Look around you, the one who is absent is the one who will bring you down

Written by Alon Braude, CEO of Think Ahead Ltd. and author of: "THINK AHEAD about people families and business"

There are times in which an individual ostensibly has the businesses best interest in mind, yet actually poses a harmful threat to its success. Such individuals include the family members of the company’s owner. When do children serve as blessings and not as a threat? How do we prevent family members from secretly conspiring against each other while keeping the firms best interests in mind?

The title of this article was the moto of Eizer Wizman the man who built the Israeli airforce and served as it's commander for many years. Most Israeli combat pilots saw this sentence just before they entered their plane.

This sentence should serve not only pilots but also every businessman as well.
A successful business owner controls everything within his company. Aspects such as cash flow, profit, customer relations, suppliers, personnel, stock supplies and many others are all matters of the owners concern.

Even if the owner deals with all the above he still remains with a 70% chance that the company will not be successfully passed on to his children and grandchildren. This staggering percentage of failure is the direct result of the owners lack of attention to the issue of the family.

Every company begins with its founder, who establishes the company on the basis of his dream. In the process of establishing a company, the owner often unites with additional partners, who offer their expertise in such matters as finance and labor. This team of founders usually include a few partners. In a hypothetical situation, three partners build a successful business. They all enjoy a positive relationship based on mutual appreciation and trust. Each one of the partners is flawed in some way or another, yet they have learned to work through these issues in a mutual attempt to create a successful business.
Every one of the partners is married and they average about three children each. A simple calculation illustrates that this business has at least nine children that could potentially compete for their place in the company; assuming they each get married this number doubles, and a business that attempts to incorporate all eighteen family members into it’s confines is surely destined to fail.

It's illogical to assume that a company will continue to prosper when there are eighteen individuals bickering over who will undisputedly manage the business. A business cannot be successful as long as family members undermine, scheme, and battle each other for power, instead of directing their energy toward the needs of the company. It is as a result of such behavior that throughout the sixties and seventies, prominent family businesses relinquished control of their companies to external powers.

The main reason successful family businesses lose control over their companies can usually be traced back to the fact that the major share holders of the company unknowingly disregarded an important issue – THE FAMILY and the needs of the family.

Family businesses are defined as businesses that are controlled by either one or a number of families. Over the past few years the subject of family businesses has become widely taught in many leading universities throughout the world.. During the process of studying business management, a student learns all he needs to know in order to succeed in the world of business. The problem is that the student never learns how to maintain a successful business once he has created it. The maintenance and continuity of a successful business involves the balance of a number of aspects. Features such as psychological, financial, and legal elements must all be properly dealt with. In addition to all these elements, one must also comprehend that a family business cannot persist as long as a solution is not immediately found for the problems that the family members might be facing.

In order for a family to successfully pass down the business to the younger generation, they must create a family constitution which clearly defines the rules of the game. Often the problem is that the rules of the game are not made clear, resulting in unpredicted, and destructive activity. The owner of the business would surely attempt to prevent such actions if he knew they would later transpire.

A family constitution is used as a tool that helps clarify the rules of the game; the rules that allow for the family or families to coexist and run a successful business. The family constitution is the final result of negotiations between the two generations, allowing a family to set boundaries, determine future objectives and clarify expectations. Such a constitution will help the family continue the growth of a productive company while maintaining a relationship of faith and positive reception.

A solid family constitution is prepared similarly to a prenuptial agreement between a young couple; at a time that the founding generation is still of sound mind and body and the younger generation has yet to enter its confines. If you wait too long before you construct this constitution, you run the risk of the theoretical problems turning into practical ones. In such a case the principle that is decided may be made with a hidden motive.

The family constitution deals with three major subjects

• Regulations and stipulations for those who enter the business- who enters, when, and by which terms.
• Mutual coexistence- manner by which decisions are made, directorate meetings, signatures, and payroll.
• Retirement plans- pension, financial security of the next generation, voluntary retirement, retirement as a result of health issues, retirement as a result of death, and the sale of the business rights.

Every one of these issues may potentially be a source of conflict and deliberation amongst the family members. For example: Lately the news papers are filled with articles that deliberate over the subject of pension rights, and the conflict between the treasury and the labor federation over the pension funds.

As one whose expertise lays within the field of family businesses for over 20 years and has dealt with over 1,500 families, I can definitively state that the holders of controlling interest of family businesses are the ones who suffer the most neglect in terms of a pension. Most holders of controlling interests in Israel do not have pensions that match their level of income prior to retirement. The majority of these individuals only allocated a minor amount of money to their pension plans, given that they plan on the company remaining in their control and providing for them in their later years. The problem is that in many cases the formal control does indeed remain in their hands, although the practical control lays within the hands of the younger generation of managers.

Pension plans are not only designed to secure the future of those who work in the company but often to secure the future of the wives and others. In these cases we are not dealing with simple insurance plans, rather with intricate plans that link the income of the active managers with that of those on pension. Such pension plans require a contractual commitment by the business, which can damage its value when attempting to sell. A pension plan for the holders of controlling interest must also include the promise of a minimum dividend, and the coordination of goals between the company owners and the active manager. Only clear and respectable pension plans will allow for a successful transference of company ownership from one generation to another without harming the security of the owners.

Last will and testament

1. psychological.
2. financial
3. legal

An integral part of the family constitution should be the composition of a last will and testament by the holders of controlling interest and their spouses. The will is the tool by which the legislator guaranties that ones final wishes in regard to handing down his business shall be completed. Although the will is generally perceived as a legal document, it is first and foremost a psychological and financial document.

95% of the Israeli population does not write a will. The main reason for this is strictly psychological; they fear that dealing with the subject of their demise might bring them one step closer to it. The other 5% that does write a will and testament, must understand that their will should primarily indicate a clear financial arrangement between the family members, and both the businesses and assets that they own.

There is an interesting phenomenon that can be found throughout many wills, in which the more possessions one owns, the less he can bequeath. This occurrence is called the "Asset Paradox" and it has a simple explanation to it: the more assets one has in his possession, the greater the chance that he will manage the majority of his business through a holding company. Although various proceedings may take place under the jurisdiction of this holding company, when the time comes to compose a last will and testament, we discover that most of the assets are maintained by this one company. As a result of this situation, the only things left for this individual to bequeath are the rights to the company. This leaves all the children as partners in a large company. He who is not interested in having his children serve as partners, must make sure he establishes numerous companies that can be equally and fairly divided between the children.

The consolidation of a family constitution and a proper will serve the purpose of the one who wishes to bequeath. These procedures will allow for the family members to enjoy there inheritance instead of having it be a source of conflict and pain.

A proper model of a family constitution requires the harmonization of expectations and abilities, while considering each family member and the financial capacity of the company.

If you are contemplating any of these or other questions, I would be delighted to learn of your insights and comments to this article.

Good luck,

Alon Braude
C.P.A. M.B.A
CEO of Think Ahead Ltd.

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