Joe Reilly, president of the Family Office Association, sat down with Amy Renkert-Thomas of FBS Global Limited, a family business consultant.

Joe Reilly, president of the Family Office Association, sat down with Amy Renkert-Thomas of FBS Global Limited, a family business consultant, to talk about the challenges of families in business such as motivation for younger generations, what to do when great-grandpa is still in charge and why saving on taxes is not always the best strategy.

Do you think inherited wealth destroys motivation?

No – I think having all challenges removed from your life destroys motivation. We become motivated when we learn that we can change our circumstances by our own effort – that we control our own destiny. I think it’s a mistake to think that money is the sole thing that motivates people. I know plenty of people with inherited wealth who are deeply motivated. They see their wealth as a tool to achieve their larger goals.

You ran your own family’s business for many years, and work with many global family businesses. With all the liquidity in the world chasing private businesses, why should a family seek to hold onto the business?

One of the first questions I ask the families I work with is “Why are you in business together?” I’ve found that “making money” is surprisingly far down their list of reasons. They are in business to seize a market opportunity, employ people in their community, utilize existing resources, and keep a legacy alive. My family would say the same about our business, a brick and tile manufacturing company. We’ve made it to the fifth generation because we like being manufacturers, creating something useful out of dirt. When the time comes that there’s no one in the family who really wants to do that, we’ll likely sell the business.

What is more challenging in a family business: father-daughter or father-son relationships?

Nothing scientific about this answer, but I’d say father-son. My dad was proud to have his daughter working in the business, and while we certainly had our disagreements, there wasn’t the innate competitiveness you often see with father-son management teams. I’m not sure we can generalize from my experience, though – so much depends on the circumstances of the business and the relationship between the individuals.

How can a second-generation family member running a family business handle the tension between them and their “can’t let go” parents?

It’s a common dynamic – G1 names a G2 member to a leadership position, but refuses to retire. Maybe G1 stays on as chairman and runs the business from the board. Even more frequently, G1 keeps an office and maintains the same schedule as before, then chastises G2 for failing to lead when the management team continues to come to G1 for decisions. Most problematic is when G1 stays out of the decision-making process until he detects some problem – often small – then uses that problem as an excuse to dive back into day-to-day management.

Entrepreneurs have difficulty letting go. Helping G1 get involved in new activities that exercise their entrepreneurial muscle – joining outside boards, making direct investments, starting new ventures – can help. The most successful G2s have also learned to manage G1’s ongoing involvement in the business and avoid escalating conflict. But it’s not a quick or easy process.

How can a generation manage the tension between siblings?

In the first generation, the owner-manager controls the business and makes decisions intuitively. We call this “natural governance”, which is really just a formal term for “how we do things around here”. When there’s a single owner-manager, natural governance works. But once ownership and/or management pass to multiple G2 members, there’s a real risk that the understandings, assumptions and expectations that make up natural governance will devolve into misunderstandings, mistaken assumptions and unfulfilled expectations. 

Some G1s try to avoid this problem by handing complete control to one G2 member to exercise on behalf of his or her siblings. This strategy often works remarkably well…for a while. The sibling who takes control has absorbed the natural governance system established by the parent, and manages by the same rules. The siblings who aren’t involved in the business generally go with the program while G1 is living, and if the business is successful and the G2 members who aren’t involved in the business are otherwise occupied with other matters, they may not press for greater involvement. But at some point – maybe at the death of the founder, or at the point when G2 prepares to pass on the business to G3 members - natural governance just isn’t enough. Conflicts that have simmered below the surface break out.

What about third generation family businesses?

I’m seeing a trend in this area that will make engagement and succession more difficult. As people live longer, they’re working longer. Often, the seniors aren’t ready to step out when the next generation is ready to step up. Either the business needs to make new leadership roles for the next generation when they’re ready – perhaps through geographic or market expansion – or recognize that the next generation will likely find it too crowded at the top and leave for more productive opportunities. We even see family businesses skipping an entire generation of participants, with G1s retiring in their 70s or 80s and handing the reins to 30 year old G3s. That pattern creates difficult family dynamics and significant governance challenges. 

Your ownership in your family’s business came to you in trust.  Do you think placing a family business in trust is the best option?

So many US family businesses are now owned in trust, solely because of the tax code. But at the end of the day, when the next generation is capable of overseeing the business – whether as managers, or directors, or both – the transition often goes better when the shares pass outright, rather than in trust.

Often, saving taxes is the sole objective, and the planners don’t give all that much thought to the consequences for operating the business and making tough decisions. Let’s say the trustee receives a lucrative offer for the business. The grantor of the trust probably gave the trustee verbal instructions back when the trust was created – something along the lines of, “Don’t sell!” But what if that direction is in direct conflict with the trustee’s fiduciary duties to the beneficiaries? And what about the beneficiaries’ wishes? Should the trustee consult with them? Must he? May he? Trustees are personally liable for breaching those duties, and so it shouldn’t surprise us that most become highly risk-averse when faced with a difficult decision.