasn't necessarily so much fear of losing it. Whereas succeeding generations may be looking at the family business as this is how we support our lifestyle, this is how we're going to maintain this, and be maybe more risk-adverse because they don't want to do something that jeopardizes it, or may just see more threats along the way.
And so it's just a different mentality. So I think, and this is true, we find outside of family businesses just with families that have a lot of wealth and passing it down through the generations, it's really needing to be able to think about the different experiences of the family members and really have each generation being developed so that certainly we hope the wealth can be preserved. But also, we're making sure that values, responsibilities, education, things are passing down where we can find that the next generation can step up and hopefully thrive in the business and with the business experience and bring their own unique values and risk potential and things to that for long-term success.
Brian Greenblatt:
So you bring up a big point of the skillsets of the founder being very different than the skillsets of the next generation. How do you actually transition a family business so that the harmony is built on as opposed to eroded over time?
Caroline Mckay:
Yeah. I think the first step is always... These conversations, I think, can be really, really difficult, honestly, and because it brings up a lot of concerns from both sides. If we're talking about family transition, think about it going from one generation down to the next generation. And the generation that is currently in control may have their own concerns about the next generation being ready or able to step in and run the business that they want them to run. Because we all have our own thoughts about how something should be run, and it's very hard sometimes to let go and let somebody come in and do things maybe differently. So it's oftentimes very hard for the older generation, I'm going to call them, to transition responsibilities to the next generation. That's very off-putting. And they may not only fear that the next generation isn't going to do it right, but they fear what will they do now that they're not doing the day-to-day activities? What will keep them business?
I think that happens in anybody's retirement. But especially when your day-to-day, your bread and butter has been working for this business, what do you do without the business? And then also, concerns about their financial futures. Their financial futures are also probably tied to the success of the business. And then the younger generations have this tension because they're probably like, "We're ready. Let us in. Let us take control." And the older generation may be really slow to do that. I think it's also really important to know, does the next generation or the other family, whoever's coming in, do they want to be in the business too? I've seen conversations with family where the senior generation is ready for the next generation who is already working in the business to take over. And the next generation are kind of like, "We're happy just doing our jobs," and don't necessarily want to be the manager or be the president of the company and have to put in the blood, sweat, and tears that their forebearers did because they want a different lifestyle.
So all of this transition, I think key is having really open and frank conversations among the family about, what are everybody's expectations or desires? Who wants to be in the business? Who does not want to be in the business? Who's qualified to be in the business? If they're unqualified, what do they need to do to successfully join or enter the business? And oftentimes, I'm sure we all have families where those conversations are really hard to do on your own. And so bringing in outside advisors can be really beneficial. I mean, some of the work that these outside advisors do, while they might not be like therapists or social workers themselves, I mean, they're doing a lot of this work of figuring out family dynamics, how families communicate, what are the desires and goals, and trying to push that or mesh it all together so that everyone's being heard and we can actually create a transition.
And that transition may be from generation to generation. It may be that there's an agreement that no one in the family really is ready to take on or take over ownership, and that maybe they need to look at third parties coming in, whether that means the family gives up control or that just means they bring in new professionals to help run the company. You can still retain ownership of a company and not have to run it day-to-day with family members. So I think addressing these concerns is key. And usually, that, I think, is benefited by bringing in outside advisors.
I think preparing the generations, again, assuming we want family members to join the business or help take over. They need to be properly prepared, expectations need to be set. And I think there's some benefit too to, as the transitions really start to happen, that we honor the leaving generations and celebrate it the same way we would do other important milestones in our family lives, whether that's going off to college or having an anniversary. That's an important transitional step that needs to have, I think, proper attention paid to it so that the generational switch, it becomes a thing where it's more excitement in moving generation to generation than something that's considered fearful or something that we don't want to acknowledge, right?
Brian Greenblatt:
Yeah.
Caroline Mckay:
We want to focus on it.
Brian Greenblatt:
Yeah. So the two things I just got especially were planning and thinking about outside advisors of people who can help you get there. How does a family best think about finding the right advisors in helping them into this transition? Is it something that's built over a long time? Is it going for a search? Is there a way that families can think about finding the right advisors that may be helpful?
Caroline Mckay:
Yeah. I mean, I think it really depends on where a family is in their transition cycle. I think oftentimes I've seen families who are... I mean, ideally, we would talk to and we would get in front of families who were years before they were actually ready to transition, because then I think you can start laying a lot of groundwork. And maybe the need for lots of different advisors is reduced because I think whether it's a professional business transition advisor, which they absolutely have, or using a business succession attorney or using a management firm, there's different types of advisors out there. I think a lot of the groundwork is, though, helping to think through, what does a transition potentially look like? Again, who's in? Who's out? Who's prepared? Oftentimes, I find benefits, clients benefit from outside advisors who can help flesh out communications.
So a lot of this is sort of therapy early on, is helping families make sure they're communicating and that they understand each other's values. And sometimes, again, that's going to be a paid advisors. Other times, you may already have advisors as part of a family team that can help have those conversations. I guess, in these days and age, there's an advisor out there for everybody. When we get closer and closer to an actual transition, that's where you definitely need to have the accountant, the lawyer, every step of the way to make sure that whatever the transition looks like, whether it's a sale or moving ownership interests or just bringing in more management, that it's all being done in a cohesive manner.
Brian Greenblatt:
That's great. No, thank you very much. Caroline, really, thank you. This is such a delicate topic when it comes to keeping harmony among family, so I really appreciate all the points of consideration that you talked about today. And I want to thank all of you for joining us. If you have any additional questions, please reach out to me or your relationship manager at CIBC to assist. A well-executed transition is made possible through collaboration with your banker and other business advisors by communicating early on, asking questions, and sharing your ambitions for the future. In our next episode, you'll hear from CIBC's Ron Miller, who will be hosting a discussion intended to help you find your answer to the inevitable. What's next for my business? In the meantime, check us out at us.cibc.com, or across several social media platforms by searching @CIBC_US. Thank you for listening, and we look forward to catching up with you again soon.
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