Dan and Maxwell Youngquist talk about government strategies for successful family business succession on the "Never Go Against the Family" podcast. They highlight the significance of effective communication, family governance, and creating a family constitution for having a shared vision and democratic participation. They also invite people to join a panel discussion on governance on the 30th and emphasize the importance of determining employment policies, establishing committees, and offering proper compensation to avoid disputes. 

Transcription

Katie: You're listening to Never Go Against the Family, a podcast by the University of Northern Iowa Family Business Center. In this episode, we're jumping into the middle of a conversation between Dan and Maxwell Youngquist. Maxwell is part of RSM's family office enterprise practice and has worked for and with many family businesses. We start the conversation about succession and then dive into government strategies that family businesses can employ to see the most success for both the family and the business. Keep listening to hear their conversation.

Max: where one family member is getting part of a family business originally thought he was going to control the whole family business and he was going to be the clear successor. As I said, unfortunately, that's not as common. There's a couple issues with that. One is family dynamics and you always kind of start with, well, why did the parents or parents make that decision and why didn't they communicate it beforehand? So that's kind of a family dynamic issue that they would probably want to spark a little bit on. Did you go back and talk to them? You know, what, what was their answer, why is, is, was it just because of the consideration for the other family? I remember saying if we didn't do this, you know, they wouldn't have enough to keep their current lifestyle or there would be other issues or, you know, we went, we, we thought it was fair. Sometimes the answer you're going to get that, that we thought it was fair that, you know, they, they did, they've part of the family and we felt they deserved part of this. I mean, the one thing that is the problem is there was a process and a decision that was reached without consulting that one family member. And again, even if it was an outcome that I think that family member would have been ok with or happy with the sheer fact that it wasn't communicated by the parent and the reasoning is already kind of a big, a big issue. I mean, everything about family governance boils down to communication. It is the ultimate kind of fundamental there that without communication, you're gonna have more and more problems. So I think that the first step is the lack of communication. What's the problem? Then the other issue is if you are putting up so much as we talked about in an earlier conversation, so much sweat equity into it, you want to make sure that you're kind of communicating and that you're rewarding the sweat equity in addition to everyone's kind of blood equity. That. Right. Yeah. And that's, and that's usually in the form of control again because they've been putting it in, they want to have control of the business, as you said, the successor, the operational. So I, I think that also needed to be, again, communicated and, and determined before it reached a situation where the business had actually happened and the business succession happened because without that, you're gonna need, I think a lot to make sure that that person's gonna be ok with the situation. If they're gonna put so much of their time and energy in a business and then they're not going to get control of it at the end of the time, you already know there's gonna be an issue there. And I I it's gonna happen in a conversation on if you can get them ok with that situation of their brothers being involved, maybe there is something there where there is another business arrangement or another kind of solution to the problem where if it was a money concern for the other family members or a value concern where this is going to support them, maybe there is something else you can do with the family business or you know, another class of shares or, or however you could have done it to accommodate everybody in the family without having it be a surprise and kind of a negative situation for one of those family members at the end of the day. 

Dan: That's a good point. I mean, perfect case in point of why governance can help, right.

Max: So governance would have hopefully, you know, been a solution. They would have, they would have, this would have been something communicated at a, at a family meeting. you know, this would have been something probably also communicated through the normal business channels would have been at some as well. Yeah. Yeah. And then you would have had a voice. You know, if this has happened at a family gathering, a family meeting where they brought up the situation of, you know, we're, we're looking into business succession. We're looking at the planning here, here's my thoughts. It could have been communicated. If they still couldn't reach an agreement, then there could have been a mediator. There could have been a number of steps that happened before the actual execution of the business succession that could have resulted in a much more favorable outcome even if it had been the same outcome. If everyone had faith in the process too. I like to say that a lot of like that if everyone is on board with the process, they're gonna be a lot more accepting of the outcome. If they felt like there was a fair process in play for them to voice their concerns, to voice what they're feeling. Because for all this family member who said, you look I'm very happy with them, owning part of the business. I just don't think they're making great business decisions. So I still wanna have control and you've already entrusted me so far. So why not continue that? Because they don't have a proven track record. And again, that can be, that can be accomplished. you know, that can, or maybe it's a division, maybe they felt, you know, what, they would have been better suited to a different division in the family business and all that could have been laid out. And, and we also don't even know what the other family members had said that did, you know, we don't, we only have kind of one side of the story and they may have said, you know, I would have preferred that I, I didn't really want to be involved. I only wanted to be kind of involved for a short period of time, but I don't really see, you know, my, my kids or my younger generation being involved. So I would have been actually ok with a different set up or a different solution. and that could have been accommodated, maybe they're cashed out or maybe, you know, ah, there's a number of solutions there that might have better suited everyone if there had been kind of that proper communication. And, again, the family government set up that proper communication, the proper forum, the proper process. And again, ah, you know, there are conflict resolution policies everyone can be on board with, you know, maybe we do get somebody from the outside to really analyze this.

Dan: So with that, you know, I know you have experienced Mac working obviously now with families through R S M but also in family offices settings where they are pretty evolved, extremely evolved and, and have well laid out governance. You know, I think our audience on this podcast, a lot of times are folks who are just dipping their toe into what we do? And trying to, with the best of intentions, not screw it up. You know, trying to, trying to be proactive. So, you know, for those families that are just getting into that level of maybe they're, you know, getting ready to take it from, from the founder to the, to the, to the next gen to the kids. What kind of governance or just models are, you said, trust the process. I think that's a, I, I remember that from the Philly 76ers. But what do you, what kind of things do you want to see a family like that?

Max: Start with a lot of times, I mean, first and foremost is getting them all in a room together, especially where you have, ah, the original generation, the second generation, getting them communicated. A lot of times the kind of the low hanging fruit is we usually like to get them to come together and talk about and solidify statements. This gets them talking and communicating and, and solving smaller problems of, of what are our shared values. B, once they've kind of talked about their shared values and what they're doing, And what they hold dear and that usually involves conversations of, you know, from the, from the first generation, what really stood out to them, what experiences they have, how do they experience it? And what it means to them, we've already come together on something that we can kind of rally around, you know, something that's going to be outside of the family business. It's gonna be something that the family can rally around and provide unity. You know, it is something kind of continuous, they can point to that and, and that can also help guide people just reading that mission statement may say, you know what these are our values, this is gonna help us guide us in decisions going forward. So once we got kind of that piece and it goes hand in hand with, I usually like them to get at least some version of their family history on paper and kind of chronicled. because it does kind of set up the stage of how things have evolved to this point in time. How are decisions made, how are we thinking about the family business or our family wealth and, and where do we see it going? You know, if we look at the past and we have that kind of look, we can definitely say here's where we think went well, here's where we think we are bad, here are the things, the experiences that kind of shaped us. You know, maybe it's a macroeconomic factor. You know, a lot of times people, you know, during the Great Depression that shaped a lot of their values that's going to come out in the mission statement and their work ethic and, and really ingrained with them, the sense of how they operated, how they went forward, how they made decisions and how they functioned as a family. So if you can get that on paper too, sometimes that also helps identify some family dynamic situations. you know, there's always those triangles of family dynamics and issues that come up where you can kind of see where those triangles within the family are, kind of those relationships have progressed. And then a lot of times you can say, you know, what we've discovered is that, you know, this family member wasn't always involved in the family business, but they were a source of wisdom for the family, you know, and capturing that and kind of how that happened. And then we can see a lot of times too. if there's any areas where these two family members, whenever they were together and making family decisions, it didn't work out so well or they got into a fight So it kind of helps identify too when they're going through the exercise. And especially with the mission statement too, when we're going through the rest of the process to really institute governance, we're already kind of shaping where we might have some issues and have they already begun to work together, if there's people that haven't worked together before? Are they working together now? So, those are a really good, easy place to start. You know, it's something that isn't just immediately getting into this is how we're gonna set up our entire governance. It's something to bring people together and get them working together and to start shaping things.

Dan: After that, it kind of gets everybody on the same page of, well, maybe it doesn't get them on the same page but it gets them into a place of, oh, we do have some commonalities here or we do have something to agree on.

Max: Yeah, in talking and working together and, and coming to a decision. Yeah. After that, we like to move to a situation where we want to start putting some, some higher level things to paper. So if there's a family business, we like to talk about, like, let's codify now and get on, get on paper. What does it mean to be an owner? What does it mean to be somebody working in the family business too? What does that mean? Sometimes that even talks about, you know, a family employment policy, especially if there's kind of a third generation on the way too, that's going to be involved in the family business. So a lot of times too, as you said, some family members want people to step away from the family business, get some experience and come back. So at times two, since the family business is usually core, even before they have a separate family office, it usually starts with a family business. We, you and those are usually very common, you know, not a lot of people have fully exited the family business when they have a family office. So again, getting that on paper, if there is a separate family office, getting on paper too, kind of, what does it mean to be a part of the family office to be an owner of all these? What does it mean if somebody's on the board? Because a lot of family members are gonna be on the board of the family business? What are those expectations? So now you've, you've kind of established, you know, what does it mean for us to be owners of the family business? What does it mean for us to participate? And what does it mean for us to be a board member on this? And, and a lot of the upper echelon generation will be. So again, now we've kind of set up on paper roles and responsibilities. A lot of times we don't find a lot of documentation around this. But it really comes out to the fact that we want to get an agreement of, if you are an owner, you have some sort of responsibilities to the business, to the family. And now it's on paper, you understand what it is. And now we want to get a regular cadence of getting the family together. So then we started to talk about, let's even if it's informal or just from the process, let's start getting families together so they can start making future decisions about all these now that we've kind of laid out what your responsibility is and if there's a formal family assembly that we want to talk about or, or put it again in the family, A lot of times you'll early on there is kind of a family counselor or family assemble that has a short agreement next to it. especially among families that have a lot more, you know, there's more than 67 people and stuff. Yeah. Yeah. So that we would also lay out that time. What does it mean to be a part of the family assembly? What are your expectations and things like that? So now that you've kind of got out all the expectations and the roles for people, we want to start getting together to make decisions and that's where we're starting to get in the process of things. And that can go hand in hand usually there. The ultimate goal is after that, we can build a family constitution which incorporates a lot of these elements into it. But that's kind of that, that other leg that we want to eventually get to. That is, we can get them all together and make decisions so that they can have this, this family constitution that they're going to work with, work around, that's gonna lay out kind of, you know, it can lay out the investment policy decisions. If there's a family bank, it would incorporate this ownership ah expectations, you know, the employment policy, all of this would then make its way into a constitution. And some are more robust than others depending upon what kind of family needs. But that's the end goal is eventually you've got them together, they can make these decisions. And now we have that document that is a family constitution. It lays out a lot of the rules. Again, you might see, you know, family education there. And again, that's another thing that comes up when we're kind of doing the roles of responsibilities. If there isn't any kind of education that's been happening as part of the family business, we like to start getting that in play too.

Dan: And when you're saying family education, you're not simply talking about making sure they can go on to college or something you're talking about.

Max: And so, I mean, shareholder for history in the educating about the, yeah, educating them about the family business, educating about the family investments, educating them about, you know, a lot of it is they may go on and want to be a doctor, but we still want them as part of the family to have a lot of financial literacy to kind of have some, you know, nowadays too, we're, we're educating earlier and earlier kids about cyber security and some other things that are very important for them as a family in a, in a wealthy family to have to be cognitive of and start practicing early on. So it starts pretty early on when you start getting them the financial literacy, financial responsibility kind of getting in that stewardship, value in there and then working it up to, you know, the cyber security, the other things. Ok. Now we're gonna learn about our family investments if they show an interest in being a part of the investment arm of the family office, they're getting more of that education so that they can be a part of that, they can make, you know, responsible decisions. And again, a lot of it is even if they're going to be more of a passive owner of the family business, there's still decisions that they're going to be making that affect the family business likely, or they want to understand the decisions made by the family business. So if you know, if they're getting all of these reports in a family meeting. What does it mean? How are they interpreting it? What are the decisions being made even though they may be passive, we still want them to have a full understanding of what is happening and that they understand the family business that they're an owner of. And that's very important because they may at one point want to have a voice about something. And if they haven't been educated, it's not, they're going to, they may not voice at all, which is not a great answer or they may, it may take longer to reach a decision and time always matters. You know, you think there's all these decades and decades. But let's just say, they say we want to divest part of the family business, everyone's getting together, we're talking about it and if you don't understand it, you're not gonna, it's gonna affect you and, and we want them to be able to be educated about that and so that they can say, yeah, yeah, yes, I want to do this or no, I really don't feel like this is a good idea guys. And, and so again, it may cut off at a certain point if they are a passive investor. But again, we want them to have that understanding of the family business. They don't need to know the day to day. But definitely the direction is going because that's also gonna be a topic for family meetings if it's a big part of their ownership and their wealth. When it comes to them in the family meeting, they say, hey, you know what, the war in Ukraine is really affecting us. This is why we want them to be understanding like, OK, we might be looking at a significant pull back at our valuation. We may be looking at a significant pull back at our payouts. And it's gonna, it's gonna solve a lot of conflict in the future. The better educated everyone is and they're better at articulating their points too.

Dan: I think that's, it's simply stated, but much more complex, you know, sometimes for everything is, but you know, when you're mentioning this, what does it mean to be an owner? What does it mean to be an employee either though? I mean, that founder, you know, especially in this head or her head? There's no difference, right? They are the employee and they are the founder or the owner and they don't think about all these can actually be two different things potentially, right? Or these are two different buckets and like the three circles model has helped everybody. See that's a familiarity with it anyway, is that there's overlap of their differences and, you know, there can be differences and, and allowing for that is sometimes a way to bring some peace and harmony to your family. I don't know if you have some thoughts on that. Max.

Max: I do a lot of times, you know, the first generation they've been so it's such a part of them. There is no, there's no, a lot of times looking back on what happens if somebody wants to exit, what happens if somebody wants to sell their part of the business to another family member. You know, there's a lot of times it hasn't been contemplated or there hasn't been a need to contemplate it. But, that is something that you have to think about. You know, we've, I, I in the family offices, I worked for. There was that situation of when, if somebody wants to exit certain investments, when, if somebody actually wants to exit the family office altogether, they decide as a family member, they want to go off and do their own things. You have to be prepared for these and it can't be kind of an acrimonious thing. So if somebody doesn't want to be involved in the family business, wants to liquidate their person, their portion of it, you have to be kind of prepared for it. And we want to get that earlier rather than later because if there's a process and a way to do it because you also don't want to break and fracture family unity by having somebody that doesn't necessarily want to be involved with one aspect of the family. because now it's not just a family business it's your investments, it's your family. You don't necessarily want to say they don't have a voice anymore. They're not. And then that's where it's about communication. You may have, you may not be an owner anymore, but you still have roles and responsibilities and a voice in the family and you want to be sure that that apparatus is set up so that there isn't this? Ok. Now they're gonna fall away. You know what? They've now divested the family business, they don't feel apart, they feel like their voice isn't heard. and now they want to exit completely and now, and now that may cause family bonds to break because now they aren't a part of it. So that's one of the areas we go over to. a lot of times too, what hasn't been contemplated is people not only may want to exit the business, but, but what is the involvement of spouses? What is the involvement of people on the periphery? And so talking about that too, what, what is their role in the family office? are they gonna, you know, how much a voice can they have? What are their roles and responsibilities? And that's one thing that's kind of a touchy subject too, that we've always had to kind of go back and say, well, you know what, we actually need to put this on paper. we can't just ignore some of these facts. And so that's been an important one too. and again, they may not, they may figure that everyone's gonna want to be part of the family business generation 34567. That's just not gonna be the case. and they may have differing views too that we always get into if there's a large investment portfolio, maybe they want to go in a different direction. Maybe, you know, nowadays we hear about E S G, maybe we're starting to look at the original philosophy that we are gonna have, ah, or, you know, put in place originally and now we might want to adapt that to accommodate them or maybe this is a great way for them to be a part of the family office, a part of the investment committee. I am in and kind of lean into this a little bit. So that's always something we want to set up. We have to be adapting to the current times, the current attitudes and the reality that there's just no way that every single family member will want to be a part of the family business or the family office. There's gonna be people that are going to carve out their own way and we don't want them to leave the family apparatus. We want to keep it together so that they can still have their outlets to pursue their own business, to pursue their own careers, to be passive in the family business, you know, maybe even passive in the family office, but we're still going to get them together. They still have to have an effective way to make decisions and have a voice in decisions that the family is making without having this completely fractured because there isn't that kind of relationship that they have to the family, through the business or the office or the investments.

Dan: Ok. All right. Perfect. I think that makes a lot of sense and I'm glad that we're talking about this now because I'm gonna give a shameless plug but on, on the 30th, you're gonna be back with us on the panel with Joe King of, of King technologies, Minneapolis area and talking about governance and what are some of those first steps and you know what parts of this are, are maybe do it yourself a little bit for some of those smaller families. I could try some of these things. What are some best practices? What are some of the ways that families can start to dig into this and feel like it's gonna be worth their time and not just make problems worse for a family that has some dysfunction because I, I mean, every family has some dysfunction and it seems like it anyway. And you know, how do we, how do we get ourselves to jump off the ledge and, and try some of these things? With that fear of, well, what if things get worse than they already are? I don't know if you ever heard that before from a fan?

Max: Yeah. Yeah. How, how do we add fuel to the fire? A lot of times, is, is, is what we hear it, as I said, step one really is creating a cadence of meeting as a family trying to get together as a group. I, that, that's just the step one is if can, can you get together, can you come to an agreement on getting together at certain times throughout the year and making decisions as a family? After that, as I said, we like to focus on, can you make decisions about what matters to you guys voicing your concerns? As I said, even if you're not talking about a family mission statement or something like that, what are the concerns that family members have? You know, if it is a smaller family that's just starting off, what are their, what are their concerns about the business? What are their concerns about investments? What are their concerns about the future generation? And, and what are the con you know, as I said, the business succession planning is one but, but concerns about what do we want as a family? Like what is the vision that everyone has? you know, John, not just with the vision, not just with the kids. What do we have as a family value and want to do it? It may be that the business is a stepping stone. It may be that collectively, we do want to have our kids start being a part of what we're doing. It could be the involvement, it could be that we want family members that may not really have voiced anything about it to get them involved. And, and really have them part of that kind of process democratically too, to start making these decisions. And it is kind of sharing with the experiences that I have. Hopefully, if they can come together and start talking about some of these things, that'll provide a direction of where they need to go. Where are the immediate problems? The immediate problems are all with succession planning at the family business or people being involved at the family business? Obviously, you want to start with that of let's get it down, you know, what, what is our employment policy? What is our involvement? What is the future involvement of our kids? Do we want to start educating them about the family business? Maybe they start out young kind of getting a feel for it. Maybe it's just the fact that everyone does own the business currently but somebody might have liquidity needs. So is it, is it really pressing, is it, is it cash issues? Is it liquidity? Is it we've waited so long to have this discussion in state tax concerns? So, getting all of that on the table from the beginning is really gonna point you off, or where it is next. a lot of times too, we've had this issue of, we get them together and obviously things are diverging pretty quickly. so, but again, it is getting that in there and, you know, if they do want to divest and start pulling money to a new investment vehicle, maybe that's not a problem, but maybe they say, you know what? That's not a bad idea. Let's get together, let's start structuring our investment. So maybe your immediate need is, is gonna be with a legal and accounting firm to figure that out. And a lot of times too, if it is a larger family that we have, it's starting to get people into committees so that we, it's not just kind of a free for all of the family, family get together. There's people that are, that are kind of getting together saying we're going to designate these people to be part of these committees. Maybe one committee is handling family education, maybe one committee is handling investments. Maybe another is, is talking about, let's start getting this on a blueprint for, for, you know, our governing bodies, whether it's an assembly, a council or, or mapping out what we want from a board of directors. And how that looks because a lot of times there is a family business, maybe they're looking at a family office again, kind of mapping out that process so it can take a number of forms. But I think just getting everyone together and talking about what are the issues we're all facing currently is, is gonna be a big step and if it's, we're too big to make any decisions and you gotta start breaking it down into smaller groups and, and people agree on it and start getting real results from that or, or as I said, if it's a smaller family, just checking those immediate problems so that you can focus on the ones that are gonna be further down the road. Ok? In the end, yeah, the last addendum is that a lot of these decisions take time. It sounds like they're gonna be done in, in one family meeting and then it is just not the case, it's gonna take numerous conversations, numerous meetings, probably some side conversations to get all of this done. So, you know, we were talking about succession planning and something that's like, well, you know, that may be a five year process to really hammer out all the details of doing that. And so it's, it's better to start those conversations sooner rather than later. Don't, don't wait until it is an issue because it's almost too late to now tackle it truly effectively. And a lot of times that's when there's the least amount of emotion around these because we're talking about business succession planning. You've waited until, you know, your parents are in their eighties. It's because you have a whole new set of concerns, a whole new emotional response to this because you're also dealing with all these other issues at the same time, from an emotional family standpoint, from a son, daughter, grandchild. You know, you don't want to be dealing with these when you're also dealing with other emotional issues. At the same time, you want to get it hammered out beforehand so that you're not, so that, you know, you're not high strung when you're, when you're trying to say, ok, but you know, we're, we're dealing with, you know, wills and all this other stuff and we're trying to figure out, all these other issues with the family business and we're dealing with somebody in bad health and we're dealing with health decisions at the same, you just, you, you want to get, start getting it on paper beforehand. So that when you do hit those emotional things, you can rely a little bit on, ok, we've, we've prepared for these scenarios, and prepared for things. You, you probably may not even understand the person that's been involved with the family business may say, you know what, now that I've got you all together, I only want to be in for the next 34 years and then I want to go do this and that may be a shock to everybody and you don't want to hear about it six months before they're saying. You know what I'm, I'm putting my notice. You guys are gonna need a new CFO, you don't, you want to avoid that kind of thing because that's gonna add fuel to the fire. when you're running into those, those timing issues on top of it when you're up against a deadline.

Dan: Well, that's great. I appreciate you kind of walking through this a little bit Max. I think it's given me some good things to think about, just in general about how their biased families are looking to get started. And I like the idea of starting with somewhere where we can all have some common ground and, and hopefully there isn't gonna be fighting, right? Is this idea of what is our, what are our values? You know, I'll start with something that hopefully everybody can rally around before we.

Max: Yeah. And, and that's gonna lead to the thornier conversations of, of, of how people should be compensated in the family business. How should family members be? Because again, that's one of those things. If, if you wait until now somebody is you, you, you haven't done the succession planning. Now they are. And now all these people have taken roles in the family. You haven't kind of equalized or done studies on proper compensation. You're gonna run into problems down the road because there's gonna be opinions on this person over, under compensated for the role. Getting, again, getting that hammered out beforehand is well worth it.

Dan: Oh, yeah. If, if not, then it's, sometimes a lot of TFL is right. So, I appreciate you being on with us here today. Max. Max again is a CPA with RSM, has a lot of experience running family offices and, and now working for R S M specialized with, with, with families and family office services. Max is great. I know you're gonna join us on March 30th as well. So I just wanna say again, thank you so much for being with us today and I wanna wish you a great rest of your day. And thank you to our listeners for paying attention a little bit today on, on some of the bedrocks of, of family governance and some of the great places to start. Hopefully, we took away a couple of things from that and hope you tune in the rest of the series. So, thanks Max, I appreciate it.

Max: All right. Yes. Thank you. Have a great rest of the day. Thank you for having me.

Katie: Thanks for listening to this episode of Never Go Against The Family, a podcast produced by the University of Northern Iowa Family Business Center. You can find more information about the center membership and upcoming events at https://unifamilybusinesscenter.com. As Vito Corleone advises, never go against the family.