Monthly Archives: June 2016

Setting family member expectations early

IN my family business coaching work in Asia, I can confidently conclude that the satisfaction of each member of the family business is the key to their long lasting participation and support.

Without knowing what could make the members of the family feel fulfilled, making them work for the family enterprise and making them follow with what could be beneficial for the family business would only be like dragging them to do so, and the likelihood of it being short-lived is highly possible.

Therefore, it is important to make the family members satisfied, because it would give meaning and purpose to their lives. Where there is meaning and purpose, the longevity of commitment of the people involved would absolutely be limitless.

What will satisfy a family member?

Determining what could make each and every member of the family business satisfied requires attention to personal needs, desires, issues and expectations. The emergence of these factors is not always likely to become readily obvious. Some of the family members could only be trying to avoid confrontation, but are actually dissatisfied with how they are treated in the family.

Communication is key

Other members of the family who are not holding any position in the company could feel left out, even if they really possess noteworthy insights. In order to respond to these circumstances, an active engagement to open communication about family and business matters, and inclusion of all members of the family in meetings for planning purposes are steps needed to find out what could satisfy everyone. However, there could be a possibility when one or a number of members in the family might have irrational demands. But no matter how irrational those demands could be, those are still points to address and should not be ignored, or else whoever those family members could be, they might retaliate or quit, abandoning whatever their responsibilities are in the family business.

Human nature at its best: set expectations early

Paying attention to the needs, desires, issues and expectations is the beginning of satisfying the members of the family who are united in a business. In this way, the need to express and be listened to of each member is recognized. Appropriate attention could give anybody a sense of being valued and appropriate action could keep the integrity of the company true to the eyes of everyone in its sphere of influence.

The question is, what could make the members of the family business satisfied? Below are some basic factors to answer this question.

The founder of the family business is satisfied when he or she:

-Is being understood by the entire family to the best of their abilities that he or she is devoting time and effort for the business, because it is the source of the family’s livelihood

-Has control over the business

-Has people working with him or her, both family and non family members who are trustworthy and reliable

-Is able to do everything possible to make the company become stable and expanding

-Overcomes his or her worries on translating to the children the importance of maintaining the family business for the benefit of the family, gaining their interest and training them on how to handle the family business according to its vision and mission for the future

-Confidently chooses the next leader in the business and applies an effective succession and plan

-Retires freely with all the perks and benefits

-Has the prerogative to comment and advice about the family business despite his or her retirement

-At peace that his or her children are not entitled and greedy and they have embraced the true meaning of stewardship

-Is satisfied and relieved that after years of hard work, his or her legacy is now ensured due to governance and ownership

To quote my family business colleague at the Ateneo Graduate school of Business, Prof. Danny Barrenechea, there are five ultimate challenges for any family-owned enterprise:

  1. A healthy and stable business that is ready to explore opportunities;
  2. A healthy and harmonious family, free from any major conflict;
  3. A family business that thrives on professionalism, excellence and meritocracy;
  4. A family business that will transition to a family-inspired business run by professional leaders; and finally,
  5. A family business that embraces governance and stewardship so it will continue from generation to generation
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Family businesses must always prepare for the worst

SINGAPORE- Many would say (and they have a point) that initially, family members are only active in family businesses because of the obvious reasons, like being able to receive extraordinary financial gains (which they could never receive from other companies), better treatment by their colleagues (non-family employees) and the opportunity to select their preferred line of duty and their freedom to maintain a particular lifestyle.

These are all undeniably true in most cases, but nonetheless, family businesses remain standing because the family members eventually learn the value of teamwork amongst themselves.

To prepare the family members to develop contingencies in the event the family business suffers a reversal, it is always helpful to be honest with everybody’s needs and opinions. A dialogue wherein every single family member will have the chance to voice out his/her needs and thoughts about the company’s situation and other specific issues that need to be addressed could be a healthy practice. Stressing the guidelines beforehand and doing consistent reminders are ways to preventing these from happening.

Below are some of the best practices of successful family and closely held businesses and the actions/steps they took which allowed them to weather economic upheavals:

  1. Focus on cash flow rather than paper profits.

Cash is king in business, and no company can survive for very long without generating positive cash flow. Cash flow is defined as a company’s cash inflows minus its cash outflows over a given period of time. Most closely held business owners think of cash as revenue less expenses. Sales may flatten or even fall while fixed costs remain static. If sales fall below the point where the company is able to produce a paper profit, it still may not be time to panic IF the company has strong and stable cash flow.

  1. Collect accounts receivable.

It may be acceptable to allow customers to pay with some flexibility in mind in normal times, meaning that you’re extending credit – often interest free – to your customers. But in hard times, you have to keep a close eye on accounts receivables to protect your cash and the family business.

  1. Focus on creditor relations, and keep them informed.

Creditors do not like surprises. Whether you’re doing well or whether you’re experiencing some recession difficulties, now is the time to invest a few hours in keeping your banker/creditor informed. Make sure you adhere to all your loan covenants, and meet face to face with your banker/creditor regularly. Work with your lender in a partnering rather than adversarial way to make sure they’ll be there for you if and when you need them.

  1. Compute tax payments accurately.

Most family and closely held business owners are focused on—if not obsessed with—avoiding taxation. The practice in some emerging economies like the Philippines is to come up with two, sometimes even three, books. One for the tax agency and the other books for the business owners’ personal information.

Their focus, however, tends to be on personal and business income taxes. There may be other tax reduction opportunities available. Make sure you’re taking advantage of all available tax credits. Make sure your internal or external CPA is using the most advantageous methodology for calculating quarterly estimated tax payments. Review fixed and leasehold assets to make sure they are being depreciated over their correct life for tax purposes. It’s often possible to reclassify certain assets to enjoy current rather than future tax deductions.

  1. Know your break-even point.

A company’s break even point is the point at which a product or service stops costing you money to produce and sell and starts to generate a profit for your company. It tells you at what sales volume the variable and fixed costs of producing your product or providing your service is recovered. In hard times, you have to know what your break even point. If sales fall below the break even point for an extended period of time, you’re in trouble. Every time you change the parameters in break even analysis, the break even sales volume changes. The parameters, then, are the factors which must be controlled by family and closely held business owners and managers.

My other advice to family business leaders: focus

Don’t be all things to all customers! In a complex marketplace, if you want to win and grow your market share, do not blindly target consumers: Target the most motivated!

Focusing your limited resources on those consumers with the highest motivation and propensity to buy what you are selling will deliver the highest return on investment.

The youngest self-made billionaire at 25

SOME of the richest, most successful entrepreneurs take decades to accumulate their fortunes. But others strike gold very early on.

It’s never been easy to get rich so young. Some of the wealthiest in our midst took almost a lifetime to amass wealth. Surprisingly, in a Forbes article penned by Kate Vinton, a record 66 members of the 2016 FORBES Billionaires List are under the age of 40, more than triple the number four years ago and a seven-fold increase since 2010. They are among 30 billionaires under 40. More notable is the fact that the majority of these youthful billionaires have created their own fortunes through innovation and imagination with a hefty dose of some good luck.

Of the 36 who made their own way, more than three-quarters got rich in the tech sector, including 25 billionaires whose fortunes come from unicorn startups valued at more than $1 billion.

The youngest of these self-made tech mavens is 26-year-old Snapchat co-founder Evan Spiegel (born June 4, 1990) who first appeared on the Billionaires List last year with a net worth of $1.5 billion.

According to Wikipedia, Evan was born in Los Angeles, California, the son of Melissa Ann Thomas and John W. Spiegel, who are lawyers. Spiegel grew up in Pacific Palisades, California. He was educated at the Crossroads School for Arts and Sciences in Santa Monica, and attended Stanford University.

In 2012, Evan left Stanford to focus on Snapchat shortly before completing his degree. While studying product design at Stanford, he proposed “Snapchat” as a class project. Spiegel co-founded the mobile application Snapchat along with Robert Murphy and Reggie Brown. He is the CEO of Snapchat.

The app — which, in the place of archived, chronicled posts a la Facebook, allows users to send messages that disappear shortly after being opened — has come to heavily influence, if not define, the way young people communicate, making it integral to brands, advertisers and anyone else looking to capture the attention of millennials and Gen Z-ers.

Like many tech startups from near the Silicon Valley area, Snapchat has its roots in a bunch of college kids.

In an Entrepreneur Magazine article written by Laura Entis, if Spiegel is quick to acknowledge the privilege of being born with a silver spoon in his mouth, he’s also quick to point out that privilege isn’t everything. To truly succeed, one must capitalize on it. “It’s not about working harder; it’s about working the system,” he said.

At Stanford, he did just that, aggressively networking in order to meet influential people, including Google executive chairman Eric Schmidt and Intuit co-founder and chairman of the executive committee Scott Cook, who set him up with a job at the tech company while he was still a student.

A university dropout

In 2012, Evan dropped out of Stanford and his course in product design, joining the same club as Bill Gates, Mark Zuckerberg and Steve Jobs. Despite being a frat house favorite, he failed to graduate, quitting college just a few credits short of earning his degree.

His first app was a flop

Digital Spy online also reported that prior to releasing his money maker, the entrepreneur launched “Picaboo”, a photo-sharing app that deleted images within 10 seconds of them being viewed by their recipient. Sounds familiar, right? Picaboo was a flop, failing to gain traction before being canned and rebranded as Snapchat. The rest, as they say, is history, more than 200 million users later.

He turned down $3 billion

Back in late 2013, Evan Spiegel turned down a huge sum of money from social giant Facebook.

With Zuckerberg’s team willing to front up $3 billion to acquire Snapchat, Spiegel reportedly gave them the runaround before turning down the sizeable bid. Instead of coveting instant riches, the Snapchat man admirably opted to pursue the dream of building a successful business.

“There are very few people in the world who get to build a business like this,” he told Forbes at the time. “I think trading that for some short-term gain isn’t very interesting.”

To give or not to give: The inheritor’s dilemma

JACKIE Chan announced in 2011 that he would give half his money to charity when he dies. He is not planning to leave his son Jaycee any of the millions he made.

Similarly, American investor Warren Buffet reiterated in one of the interviews, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.” Buffet pledged to give away 99 percent of his wealth either during his life or when he dies.

The retiring generation has given its children two things that they need to succeed in this world: personal wealth and a privileged education. However, most family business founders are not confident of the next generation’s commitment to the business. They worry about the impact that sudden wealth will have on their children.

This is a growing concern that needs to be addressed: the ‘Inheritor’s Dilemma’, which can block the succession plans of family businesses for decades.

Children of successful business owners have not had time to create an identity outside of the wealth and status of the business. Affluence is a part of their core and they may find it a challenge to develop self confidence and forge healthy relationships. No wonder most business owners try to keep their newly earned wealth under the radar, even to their own family. And wealthy parents aren’t raising kids to be good with wealth either, so they refuse to leave them wealth.

We call it the Rinehart Paradox. Remember Gina Rinehart, the Australian billionaire who was recently called the richest woman in the world? In a battle over the family trust, Ms. Rinehart said the kids “lacked the requisite capacity or skill, knowledge, experience, judgment or responsible work ethic” to manage the business and inheritance.

Study after study reiterates that only half of millionaire baby boomers think it’s important to leave money to their kids. A third of them said they would rather leave the money to charity rather than their kids.

The Philippines is no exception. Unfortunately, our inheritance laws mandates the intergenerational sharing of wealth to the qualified and beneficial heirs in the next generation. But most often than not, I still hear business owners having strong preference of bequeathing their wealth directly to their grandchildren and skipping the next-in-line descendants.

According to a CNBC article written by Robert Frank, there are two explanations for their stinginess.

First, they want their kids to grow up with the same middle-class values they had. They want them to learn and experience struggle and hard work and failure and the joys of earned success and all the other lessons that helped the boomers become successful (those born from 1945 to 1964). Aligned with this benevolent explanation is their commitment to charity and the broader world.

The second and perhaps more realistic explanation is that boomers don’t think their kids can handle all that money. Only 32 percent of baby boomers are confident their children will be prepared emotionally and financially to receive a financial legacy.

Microsoft founder Bill Gates, the richest man in the world, and his wife Melinda, are not interested in keeping their money for themselves or their three children. In 2010, Gates told “The Sun” that leaving the money to his children wouldn’t be good for his children or society.

Texas oil and gas magnate T. Boone Pickens, who is worth $1.4 billion, does not favor handing over his money to his children. Asked about leaving money to his kids, he said, “I enjoy making money and giving it away. I’m not a big fan of inherited wealth. In general, it does more harm than good.”

In the end, the situation boils down to a simple problem: the millionaire entrepreneurs have raised kids who are unequipped to inherit large amounts of unearned wealth. It is absolutely imperative therefore for business owners to start a strategic wealth management plan so they can confidently hand over their inheritance to the next generation stewards of the family business.