“Trusts & Selling Your Business” – FBA Panel Discussion – Winter 2021 Edition – PART ONE

Nathan (0s):
Welcome Radio Entrepreneurs, listeners and fans, I’m producer Nathan gobos. And I’m excited to introduce you all to the fourth family business panel discussion in this family business and trust related winter 2021 edition of the panel discussion. We will be covering topics related to trusts that own and operate a family business. And when is the right time for a family business to sell this episode is part one of three, and all of these discussions are intended to be highly relevant, family businesses, but also entrepreneurs of all types. So be sure to follow Radio Entrepreneurs on LinkedIn, YouTube, Spotify, or any of the many other platforms we stream on to catch the other segments as they go live. But before we get into the discussion, allow me to introduce our panelists.

Nathan (41s):
Of course, we have our regularly regularly returning panelists, Steven Wilkins, founding partner, and attorney at Wilkins Cosentino and Novant’s with over 42 years of experience serving the businesses and estate planning needs of families, individuals, and owners of large closely held businesses. Steven has also co-founded several businesses himself and serves on seven privately held boards in several diverse industries. Welcome Steven. Next I’m excited to introduce Bob Rosenfield. Bob is a founder and managing director of Cape Vista capital Cape Vista is a family office investment entity focused on renewable energy, sustainability and broadening availability of housing, healthcare, and healthy food supply chain.

Nathan (1m 24s):
Prior to Cape Vista, he was CEO of true road holdings and Jay and Phillips. Autoglass guiding the company’s growth from an eight store local business to become the second largest company in the $4 billion us auto glass repair replacement and claim service market. That business was acquired by the number one industry participants Safelite auto glass in August, 2019. Welcome Bob. I’m also excited to introduce a pair of guests from Northern trust corporation. Joining us is Dale sands, director of business advisory at Northern trust and Chris Perry, president of wealth management and senior managing director at Northern trust. Dale has more than 20 years of experience in investment banking.

Nathan (2m 6s):
He has advised on hundreds of public and private debt and equity offerings, merger acquisition, and divestiture transactions and Sev and general corporate advisory assignments for both public and private companies in the U S and abroad. Chris spent eight years in private practice as trust and estate lawyer prior to joining Northern trust in 20 2006, since then he has helped substantial clients develop creative solutions to their complex wealth planning needs welcome Dale and Chris, of course, we need also need to give a shout out to longtime supporter and regular FBA panelists Richardson of Gregory and grey CPAs. Even though he couldn’t join us this morning, we always appreciate Gregory and Gray’s continued support.

Nathan (2m 49s):
And then finally, I would like to introduce the panel’s moderator Radio Entrepreneurs, host and CEO of major LLC Jeffrey Davis, welcome Jeffrey. And I will now hand the conversation over you.

Jeffrey (3m 0s):
Thank you very much, Nathan, and welcome everyone to the family business association and Radio Entrepreneurs panel. I appreciate all of you attending. These are very important topics and very important times. I want to start off with the question, how does a family work best to balance the interests of the business and the family? This seems to be an ongoing topic for all families in terms of staying objective. Does anybody want to take that one first?

Bob (3m 33s):
Yeah, I’ll be happy to jump in, you know, 30, 33 years, 35 years cumulatively in a family business in several different incarnations. I really think that a family business needs to be forthright with each participant about their role in the organization. If there is to be a role in the organization, let me put it another way. When I entered the family business, I tried to influence our family members not to think of it as a family business, because that would be a disadvantage in terms of roles, responsibilities, functions.

Bob (4m 32s):
Everyone was an employee of the company and had to perform to the standard set. And so clarity, honesty, kind of the hard conversations need to happen early in. Often, otherwise things get baked in that are dysfunctional.

Jeffrey (4m 52s):
Let me just add a little bit to what Bob said before. Anybody else wants to respond. You know, it’s funny a term that’s in the dictionary. I’d never heard it before in a practical sense until Bob Rosenfield had said it to me and other advisors and he was determined, he said to run his business as a meritocracy. And I hadn’t heard that before from a family business member, but it received a lot of dissonance from the family, the whole concept of meritocracy in a family business. So I don’t know if anybody else would like to address that topic. Anybody else wanted to address it before I move on?

Steve (5m 33s):
Oh, I’ll say, I’ll say something there.

Jeffrey (5m 36s):
Good Steve.

Steve (5m 41s):
Okay. So I think it’s in conflict. I think the family business and the family are in conflict. And I think that what Bob said resonates well, and I think that people have done their stand, that in order to make a successful family business, they have to be objective and they have to basically remove their family feelings and ties and actually put themselves into the family, into the business side. And then when they’re having gatherings move into the family side, I think that’s a very difficult challenge, but I think that’s why for the most part, most family businesses don’t succeed to the extent they could because there’s a lot of bad feelings about jealousy and you know, he, he or she has taken this position and he’s not qualified.

Steve (6m 38s):
So I think it’s, it’s, you have to really work at it and, and educate the family members to make sure that they all understand that that’s the, that’s the bar. If we’re educated and that’s what we’re striving to do, then we all need to be go through that process together.

Jeffrey (7m 2s):
Well, I’m going to go onto the next question in terms of outside board members. I’m wondering if people feel that in a closely held family business, how useful and how they can be used to be useful outside advisers can be in a family business. Does anyone want to take that first?

Bob (7m 24s):
I’m happy to jump in again. I think from my experience, my observation, it’s an issue it’s important for a board member to understand going in. Are they there to, I don’t know, help a family member influence process to get what they want or are they there to help the business strategically positioned for success? You know, when some family businesses, the actual selection of board members just is another manifestation of family conflict and you end up instead of having a board, that’s helpful, you have a board that reinforces the problems in the divisions.

Bob (8m 19s):
So I think the way a privately held company can be successful is to make sure they have a board that understands the CEO job. And it’s lonely at the top. It’s hard to go places to get good advice. Sometimes can’t always just shoot the breeze with your executive team and strategic challenges for a family business are so important because sometimes kind of the status quo desire of members to, oh, why do we need to change? Let’s keep everything the way it has.

Bob (8m 60s):
What’s what’s wrong. There’s nothing wrong. Everything’s good. Everything’s great. Look at last year’s numbers. No, the world moves too fast. A board is great if they understand that they’re focused on strategic initiatives and to take away the fire fighting exigencies in front of the CEO for even if it’s two hours a month, you know, you’re gonna meet payroll on Friday, don’t worry, but you know, what are the, what do we do to grow our business, to keep our customers, our customers, and to have competitive advantage.

Bob (9m 41s):
So if you can, if you can engineer that boards are great for closely held companies.

Chris (9m 49s):
Yeah. I’ll jump in and, and Jeff, thanks. Thanks for the question. It’s a, it’s a good one from the standpoint of the trustee, w you know, we find that if you’re laser focused on shareholder value, you’re gonna think to yourself about how, whether it’s a board can be helpful to try and bring new perspective to the situation. And, and you’re gonna, you know, th that’s a situation where a board can be very, you know, can, can be a helpful as Bob was suggesting kind of, you know, either reality check or somebody who’s, who’s really looking to make sure that, that the business is doing the best that it can, what you don’t want is somebody on the board.

Chris (10m 37s):
Who’s just gonna essentially kind of placate to the wishes of the family. If the best interests of the business are not being served with that strategy. So one of the, the, the, the, you know, the kind of follow on question that we often deal with is how do you know, how, how much do you pay a board member and what is their compensation that’s involved and our experiences, you often get what you pay for. So a really good board member can be somebody who you may want to pay. So I’ll, I’ll leave it with that, but those are some thoughts.

Jeffrey (11m 12s):
Well, you know, one of the problems that I’ve seen with families and I’ll, I’ll get to you, Steve, I’ll just add to it is that, you know, we’re, let’s say a member of the family has had control for a generation, and then they have a family sort of coming in, there’s this sense of loss of control. And they tend to pick, let’s say friends, their personal attorney, their personal, you know, the personal accountant. And they go, that’s my board. And, you know, so I, you know, at times I think that that can add also to the conflict of not really having an independent. So Steve I’ll, I’ll, I’m probably adding a little kerosene to your argument.

Steve (11m 51s):
I think a lot of time needs to spent on who what’s the makeup of my board and who should play that role and why. And I think we have to be very careful if we do select trustees, which that are serving on the board as well. We have to understand the conflicts and, and who they really represent, because your standard is different. I mean, the trustees standard, you know, the fiduciary standard versus the business judgment standard is way different when, when dealing with boards. So I think there needs to be a clear path of understanding the makeup of the board.

Jeffrey (12m 41s):
All right. So let me go onto my next question. And let’s add that the trustee element to all of this, how complex is it for a family to add a trustee to the family business? This is something that maybe Steve, you know, a lot about that, Bob, I don’t know if you had a trustee, but Steve, can I go to you first on that one?

Steve (13m 3s):
Sure. I mean the first thing, and, you know, Chris and Dale have a lot of experience on this as well, but certainly the standard of care is differently. And so when you serve as a trustee of a trust, is D does the trust own shares? Because there are really three broad, different types of situations. One is called a directed trustee where you’re dealing in a different jurisdiction like Delaware, where the trustee, where the business is directed by a separate trustee. The second one is more like a co-trustee, which is working with the trustee and serves only on the business interests.

Steve (13m 44s):
And the third is basically that the trustee delegates that responsibility to someone to run the business, but you have to be careful on each structure and what the purpose is of that trustee and who do they represent and who are the beneficiaries of the trusts. It’s very important. And does the trustee own an interest in the company at sell? So if you had a major shareholder that was a trustee running on the board, that’s going to create a lot of conflict and issues that need to be wrestled with

Jeffrey (14m 23s):
They all are Chris, did you want to jump in on that?

Chris (14m 26s):
I’ve I think it’s important too, to note that it doesn’t have to be complex, per se, Steve was raised excellent kind of role clarity questions regarding the standards that apply to a trustee. The real key is that the trustee has some understanding of what the business does and how to, you know, how it’s run our experience with our clients is that if we understand the business, well, if we’re involved early, if we have an opportunity to, to really understand the business and, and work with the family, that’s not necessarily complex. It’s, you know, it’s a challenging role.

Chris (15m 7s):
You’re balancing many interests, but it’s, I don’t think it needs to be complex. No,

Jeffrey (15m 15s):
I want to move on to the, our last question of the segment. If a family business has held in a trust, Kenny can a family member who is more involved in the management of the business received different compensation or equity as an active family member. I think this is a very interesting conversation, especially around the equity because, and compensation, there seems to always be some debate in every family business I’ve ever experienced around this what’s fair.

Dale (15m 45s):
There I’ll, I’ll take the first stab at this. So of course the governing documents would, would, would rule here, but it is certainly appropriate for management team members or some family members that are in the business to receive out-sized compensation for their roles within the business. Of course, it needs to be reviewed carefully by the trustees and make sure that it’s fair and appropriate in that market environment. But certainly there can be out-sized compensation for those participating management team members.

Jeffrey (16m 21s):
Anybody else want to address that, that issue? I know for me, I’ve experienced it in many, many organizations. Bob, I know you, I think you had, you gotta, you had more than a trustee involved in your business, but compensation was always an issue just like we’ve seen in a lot of family businesses.

Bob (16m 41s):
Yeah. I think everyone’s raised really good points about trustees and family businesses. So I’d say a couple of things. Well, one, the meritocracy comment probably speaks for itself relative to compensation. Some things a family member can try to do if there’s a board is maybe short of having a compensation committee, have a regular compensation discussion and specific goals for the senior management team, like core function of a board and something around which in the board setting, you can’t really have an objection other than, you know, familial based issue.

Bob (17m 29s):
But my experience with trustees in some ways was it was always with a minority shareholder to qualify it. And in some ways it was very good because it was not a family member. Sometimes conversations with family members have a baggage. You don’t know where the other side’s coming from with a trustee. It’s clear. So there’s a fiduciary responsibility there. And so I tried to spend a little extra time walking in that trustee shoes, so to speak because sometimes I would have to ask for something that I know was going to challenge their not challenge, ask them to make decisions around, you know, capital preservation versus growth.

Bob (18m 25s):
Fortunately for me, we didn’t have a ton of crises during that period that I had to go and ask for a lot of stuff, but, you know, asking for capital to flow out of a trust into the company for a capital event, you know, that’s, that’s a big deal. So I probably had to do a little extra homework. I understood it. Couldn’t like, you know, go have a beer and just say, okay, fine. What that heck doesn’t work that way, but that’s okay. At least, you know, the road you’re driving on

Steve (18m 56s):
Bob, how did you deal with the issue was of a trustee who wanted to increase the distributions versus increasing compensation for management or yourself? Great question.

Bob (19m 14s):
I did too. I would do two things. I would, oh, without getting carried away. Well, let me back up. I went to them and said, Hey, how about if we think about this as shared gain, we’re more like a general partnership limited partnership. So the shareholders would get the first X dollars of profit from the company. And over that it will be split between the management team and the executive and, and the shareholders. So we have an alignment of goals here in G the shareholders are getting the, the lion’s share, they’re getting the first X dollars, but also like, I think it was 70% of everything over that.

Bob (20m 5s):
And the management team got 30. So no one was wondering what their paycheck, if you will, was going to look like. So we were fortunate to kind of build an alignment on that. And I would say that model was in place for 6, 8, 10 years. And it kind of put to bed. What had happened previously was, oh, the end of the year, let’s all get together. We got to figure out what the bonuses are going to be. And there’s a lot of tension around that meeting. It’s getting to be close to the holidays. Everybody’s dealing with a massive uncertainty and, you know, jockeying for position.

Bob (20m 49s):
That was terrible. So we designed a system where everybody knew what was coming their way. They could look at the monthly financials and kind of calculate their take, and it seemed to take the edge off predictability.

Nathan (21m 7s):
Great. Thank you, gentlemen. That was a very interesting conversation with some highly useful topics related to trust and boards in this first part, that wraps up part one of this December edition of the FBA family business panel discussion. Thank you to all our listeners and viewers who have tuned in for this new segment on Radio Entrepreneurs, links will be provided in the videos description below to parts two and three of the discussion to hear more on these topics. Be sure to check out those links and click subscribe just below the video. If you’re on YouTube or follow. If you’re listening on one of our podcast platforms, stay up to date on all of our postings as they go live. If you’re a fan of these videos, please be sure to like comment, share, subscribe, press the bell button.

Nathan (21m 47s):
All of those things help immensely. Radio Entrepreneurs is also highly active on LinkedIn. So be sure to go follow our page there as well for more business advice and discussions until next time. Goodbye. And thanks for listening. We’ll be back with more stories on Radio Entrepreneurs.