How to Build and Sustain a Successful, Enduring Enterprise

by | Jan 19, 2021

Succession
Stories
Podcast

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Most of us get a glimpse into the world of complex business families by watching shows like “Succession” and “Dallas.” Josh Baron, co-founder and Partner at BanyanGlobal, has had a front row seat to some of the world’s leading family enterprises and how those companies make difficult decisions during transition. Josh talked with Laurie Barkman about his new book that he’s co-authored and published with the Harvard Business Review called How to Build and Sustain a Successful Enduring Enterprise. Listen in as Josh shares the five critical aspects of ownership influencing whether the company will have a successful transition to the next generation, or not.

Listen in to learn about:

  • Five Core Rights that influence family ownership in businesses
  • Using a Four Room Model for governance, decision making, and conflict management
  • Different ways of approaching succession in multi-generational companies
  • Beating the myths to have a family business that lasts for generations

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Episode transcript:

Most of us get a glimpse into the world of complex business families by watching shows like “Succession” and “Dallas.” Josh Baron, co-founder and Partner at BanyanGlobal, has had a front row seat to some of the world’s leading family enterprises and how those companies make difficult decisions during transition. Josh talked about his new book that he’s co-authored and published with the Harvard Business Review called How to Build and Sustain a Successful Enduring Enterprise. Listen in as Josh shares the five critical aspects of ownership influencing whether the company will have a successful transition to the next generation, or not.

Laurie Barkman

Josh Baron, good morning and thanks so much for coming on Succession Stories. I was excited you had reached out to talk to me because you’ve written a really interesting new book. I loved how you thought Succession Stories would be a great place to talk about it, and I totally agree. So I wanted to welcome you to the show. Why don’t we begin with you telling us a little bit about you, and your firm BanyanGlobal?

Josh Baron

Sure. Well, Laurie, first of all, thank you so much for having me on. Looking forward to this conversation with you. My name is Josh Baron, I am a partner and co-founder of a firm called BanyanGlobal, and we work with some leading family businesses around the world. Some who have operating companies, many have family offices or family foundations, have shared property, basically at the intersection of families that own things of value together, and are thinking about how to pass those across generations. I’ve been doing this work with family enterprises for almost 15 years. Before that, I was a strategy consultant with Bain & Company. So working with large public companies on their strategies, and then with a spin-off of Bain called Bridgespan, that works with large foundations and non-profit organizations. Like many people that have found their way into this space, I didn’t know that there was a career advising family businesses. I like, many people, family businesses run through my own personal family history. Shaping where we’ve lived and where we’ve come from, and so many important parts of our lives. But I really found this work by accident, and now that I have, I can’t imagine doing anything else. So in addition to my day job, I also teach at Columbia Business School classes on How to Manage a Family Business and also Managing Conflict and Family Businesses.

Laurie Barkman

That’s really a broad description of your background. I want to go back to a couple of things you just talked about, because I think for many people on this show, especially, we talk about- is there an entrepreneurial gene? And you mentioned that family businesses are in your background. Can you talk a little bit more about that?

Josh Baron

Sure. So one of the family stories of lore is back in the 1850s. My family had general stores in the mountain towns of Colorado, and my great great grandfather, like many people, was frustrated with his parents, and didn’t want that life for himself. Basically he had a conversation with his parents that the gist of was, he said, “I’m leaving.” And they said, “Well, where are you going to go?” And so he just pulled out a map, pointed to a place, and it was Seattle, Washington. And so he basically moved out there. He started a furniture business that my grandfather ultimately came in. And my dad actually tells a story of going into the office when he was a kid, and his grandfather had set up a little desk for him. And he basically said, “Well, I had the little desk. And then my father had the medium desk. And then my grandfather, my grandfather had the big desk,” to make it clear that he was the one that was in charge. And so ultimately, my grandfather sold that furniture store and did some projects, and my dad had his own career in law. Then towards the end of it, my grandfather said, “Look son, I need help, and I need you to come back and help me out with this project.” And so very late in life, they actually worked together in this family business. And so, all these dimensions. I think everyone if you’re not part of a family business, I struggle to find people that don’t have one step away or two steps away in your history, and they’ve shaped so many different aspects of our lives.

Laurie Barkman

Absolutely. And how did you, as an entrepreneur, create BanyanGlobal? How did you specifically because you have a partner in the firm, correct? How did the two of you come together and decide this is what we want to do?

Josh Baron

Actually we’re a group of partners. We actually came from one of the first firms in the family business advisory space, which came out of the Harvard program originally. And then about a little over eight years ago, we decided that we wanted to form our own firm. Like many entrepreneurial stories, it starts with really having an idea that is a little bit different. And you really wanted to create something that is distinct and in our own image. What we really wanted to do was to create a firm advising family enterprises, but that would itself be set up from the start to be multi-generational in orientation. We just really wanted to build up a firm that most of us – my colleagues and I come from professional service organizations, law firms, consulting firms, accounting firms – really just believe in the value of creating these institutions, as opposed to things that were built around a single guru or whatever. We really want to create that. We’ve invested over the last eight years in building up the talent, building up our training, everything that’s required to build a firm that’s actually going to last and thinking about compensation systems, all of those things with that value in mind. And that’s really kind of what we’ve been able to build.

Laurie Barkman

Well, that’s a nice parallel with your target audience, which are companies that are inherently built to last there, of course, are transitions and companies, and maybe they do have a liquidity event. But so many family businesses are passed down to the next generation or earned, I guess I should say, going on to the next generation. And it’s probably worth mentioning that the number of family businesses across the world is a huge percentage. It’s like 85% of the world’s companies are family businesses. In the US, I understand from – and this is data from the Family Enterprise USA organization – 5.5 million in the US, which is about 62% of the workforce, which is a big, big number. Some people have asked me, “Oh, Laurie, have you created the show, your podcast because of the show Succession?” Of course, it’s a great show! I’m sure you watch it, too. I love the show. It did have something to do with it, of course, because I just have been fascinated with transitions and how they happen. And for me, personally, I’ve worked in small, nimble, high growth companies. I’ve worked in large publicly traded companies, and then I worked in a third generation company. So I have seen this whole range, and across it all, is transition. I think that’s really the focus of today, because you’ve written a book that talks about family businesses and ownership, and what do those things mean? And essentially creating or running these companies where there’s lasting value. So let’s talk about the book, what is the book called, and what was the inspiration behind it?

Josh Baron

Sure. So the book is called the Family Business Handbook. It’s through Harvard Business Review, and the title is How To Build and Sustain a Successful Enduring Enterprise. It’s part of a series that Harvard Business Review has called handbooks, they have one for management, leadership, entrepreneurship, it’s kind of intended to be an everything you need to know, of course, there’s no one book that can tell you everything you need to know. But it’s very much intended to be a kind of practical guide to working through some of the critical issues that come with being part of a family business. I think at the end of the day, the reason why my colleague Rob Lachenauer, and I wrote it with support and guidance and help from the rest of our firm, is that we’ve been doing this work out in the field for a long period of time, and just believe that there are things that we’ve collectively learned in working with families, that will be of real benefit to others.

Of course, we have a growing and successful consulting practice, but we’re still touching a very small percentage of families. That will always be the case, given the numbers that you said. We will never be able to work with anything more than a small slice of those. The motivation behind the book was how do we put something together that can be broadly helpful to a sector that we really believe in? I mean, you mentioned the data, but I really do believe that, of course, family businesses can go wrong. Those are the stories that make for great headlines and TV shows whether it’s Succession or Dynasty and Dallas before it, great great dramas and some truer than life kind of stuff you couldn’t make up that happens in the family business. But below that kind of veneer of drama, and conflict, and infighting, are these companies that are the lifeblood and the backbone of their communities. Data proves this, my experience certainly shows this. They are better employers, they’re better corporate citizens, all the stuff we hear about companies being more responsible, they do this because that because their name is on the door, because they really care about about their companies, their employees, their communities. The motivation behind the book was really to help and further support this critical sector part of all of our communities globally.

Laurie Barkman

I think that there’s a lot to that, obviously to dive into. Why don’t we get started and talk about the heart of the book, and the core of that, I think you’re calling the Five Rights Framework. So there’s a lot to talk about probably within the Five Rights. So let’s go through each of them and as we do that, I think to the ability that you can share some of these stories that you’ve seen from your experience would be really interesting. So what’s the first core right?

Josh Baron

Maybe just before diving in, just a quick context. I think you mentioned this when you started talking about the book. You used a really important word to us, and in some ways the central word of the book, which is Ownership. I would say the foundation of our practice, and of this book, is about the importance of ownership. I teach at a business school, we don’t teach ownership, we teach management. We teach a little bit of corporate governance. Ownership is not something that we talk so much about certainly in the business community.

A lot of that is because the way that we think about businesses are through the lens of public companies. Where it’s the CEO, this the person that has all the power and the control. Maybe there’s a board, but sometimes it’s the board chair, but the owners don’t really do much. They trade shares on apps, or put their money in Vanguard or Fidelity. Maybe you’ll attend an annual meeting, probably not. You might sign a proxy statement, you probably won’t. Other than the occasional kind of activist challenge, owners of these kinds of businesses don’t do much. That’s totally different in a family business where the owners are a small group of people, maybe even a couple 100, in some of the ones we’ve worked with, but still, you can get everyone in the room – these days a virtual room – but you can actually understand it and have contact and connection to this business. It’s not just something you trade, it’s something that you are very much connected to. In that setting, ownership is incredibly powerful because the owners of a business, or any asset, think of your home or your car, you have rights. By that, we mean you have the ability to do things that no one else does. We’ll talk about the kind of five core rights that family business owners have. Through those rights, you can influence almost everything of importance about a family business. That’s really why we focus on ownership as a critical determinant of the success or failure of family businesses over the long term.

Laurie Barkman

And terms of matter. I’m glad you brought this up, because I was going to ask you this question, and so maybe this is a good place for it. Do you see a difference between when people describe themselves? If they describe themselves as a business owner, or as the owner of a business? Do you think there’s a difference?

Josh Baron

It might be in the sense that one of those feels more active and the other a little bit more passive. An owner of a business kind of strikes me as someone who’s taken a little bit more of a sense of ownership. Like I’m in the driver’s seat here. Where a business owner sounds a bit more passive. I do think that more broadly, when we talk about ownership, we’re using it in the broadest sense. Certainly in the US where we have these tax estate rules, and so on, ownership can mean lots of different things. If the business gets put into a trust, the owners are trustees or beneficiaries, and they have different roles. So we’re talking about ownership in the broadest and most collective sense of a group of owners who have the ability to do these things. I actually think what you’ve hit on is an important point, which is, sometimes people do think of “I’m really in the driver’s seat as an owner.” Other times people think, “Well, I’m an owner, but I don’t get to do very much either.” It’s like something happening to me, as opposed to something I’m directing. I think part of our mission is to say, “Understand that even if you are not actively working in the business, you have an important role to play if you’re an owner of that company.”

Laurie Barkman

Definitely. That makes a lot of sense. So when you sat down to put the book together, was it difficult to come up with the context of how to organize it? There’s so much information here from you and your collective team’s experience. How did you decide what was most important from a thematic standpoint?

Josh Baron

It’s a great question. The book is really broken up into three core sections. One is understanding how family businesses work. We talk about how to decode what’s happening in the family business in the first section about the power of ownership, because it’s something that isn’t necessarily as clear and talked about. Then the second section really goes into these Five Rights. That was, in some ways, the easiest part to structure because that’s really the core of our practice as it’s evolved over the last eight to 10 years, in particular with Banyan. That really has emerged from our work and knowing that these are the topics that are most critical to work on for family businesses to succeed and to last across time. Then the last section was a bit of a grab bag, but basically, these are critical issues that we see people facing that are a little bit kind of more of a deeper dive. So there’s one on conflict. One on different disruptions that happen on the family and how to try to manage some of those things. Family employment, which is a huge topic in family businesses. Family offices. Topics like that are, I would say, we could have added two or three others that we had to cut for space reasons, other kinds of topics. But, those are the ones that we see the challenges that family businesses are wrestling with, more and more. Our hope is that as a reader, you can both read through it, the whole thing start to finish. But then as you’re dealing with a particular challenge, you can just pull up the table of contents, go to that, and hopefully have some practical advice and perspectives on how to work through one of those topics.

Laurie Barkman

Yeah, and people who listen to this show, it’s a mix. We certainly have people who listen who are in family businesses, and we also have people who have founded companies, and inherently might be creating their own family business. I had one guest on the show (Laura Coe, Snapology, E28), she co-founded it with her sister, and her brother now works in it with them. So they technically are first generation, but they are envisioning this might continue. I also have interviewed a company that has 10 generations, and that was a really fun discussion. Really very interesting. Every company is different, of course, and for anyone listening and trying to understand how this may help them with their business, whether you are “a family business” or not, if you are not publicly traded and you’re privately held, it’s about ownership and control.

As you said, really deciding how this business, which is for a lot of people, their largest asset, how are they curating this asset? How are they growing enterprise value, and then at some point in the future, determining if they’re going to transition? Because it’s only a matter of when, we’re human? So we’re not on this earth forever. So we essentially – this is what I talk about with clients – regardless of how or when – we know it’s going to happen. So we need to start planning for that, and I think you and I are much in alignment on that point. In terms of starting a conversation, though, for people listening, what’s a great place to start? Let’s talk about these Five Core Rights, because I think there’s so much in them that people can really relate to. Why don’t we go through those, and I’m sure I will probe and we’ll find other directions to go, but why don’t we describe what the Five Rights are? And we’ll go from there.

Josh Baron

Great. So the Five Rights are Design, Decide, Value, Inform, and Transfer. We’ll just start with the first one, which is Design. When we talk about what we mean by Design is that, as an owner of a business, you get to give it its basic shape. So if you think of the analogy of building a house. How many bedrooms? How many bathrooms? What’s the basic architecture of your family business? This is a choice that the owners of a company get to make, and inside that are some core decision points that you’re having to face. So one of them is what’s the scope of your family enterprise? For some, it’s the business, right? Others want to also have shared philanthropy, shared investments, other things together, and so deciding how much of an overlap do you want to have, and what’s the definition? You mentioned founders, and a lot of these decisions happen in that founding generation where they make a decision about what are we going to pass down? What’s going to be the basis of this family enterprise? I’m thinking of one founder that we worked with, actually two brothers, that had built a very successful company also had a lot of generated both money that they could invest, but a lot of focus on philanthropy in the family.

One of the conversations that they had was first of all, do we want this to be a shared family business that we pass down? Or does one branch of it go and take it, the other will exit? Do we want to be just a business? Or do we want to have a shared family foundation, shared family investment pool? What they decided was that they wanted a shared family business that would go through both brothers and their families, but everything else would be outside. They really said, “Our philanthropic interests are different, and our investment preferences are different. So we want to keep those things separate, and really focus on our family enterprise being the operating company itself.”

But, these are the kinds of decisions that you make over time as the owners, and really only the owners can make. Once you decide what you have, you have to decide, well, who can own it, and since we’re talking about family businesses, in general, we’re saying, well, only descendants. In most families, there’s a restriction on who can be an owner of the business. But some actually say not only do you have to be a descendant, but you have to work in the business to be an owner. Some family businesses require that, other family businesses allow any descendant to be an owner, and there’s no right or wrong. There’s successful examples of both. Then lastly, once you say, “Okay, this is what we own, this is who the owners are,” the last question is, who gets to have control? In some family businesses, if I own 20% of the shares, I have 20% of the ultimate control. Whereas other family businesses actually place that control in one person or a subset of people.

One of the examples we give in the book is Vitamix, which is a successful, high performance bender company. What they’ve decided is that the value of the ownership goes through the descendant lines. So, if your parents were owners, you can be owners and so on. But the CEO, actually, according to their shareholder agreement, buys a super majority of the voting shares in the company, which basically means that they operate by consensus, like most families do. But if there’s a breakdown in consensus, and they need to make a decision, the CEO who’s a family member gets to make the ultimate call. There are other businesses that also do that. It’s a bit like trying to take that founder tradition where the founder has that ultimate say, “Why are we going to do this? Because I said, so.” There’s some families that try to embed that into the next generation. Again, all these are choices. There’s successful businesses in all different directions. But it’s really important to make these choices consciously and figure out what’s going to work well for your family.

Laurie Barkman

So you think that this is mostly happening at the founder stage, Josh? Or is this something that evolves over time? Because especially as generations – you get fourth, fifth – the original generation’s long gone, and things change. There’s more family members, and there’s more dynamics. Are you seeing that this is part of it? It’s a design, but then there’s also a redesign?

Josh Baron

Yes, that’s a great point, Laurie. Absolutely. A lot of it is set into motion by the founder, but one of the things that we encourage families to do in every generation is to revisit these choices. Because sometimes, either there’s more opportunity, for example, because your business has been successful. You have these liquid assets outside the business, and there’s benefits of putting them into a family office and forming that together. Or sometimes the overlap is too much and you need to kind of say, well, “Okay, let’s give each other some more distance, some more independence, so that we can make what we do have collectively stronger.”

Or some family businesses actually toggle between different structures of ownership, where they’ll go from having it be only those who are active in the business can be owners, and they realize at some point, actually, the next generation doesn’t want to work in the business, and we don’t want to sell it. So maybe we have to change those rules. So absolutely. I think a lot of the work of being part of a successful multi-generational family business is about understanding your traditions and rules and valuing them, but also recognizing that sometimes you’ve got to make tough decisions and change some of these foundational elements of your family enterprise so that it can continue to go on into future generations.

Laurie Barkman

Also for the leadership side, there are closely held companies that don’t have the CEO in that generation; they skipped a generation so they need to bring in someone from the outside for a period of time. It was interesting to hear you talk about the super majority, I guess that really depends on the company. My very first guest on Succession Stories is Tony Uphoff, from Thomas, and they are a fourth and fifth generation company and he was hired in from the outside and we talked a bit about governance. Certainly on other shows, I’ve talked with people about governance. Another wonderful example was Shelley Taylor (Episode 03) talked about marrying into the family business. She’s very much involved with the Family Council. Governance comes up from time to time in the context of strategy. Also having independent boards of directors, or advisors, in addition to having a family council. One of the frameworks that I read about in one of the rights – which you mentioned was ‘Decide’. I thought we could segue to that, because this is really about governance. The Four Room Model – I don’t know if anyone’s heard of that model, I’ll certainly include a link to it in the show notes – is very interesting, and I thought you could explain what is that and why is it important?

Josh Baron

Absolutely. As you said, this really connects to the second right which is to decide. As the owners of a business you can literally every decision if you want to, and there are some founders or even second, third generation folks that still continue to hold on to lots of decisions. But as you grow, as a business grows, as the family grows, it becomes important to really think about what you want to hold on to as the owners of the business. What do you want to delegate? That, as you said, that gets us into the work of governance. We found this Four Room Model to be a really simple, but really effective way of thinking about governance in the family business. Going back to the house metaphor, the idea is, just like in your house, you do different work; you make different kinds of decisions in the kitchen versus the living room. In a family business, you have to do different kinds of work and make different kinds of decisions, and the four main types are these four rooms. One is that you have the Management Room, which is where you’re running the business on a day to day basis, making tons of operational and strategic decisions, people decisions, all those kinds of things.

You have your Boardroom, which is where you’re hiring and figuring out who ought to be in those management leadership seats, you’re thinking about the strategy of the business, where are we going over the next three to five years, all those kinds of things.

The board then also ultimately reports up to the owners and the Owner Room, and the role of the owners in this structure is to make a relatively small number of really important decisions. So things like do we stay private or do we go public? Do we reinvest the earnings that we’ve made back in the business? Do we pay them out in dividends? Are there certain things that we won’t do, even if they might make us more money? So for example, there’s a family business I know, they’re in the chemical industry, and they can make a lot of money selling their products to secret manufacturing companies. They basically said, we’re not going to do that, we’re going to take that off the table because it’s counter to our values. It’s only the owners that can kind of set those broad directions, and that’s a hierarchy. That management ultimately reports to the board, the board ultimately reports up to the owners.

Then we have the Family Room, which is not part of that kind of business decision making process. It kind of goes alongside in our picture. It’s critically important because the role of the family room and a family business is not to make business decisions. It’s to bring the family together. To organize, to gather, to stay connected, to develop family talent, and to create ladders into each of those rooms into management board and owner roles. Then there’s some family assets. Sometimes families will have a vacation house, they have to make decisions about it together. Or they’ll have a foundation. These are family assets, not business assets, and you need a space to make them.

What we found in our work with family businesses is that it’s critical to be clear on how you’re making decisions in all of those four rooms, make sure you have the right venues, whether that’s a family council, owner council, board of directors, executive leadership team, and also be clear about how you’re making decisions across them. This is true, even if it’s the same people making those decisions. I work with one family in Southeast Asia where there’s a group of siblings that would have lunch together every day and their decision making would go everything from very tactical business stuff to how much dividend are we going to pay this year to where are we going on family vacation.

What would happen is they’d just swirl around and around and nothing would really get done. So part of it was just breaking up their session so that we’re clear, okay, we’re now we’re making management decisions. When we do those, by the way, we should include some of our non-family folks that are in there, right. Now we’re making vacation decisions. This needs to be in the family room, and by the way, we should include spouses and some of the next generation into that conversation too. So even if you don’t have this big family enterprise, just being clear on what hats you’re wearing, who should be involved, how are we making those decisions can be a really helpful way putting some structure to decision making in the family business.

Laurie Barkman

Specifically on the outside independent director, if they have a board of advisors or a board of directors, can you talk a little bit about that? That’s a topic for people that are interested in, from the standpoint of the role of an independent director in a family company if they are chosen to join. Sometimes we talk about how you even get on one of those boards, it’s the country club crowd. And now, with more interest for financial results as well as sustainability and diversity and inclusion reasons, lots of really good valid reasons, why the whole way of recruiting to those boards might not be so effective anymore. Can you talk a little bit about how family companies who are interested in diversifying their boards, how do they approach that?

Josh Baron

Sure, absolutely. And I will say, I really, I don’t like the term best practices much, because I think there are very few things that always work for every family. But I would say that when your business gets to be a certain size, having independent advisors or formal directors is about as close to a best practice as I found in our work. The reason is because they’re so useful in so many things; having that outside perspective, changing the nature of the dialogue, and otherwise the family dynamic that having outside people brings, and helping to make some tough decisions.

When you have an independent board member, it’s usually someone who’s in a stage of their career, where they’re not so worried about getting fired, they don’t really need this job, right. It’s something they’re doing, because primarily because they’re passionate, and they’re wanting to help. So when you’re dealing with tough issues, like family employment, or who should be the next CEO, having people who you trust, and who have wisdom, and who don’t mind getting thrown out, if they’re a bit controversial, can just be so powerful. So I just really encourage people, sometimes families worry about losing control. If it’s not working out, you can always ask them to leave, and so it’s not like you’re actually giving up control over the business. The benefits are just so strong if you have the right directors and the right board structure set up.

But your point is well taken that oftentimes, these become like friends of the founder, or friends of the CEO kind of things. Sometimes that’s a place to start to have some people in the room that you feel comfortable with. But it’s really important to get beyond those country club friends and other things, and to get people who are really able to bring some independence and different perspectives into the board. How you do that, I’ve always found it’s good to have two degrees of separation. It’s kind a nice way to play where it’s not someone that you’re close friends with, but asking the people that you trust, who they trust, right, and trying to get a list from those people together. Oftentimes, what I found is that once you do that, you might find enough within your broader circle to be able to get a good diverse set of opinions for the board.

If you don’t – and especially for the larger family businesses – some of the families that we’ve worked with have had a lot of success with using executive recruiters and other kinds of things. They’re set up to help you actually go through a process and find people who are not at all part of your network. And I’ve seen a lot of success that way. But oftentimes, it’s just a question of mobilizing and activating your own network in a family business. You know probably more people than you think you do, especially if you sit down together, and just going a bit beyond that. Extending the trust circle, just by one degree, can oftentimes get you to some really outstanding board candidates.

Laurie Barkman

I’m glad you brought up the executive recruiter option. I do have another episode where I talk to an executive recruiter, and they focus on family businesses. So I’ll make sure to include that in the show notes as well for people to listen to. Let’s go to one of the last rights you mentioned – oh, that sounds bad – last rights – I didn’t mean it that way. It’s kind of tongue in cheek because it’s Transfer. Maybe it fits. But yeah, so transfer, and this is a show about succession, which as I’ve talked about over and over is really about transition, it’s about change. Change is inevitable and change is going to happen whether you plan for it and embrace it or not. It’s going to happen so why not plan for it? I loved in the HBR article that I read that there was a BCG study done regarding family businesses in India, and they put some data behind it. I don’t know if you were involved in the study when you were working there, and I’m sure you’re familiar with this study. BCG found that there was a 28 point difference in market cap growth between companies that had planned for their transition versus companies that had not. Can you speak to that?

Josh Baron

Sure, and this is a public company and it’s in India. So, take it for what it’s worth. I think as you said, putting some data behind something that we all know and believe. Which is that when you handle these transfers, going from one generation to the next, in a smooth way, then the business gets to keep the momentum and keep going. When there’s a disjuncture, when you get stuck in that moment, the business can get stuck, and that results in losing innovation, losing vitality, missing out on opportunities to grow. This whole moment of how you handle the transition from one generation to the next, so much of long term success really rides on how you deal with the choices that come along with that. So I think the data does a nice job of quantifying, at least in those cases, some of the impact of that.

Laurie Barkman

Yeah, I’m fascinated by the next generation, because as I like to say, when they get the keys, what are they going to do? Are they going to continue to do what they’ve always done? Or are they going to start to look at things differently and innovate? How do they grow? Someone once said to me, “Yeah, you don’t want to be the spouting whale because the spouting whale gets harpooned.” I don’t know if you’re a football fan. Being in Boston, I think you and I are at opposite ends of the football spectrum here, being I’m in Pittsburgh.

Josh Baron

I’m from Denver, lifelong Broncos.

Laurie Barkman

Lifelong Denver? Okay. All right, you’re good. We’re good there. Patriots comment for anyone listening, wondering what I’m talking about. So the point, though, is that, I think there are ways to encourage the next generation to embrace change, to listen to their ideas, to mentor them to be successful. Companies who have a process for that, who appreciate that, are not only going to keep their legacy going, but they’re probably also going to be increasing enterprise value for the descendants and the people who ultimately have a financial stake in it. One of the things that struck me that I read was, ‘Transition is a process, not an event,’ and I wholeheartedly agree. That’s what I talk about with my clients and helping them grow their business to the point where they have options for transition. So I wanted to hone in on that in terms of the next generation. What do you think about most when you talk about this area of transfer?

Josh Baron

Well, what I found is that when people are thinking about transitioning a business from one generation to the next, too often, there’s a singular focus on finding the one. Who’s gonna be the next CEO? If we figure that out, then our work is done, and all’s going to go well. I think there’s some problems in that – a few – that we need to highlight. First of all, is that even if you find the next CEO, it’s understanding that that person’s role is going to be very different than the one that the current CEO is sitting in. I was just talking with a family about this the other day. They’re two brothers in the second generation, a larger group, and the next generation. They had a way of running the business. They took turns, basically, one was CEO, then the other was the CEO. They were able to run the business in a very collaborative way. There were just two of them, decisions were pretty easy. The next CEO is going to be part of a larger group and a larger business too. The role of that CEO is going to be less on just making the single decisions and more about building consensus, both within the family – in the executive team – and part of the broader group. So it’s a different role, and sometimes you’re looking for a different skill set.

It’s not necessarily the person that’s just going to be the decisive business builder. Oftentimes, it’s going to be the person who’s really good at developing systems and keeping people informed, and really a great communicator. It’s a different kind of role. It’s a different nature of that, and trying to make sure that you’re thinking about what that person looks like, but also how you’re putting in place the governance structures and processes around that person so that they can actually be successful because it will be different. A lot of that means not just focusing on the current who’s going to be the CEO, but who’s going to be on the board? How are you going to make decisions as owners?

Do you need an owner council? Do you need a family council? How are all those things going to work together to really position that person for success? Then making sure that that next generation – because it’s probably not just one person – that they’re prepared for the different roles that they’re going to play. As I said, at the beginning, even those that may not be in the business at all day to day, are going to be playing a critical role in this Owner Room, and making sure that they’re prepared to step in. Both having the individual understanding of finance and accounting. You don’t have to be fluent, but you have to understand the basics of all those things, and be able to work together because a family business is a team sport. You have to be willing to and able to work on your communication, work on that dialogue, work on making tough decisions together. So all of those things, I think, and more are part of making a successful transition happen. It’s not just about saying, “Okay, we’ve got the next CEO, and we’re ready to go and the work is done.”

Laurie Barkman

I can see that conflict is a big part of perhaps why clients start working with you. Maybe they have a problem, and they need an independent advisory group to help them work through something. Do you find that’s more of a reason how BanyanGlobal gets involved? Or is it the opposite, where these are firms that are just extremely proactive, and everything’s working swimmingly well, and they just want to get to the next level, whatever that next level is? Or is it somewhere in the middle?

Josh Baron

Yeah, well, first of all, I love the client situations where everything’s working well, and we’re just getting ahead of the game. As one said, “We’re building the house before it starts raining.” There’s just so many more options you can do when everything is going well. But honestly, I think it’s human nature to not work on these things. I think it’s human nature not to want to work on generational transition because it involves things like you said, death rights, mortality; all this stuff that none of us want to talk about. It’s a distraction from the day to day operation of the business, and most of us are not going to want to work on these things until until we have to. I think, for us, what we find is that sometimes it’s like things are blowing up and someone needs to come in and put everyone in their corner and start to do some sort of mediation. More often than not, it’s because things are starting to bubble up, and people are feeling something internally that there are some issues that we need to work on that no one’s really talking about, and we don’t know how to talk about them.

In this class I teach on managing conflict, one of the things we talk about is that conflict is a “Goldilocks” problem. It’s that too little conflict is actually just as much of a problem as too much conflict. Although the ‘too much conflict’ stories are the ones in Succession and all those shows that make for the best drama, most families, at least that I’ve seen, in my experience are actually on the too little conflict side. They’re conditioned not to argue about things because they’ll say, ‘It’s not worth ruining Thanksgiving or Christmas,” or whatever the holiday is over this decision. We have to get along as a family, that means not having any conflict. But of course, there are differences. Differences are real, they’re inevitable. Conflict of interest is just a part of being in a family, and so a lot of our work is families that are realizing that there are issues that are starting to bubble up. They haven’t probably resulted in an actual fight or feud yet. But people are feeling something, and they’re realizing that they need to actually get some of these things out on the table, make some decisions, get themselves back on track. That’s a lot of the motivation for the work we do.

Laurie Barkman

That makes total sense. Tell us about experiences where the family business decided that they no longer wanted to go forward as the family – whatever that major transition was in ownership – it could have been a variety of things, whether they liquidated, or sold to a third party, or decided to go public and they no longer had ownership control?

Josh Baron

Oh, absolutely, I’ve seen actually all of those things. Where companies have gone public. Where they’ve sold and gone their separate ways, or when they’ve sold and actually used the business sale to create a new family enterprise. Sometimes it’s just the offer you can’t refuse that comes out of left field and they say, “Look, we couldn’t run this business if someone’s willing to pay so much for it that we couldn’t possibly justify saying no to it.” I think when that happens, it creates a new set of choices. I’ve seen everything from some families that will sell the business and say, well, that was a great experience, but we’re kind of exhausted by being in business together. Or maybe that was even one of the reasons why we wanted to sell the business and so we’re just going to each go our own way. I’m going to take my share, and you’re going to take your share, we’ll be a family, but not a family in business together anymore.

One of the ones I’ve worked with recently went a different direction where they sold the business in part because they didn’t have the right group willing to run it in the next generation; probably just got a great offer. But they’re creating a family office. They’re creating their own kind of family investment company that they’ll put a big chunk of that money into, and then they’ll go and buy businesses, invest in assets, and basically build a whole infrastructure around it. Others have created family foundations that then serve as the glue to keep the family together. What’s interesting is that it doesn’t necessarily mean the end of being a family in business together, it may be just a reimagining or a whole new way of doing it, of finding other things that you want to do. Those are really interesting moments for families to work with families, and advising them through those big choices.

Laurie Barkman

I can see also that being very emotional, where they’ve let go of an heirloom in a way, if they’ve had that position. Do you also work with clients on the emotional side of letting go?

Josh Baron

I think it actually sometimes sneaks up on people, Laurie. They don’t realize until after the fact that, yes, it was a good financial decision, but there’s a sense of loss. It can be a really tough thing, especially when you have this business that feels like another member of the family, and you lose it and you see someone else not taking care of it as well as you do. It’s like when you go to your old neighborhood and you see the house you grew up in, and weeds are everywhere. It just gives you this sense of, “I can’t believe that this thing that’s so meaningful in my mind is now not doing so well.” Except, of course, it involves employees and all that kind of stuff. So the feelings are very heightened and so a couple things. One is that you want to be careful about the sale of a business and making sure that you’re thinking through not just the financial implications, but all these other things and how you might feel about it. Because I have seen people that regret those decisions, and they say, “I’ve got this money but I’ve lost my sense of identity and meaning and this business.” So you want to be really careful and really thinking through the implications, especially if you sell to a private equity firm.

Because one thing you know for sure, is that they’re not going to be the last owner. They’re going to sell to someone else. That’s the nature of their business model. A lot of the family business owners out there getting these calls by private equity firms, just go with your eyes open. Doesn’t mean that you shouldn’t do it. But just to really think through the long term consequences. But if you do go through with the sale, and of course, it’s the right decision for many, really think about how are you going to create that sense of connection of purpose and meaning in your life after that. What is that going to be? Is it going to be creating an investment platform where you’re going to invest in other companies, because you really like that? Or whether it’s going to be a philanthropic endeavor where you’re going to create that sense of meaning and togetherness through something else. Or whatever it is, but just to really be thoughtful about that sense of meaning that you’re losing, you’re so concerned about that. Really think about how can you recreate that through another means even as that first legacy business goes away.

Laurie Barkman

I think that’s a great piece of insight and I concur. I would say people who are happy in their next tend to be pulled into something that they’re excited about, as opposed to feeling pushed out. So certainly if you’re in the driver’s seat, and you’re working on this sale or transaction, most likely you’re in the heat of the moment, you want to get the deal done, right. Maybe there’s even deal fatigue, and as you’re going through the motions, it’s very transactional mechanics, you don’t really give yourself the time to think about the implications, especially if your name’s on the door. Now the identity part is really important, I think. In that next phase of what are they going to do having something that they’re excited about, and that fits their interests, like you mentioned, whether it’s philanthropy and giving back, including the family and creating a family office and doing investments, all those things are wonderful. Some people decide to start another company, some people decide to buy a company, or companies. Maybe they buy an island and they want to go live or whatever that is. So I think that’s a really great point, and maybe that’s a good place to start to wind down here.

I always love to ask guests if they have a favorite quote or mantra. You teach at Columbia, you talk to a lot of students, and you talk to a lot of people in family businesses. What comes to mind around that, either entrepreneurship or leadership or something specific to family businesses that you can share as a lasting mantra?

Josh Baron

Well, I think maybe I’ll share like a negative one, because this is the one that I hear probably most commonly in class, and that we spend a lot of time trying to rebut. This three generation idea that the first generation builds it, the second generation rest on their laurels, and by the third generation, the family’s poor again. This is probably my least favorite idea. It’s probably one of the most common things that people know about in family business. It’s also my least favorite one, because I think, first of all, it’s not really supported by the data, if you look at it…that most family businesses won’t make it through the third or the fourth generation.

But all that’s really telling you is that making a business last for 90 years is hard, and I don’t think that’s really a big insight.

What we know from looking around the world at long lasting businesses is that most of them are family owned.

What I’ve seen, and what really frustrates me about this saying is it creates almost like, a self fulfilling prophecy. I’ve actually had a number of third generation people who when I asked them to introduce themselves in class, they’ll say, “Well, here’s my name, and I’m from this place, I’m the third generation so I’m going to screw up this business.”

So it becomes this mythology, that I think is really unhelpful, because it suggests that family businesses are somehow more fragile than other businesses, which I think is just not true. And it suggests that somehow the third generation or the fourth generation are the ones that are going to destroy it, which is also not true. Because I can tell you that so many business success stories are actually not these “founder create something amazing” and then “the second, third generation do nothing.” So many great business success stories are the first generation creates something relatively small, the second generation or third or fourth generation takes that platform and then just blows it up.

Take Succession as an example, it’s based on the Murdock’s loosely or not too loosely, depending on what you’re following. Rupert Murdoch didn’t start that business. He took his father’s newspaper business in Australia and built it into a global empire. So that’s a saying that I hear a lot. It’s pervasive in the field. If there’s one thing people know about family businesses, oftentimes it’s that. I just find it to be such an unhelpful way of looking at the world. I guess I’ll get down for my soapbox. But that’s something that I’ve heard a lot and frustrates me about this field. Family businesses are not more fragile. The next generation is not destined to blow it up. If you do the work, and you’re willing to make the choices and put the effort in, there’s no reason you can’t have a family business that lasts for generations.

Laurie Barkman

Yeah, I totally agree, and that’s a wonderful insight. I have heard that saying, shirtsleeves to shirtsleeves in three generations. It can be a self fulfilling prophecy, which doesn’t mean it’s going to happen. I love how you’re changing the mindset. You’re educating these folks who want to learn about what they could do differently, how to keep their legacy going, and growing, and innovating. So I love it. Josh, thank you so much for being on the show today. Maybe the very, very last thing here is if people want to learn about you, or about the book, or about your firm, BanyanGlobal. How do they find you online?

Josh Baron

Sure. So you can find the firm on our website, BanyanGlobal.com, you can find me on LinkedIn, or on the website. The book is available through Amazon and wherever you buy your books. I would welcome anyone that wants to have a conversation or dialogue to reach out. Always delighted to hear and talk to people about their own experiences. Laurie, thank you so much for first of all, having me on this program and for the work that you’re doing. I think there’s so much value in having good productive conversations about all these issues that are coming up and taking some of the fear and anxiety and really talking about like the how-to’s of working through succession. So thank you. Thank you for your work.

Laurie Barkman

Thank you. Thanks, Josh. Thanks for being here.

Laurie Barkman:

Innovation, transition growth, easy to say but hard to do. If you’re an entrepreneur facing these challenges, I get it. I work with businesses from small to big to achieve your vision. Visit smalldotbig.com to learn more. I’d love to connect with you.

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