In this episode of Never Go Against the Family, host Dan Beenken, interviews Martha Sullivan, a consultant for the Family Business Consulting Group based out of Chicago, known as one of the best at providing services to family businesses. Sullivan shares her knowledge about how to manage the tug-of-war between short-term payoffs and long-term growth and investment. Her model, GRPL (growth, risk, profit, and leverage), is the dashboard of the business that creates a shared understanding of the vision and values of the family. By analyzing where each family member falls on the GRPL model, the family can determine a balance and decide where to focus based on the target metric. Sullivan ends the interview with a few pieces of advice: give yourself grace and air on the side of inclusivity.

Transcription

Dan: All right, good morning, everyone. This is Dan Beenken with the Never Go Against the Family Podcast here at the UNI Family Business Center this morning. I am just pleased really to have Martha Sullivan with us. She is a consultant with the family business consulting group based out of Chicago. I'm sure many of our listeners are familiar with that group. They are in my opinion, one of the best, if not the best at, at providing services in that realm to families, and have been doing it a long time, kind of pioneers in that field really. And, Martha, excited to have you with us this morning talking about, I would say that tug of war between near term happiness of what the business can do for me today and that long term, how do we grow and reinvest in our business, from a family standpoint. And I know that you've got a lot of different ways that you bring credibility and expertise to this. You've got a background in, I won't, I won't say the T word, but you've got a background in consulting within the financial space, right? And you are a CPA. So I will let that out of the bag. but most of your career has been spent in consulting, in different ways with families. And so maybe if you could just first give us a little background on, on yourself and, and then we can kind of get into this whole topic of, of this tug of war.

Martha: You bet Dan, thank you for having me. It's a pleasure to be here and to talk with you again. So, yes, I'm Martha Sullivan with the family business consulting group. my background is really a kind of an interesting winding road. in terms of, I've spent, as I said, most of my career in consulting, but I've also spent a fair amount of my career working in family businesses as a controller as a CFO. Being a CFO was actually a turnaround of a family business that I was involved in and that's where my CPA chops came in pretty handy there. But, I really enjoyed the experience of being involved in family business as a non-family member executive, if you will, and seeing I would say the good band, the ugly with family businesses and some of the challenges and joys and celebrations that they share together. So now, I've been very focused over the last seven years on the transition part of family business, when a family is looking towards, how do we make the business better? How do we grow it? How do we get it ready for ownership, transition, leadership, transition. And how do we learn how to come together and be aligned around some of the critical decisions that we need to make? Whether it's on? maybe it's a keep or sell decision, maybe it's a dividends decision. Maybe it's about which member of the next generation should take this key role or that key role, but really helping build alignment within families so they can make better decisions together.

Dan: I'm glad you mentioned the D word there, dividends. I was doing some reading on something here a few weeks ago that you wrote about this Tug of War, you know, and you, you're using this acronym which I wasn't familiar with and I guess you didn't invent it but growth, risk, growth versus risk, profitability versus liquidity. However you wanna look at it. If GRPL could get this just a quick 30 second on GRPL or however you pronounce it?

Martha: Yeah, we pronounce it as gripple. It's a very sophisticated term there. The GRPL model, I think, really does represent the tug of war that goes into managing a business, and having that balancing act between what's healthy for the business, what's healthy for the owners and what's healthy for the family, assuming that it is family owned. And, if you focus on growth, you may be at the expense of profitability. If you are taking high risk, you know, taking on more risk, you may be having to have more leverage or more debt in the business. And what does that do for your ability to pay dividends or to reinvest in the business? You know, if the bank comes along and, and puts on their golden handcuffs, which are golden for them, but not necessarily for the family, it could restrict your ability to pay dividends. So there is this tug of war between, between growth, risk, profitability and liquidity that every business needs to be mindful of and understand the varying dynamics and in particular within a family business and the family even needs to understand that to manage expectations, right?

Dan: So they need to understand their own kind of viewpoint of where they would be on that continuum of that tug of war and then be able to understand or at least know, maybe not understand, but at least know where their other family members are coming from and why they might not be in the same spots on there. So, if we just, you know, if we just take growth. I don't know if you call it growth versus risk or if you would just think of it as risk, growth and risk seem to go together within this model. But it, you know, I, how would you ask the question to somebody to help them think about where they are? Like if they were gonna actually go through some sort of an exercise to think about where I am and, and how do I get some self awareness about where I am on this GRPL model versus where other family members are?

Martha: Well, sometimes we start as simple as having family members do an exercise of basically saying, ok, we just found, I'll just throw out a round number. I just found a random $1000 on the ground here. It's yours. What would you do with it? What would you do with it, Dan, what would Martha do with it? Martha might put it in the bank because Martha is more conservative, Dan might run out and you know, like the kid in the candy store, run down to the candy store and buy all the candy that he likes. Another person might see a growth opportunity and want and go buy a company because, oh, that would be really cool. Let's see what we can make out of that. And so it is just having a, a really simplistic exercise that gets individuals to think about what is my relationship with money? What is my tolerance for, for risk? and, and recognizing that that's going to evolve over time, my appetite for risk when I was 25 years old is very different from the app my appetite for risk when, when I was 45 years old or when I'll be 65 years old.

Dan: Well, that's a long time from now, of course. But yes.

Martha: Absolutely.

Dan: 29 forever.

Martha: Of course, of course. So, I think it is very personal, and it needs to start with personal reflection.

Dan: And so, you know, quite often I see this like some of our family members, clients and, and others that I interact with, you know, it bubbles up to the surface when it becomes active in engaged, working in the business owners versus their passive family peers. And the dividend checks aren't coming as consistently or they're not growing like they think they should be on one side and the other side of the coin is you're starving the business of cash flow and growth and stability, et cetera, right? And, and so that, I mean, that's a very real conundrum, especially as you move past first gen to second or third gen where, you know, especially on the passive side, the ties to the business, it's more of an investment a little bit more so than it is a, this you know, family blood business, emotional tie thing, right? And so could you give us a little bit quick too, on your thoughts on when should a family be starting to look at doing this? You know, I think part of the answer is before it becomes a problem. But when should a family be looking at going through an exercise like this? And how could it feed to a dividend policy? I have a few questions here, so we might have to repeat them. But when does a dividend policy become something you advise your clients on and, and, and, and that kind of thing? So could you talk through that a little bit?

Martha: So, in terms of when to get started with the, the alignment and, and the, the gripple work, it really, I like to think of, of the utilization of the Gripple model almost in kind of a begin with the end in mind type of a philosophy. It's never too early to start having conversations about. What is our philosophy around, around growth? What is our philosophy around risk? What are our needs for profitability or liquidity and or reinvestment doing that when you're in good times or even times? is a heck of a lot better than when it's in times when the business is stressed because then it's gonna be more inflamed. But, you know, if you can work through your, your gripple policies and set your metrics. That to me is really just a good solid business strategy. You know, what is our growth target? What is our profitability target? How are we progressing on that? Are we hitting it? Are we off? Ok, we're off. Why are we off? Is it concerning or is it because we had a course correction that was intentional? So gripple in many ways it can become, can become a dashboard for the business for the shareholder group and for the family. So that there's, there's a level of transparency and shared understanding around what it is we're about as a family, how that ties to our values and our vision as a family and then, you know, translating that into what it means for the shareholder group. What does it mean for the business itself that is taking your values and vision and applying it to the monetary side or the business side of how you're gonna run the business, right?

Dan: So you mentioned something about metrics, Martha. What do you see as common metrics that people are? You know, so once we get an understanding of where our tolerances are, where our alignment and misalignment is as a family on this GRPL model, what kind of metrics do we use as a family to measure? Because obviously, you have a CFO background. So we're gonna wanna be measuring things. So what kinds of things should we be measuring?

Martha: Well, I think there are some fairly common and traditional metrics around growth around profitability. In terms of what, what's the proper rate of growth? If you've got a multifaceted business, business being aware of the fact that a growth rate for one division may not be appropriate for the growth rate of another division. But it's, it's basically, you know, looking at your business because you know what's the right metric for one industry may be a different metric in another. But your growth rate, your net income, percentage of revenue, your earnings before interest taxes, depreciation and amortization is another very important metric as a percent of revenue. Some families, for some families, look at return on assets or return on equity to help them understand their profitability when it comes to risk. I think the most direct measure tends to come into the concept of debt. And so a debt to equity or perhaps it could be even something more operational like your current ratio, your current assets compared to your current liabilities.

Dan: Yeah, I remember some of that.

Martha: Being accounting 101 here. But I also because of my background in valuation and exit planning, I also look at risk from qualitative factors as Well, in terms, it's not well understanding what are the threats to the business? Ok. So these aren't necessarily metrics. So we're kind of going down a rabbit path here.

Dan: But what's the dependency on an industry or a client or on a client?

Martha: Yeah, on a client, let's say, the patriarch. Yeah, if you know, the key owners, operators of the business are, if there's a high dependency on them for tribal knowledge, for making decisions for key customer, key supplier relationships, that's a risk that's a threat to the company. If, if the systems are shaky, that's a threat to the company's viability. And that could be a goose that you know, that something that kills the golden goose. So risk can come in different forms in a family. When you look at the metrics on the liquidity side, it may be what comes to a conclusion as to what is our target percent of income, we will pay out as dividends or what is our target yield on, on the value of, of the company. Every company is different in terms of what feels right to them. And the other point that I think it really needs to be emphasized here is education and what is the family's awareness, understanding, comfort with some of these financial tools and metrics and things of that nature. We know that financial understanding, financial knowledge, acumen, whatever word you want to apply to. It varies greatly within families, and their spouses. They're part of the family too.

Dan: Of course, they are. Of course they are. I didn't mean that. Yes.

Martha: Sure. But, but I think if you're gonna embark on this effort of, of designing these metrics and, and bridging that, that gap that may exist between the beneficial owners, those that are not working day to day in the business, but receive the benefit of ownership like a spouse or like a sibling that's not involved in the day to day operation. You've got to set a baseline of, of education and understanding is to the financial, how the, how the money, how the company makes money. People need to understand a baseline level of financial acumen and very often that's where we start is with some education.

Dan: Ok. So, so there's, you know, so if we, if it kind of summarize some of the steps, you know, we, we the family is having conflict over investing in a large piece of equipment or divesting a piece of the business or buying out a sibling or whatever it is that that's triggering a monetary event. Typically, I would guess that, you know, is sort of where a lot of the families, you know, then, then start to break down in this gripple area and then they come, yes, they come Yeah, they come looking for you, you know, an initial part of this process for you is educating, reeducating and getting everyone on the same page about how does our business make money? When does our business make money? You know, all those kinds of things, right. So that we're not under false assumptions as a family in different ways or whatever it might be. And then an understanding of where we all fall in these growth, risk, profitability, liquidity needs for ourselves, for the business and then having conversation as a family about where we fall. So we're not just understanding ourselves, but we're understanding our, our sibling and our mother-in-law and our cousin Eddie and all these other folks and, and that could potentially be owners, right? And then from that, it seems natural to me that the D word, the big D dividend is gonna come in there to play at some point of, you know, because that's where I see it with families that I work with is, well, we're fighting about dividends. We don't have a dividend policy and what are we part of our family wants to do? This part of our family wants to do whatever it might look like, right? How does that dividend policy start to get crafted from that initial process of discovery and education and self-awareness?

Martha: So, so part of that comes back to the family's values. Yep. So I, you know, that really is, is an underpinning to all this is what does the family value and let's work on alignment and, and consensus on that because that can become the backboard that the ball bounces off of before it goes in into the net. So let's, let's give an example of, dividend policies where some family members want to maximize it and you have other family members that never want to pay it. So the family members that never want to pay it are the ones that are, wanting to make sure that the company always has their rainy day fund and we can always reinvest in the business.

Dan: And the, the, the, the golden goose will, will always be as possible and protect it.

Martha: And then you've got the other side of the family saying I want some eggs here. You know, if we've got this golden goose II, I want, I need to make an omelet or two here, I need something for it. And I want, I want as much of it as I can. Well, the values exercise helps you say, well, what's really important to us? Where is that balance that we're trying to achieve? And then with that in mind, you can start narrowing it down to what makes sense for the target metric. OK? We know that we don't want to start the business, but we also recognize and want to honor the fact that as owners, we are taking a risk. Ok? As with any investment. Yeah, if, if you're making an investment in a stock, if you're buying apple stock, you are taking a risk while the same is true. When you're an investor in a family business, whether you realize it or not, there is that risk, reward relationship that I my personal philosophy is owners deserve some return on their investment that may be quantitative, that may be, or there may be other perks that come with it, but it, it shouldn't be, you're just an owner, a legacy owner of the business and you just care to only fly for so long.

Dan: Right.

Martha: Right. And is that really appropriate if that's the case? Why are you owning the stock?

Dan: Right. Very quickly. That question will be asked by either their spouse or their financial advisor or why are we?

Martha: Yeah. Yeah. So, it really, we try to understand the varying and competing issues and then slowly evolve that to, well, what makes sense for this company, this family? And how does that trickle down to the individuals?

Dan: Can you give us, as we wrap up here, maybe an example? And I'm just gonna put you on the spot. But an example of what a dividend policy might look like just from the numbers standpoint of it as far as you know, we're gonna pay out X if we hit Y or how does it, how might it look?

Martha: I mean, some of them are just that, that basic and, and simple Dan in terms of, you know, we're gonna set these, these net income targets. And if we hit that net income target, we want to understand what the budget is for next year, what are the needs of the company? and for reinvestment or other opportunities and we're going to pay out, let's say net income less a defined amount of reinvestment amount and here's our residual and we'll pay the dividends based on the residual. So that's how some people form their dividend policies. Another family might say, nope, every year we are paying out 5% of net income as dividends. I'm pulling 5% out of my ear, but that's the number that family came up with.

Dan: I've actually heard that number before.

Martha: And that's what their dividend policy is and hopefully they went through a process of looking at history and they know their business and they, and good guidance from, you know, the CFO and the executives to know that that's what makes sense. So it really gets custom tailored to the family, but those are some very high level examples.

Dan: Sure. No, I appreciate it. I think that sometimes that's where a family wants to go right away. They just want a number on a piece of paper and, you know, this is what it is and the messy process to get there is the part they don't want to do very often.

Martha: But it, and I appreciate that. I want to get to the finish line just as much as anybody. but it, you know, there are a number of ways that you can have really dysfunctional dividend policies if you go directly to that. And, you might think that you're solving the problem because now we know 5% is gonna be, be out there, but nobody knows where five came from.

Dan: Yeah. Why not? Six? Why not four? And what happens when, I don't think that's enough or when the CFO and the president of the company are concerned that that's too much and those kinds of things. Right. Exactly. Now, this is very, it's a very tricky thing, isn't it? There's a lot of, you know, and there's a lot of moving parts and then there's a lot of, you know, I'm guessing this needs to be revisited and re, you know, talked about on an ongoing basis as a family. Right. And you get nonfamily leadership of the company there. You know, they, you know, is that as those faces change and those people change that, that adds complexity and change to this as well. I mean, it's a very complicated topic as, as far as, you know, keeping the peace with, with everybody and, and protecting our golden goose as you mentioned.

Martha: Well, and that's why, you know, one of the things that we really prescribe is having a having and following a process for those types of conversations and considering having them be facilitated conversations because they can get, they can get yucky. Yeah. yeah, very professional. I know. but they can get yucky and have somebody that's gone through, through it before or is, not as vested in the outcome. help kind of guide the conversation and call a timeout when people need to just take a deep breath or bring a different lens to.

Dan: It can be really helpful, very helpful, and brings accountability. It brings a level of professionalism and seriousness to the conversations and absolutely, yeah, makes people actually do their homework of, of doing the self reflection on where they are in this gripple model. So if we kind of wrap up here, Martha, is there any, you know, piece of advice you would give to families who are in this stage of, you know, kind of that battle between long term growth and, and near term payouts and things like that. That, that you would want to make sure families keep in mind as they go through that?

Martha: Two thoughts come to mind. One is to give yourself grace in going through the process, recognize it may not be an easy process but give yourself grace and go through a process and then the other piece is to err on the side of inclusivity and inviting family members a broader group of family members to the conversation. Then keeping it an itty bitty little little that goes behind the the curtain and and comes out with, with the policy, the more inclusive you are in building alignment, the more successful your ultimate outcomes will be the man, you know, the the past year, the man behind the curtain is, is, is not very inclusive and it leaves a lot of room for people to make false assumptions and that, that erodes trust in the process and, and the ultimate policies and decisions that you make. So give yourself grace and air on the side of inclusivity.

Dan: Hey, that's great. Thanks Martha. Thank you for joining us this morning. Really appreciate your advice and, and expertise in this space. And again, my guest has been Martha Sullivan with the Family Business Consulting Group. Thank you very much for listening to another edition of Never Go Against the family here at the UNI Family Business Center.

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.