The financial life of the family business transcript

The financial life of the family business

By Fiona Boyd |

Entrepreneurs by design or sometimes by default, often end up in business with family members. Phil Grant, Managing Partner at boutique accounting advisory firm, Nexia ASR explains to Fiona Boyd, what areas need to be looked at carefully in your business when several family members are a part of it. This post is a transcript of video interview The financial life of the family business.

Fiona Boyd: Welcome today to Phil Grant, Managing Partner at Nexia ASR, the full service accounting firm that delivers value beyond numbers. Thank you for your time today. Entrepreneurs often go into business with family members, often by necessity, and if it’s not that, then they join a family business. What are some of the issues that come up for those sorts of businesses, that are unique, and need to be examined?

Phil Grant: Yes – where do I start? Family business, look, family businesses often evolve, so it may be two brothers who come up with a really good idea, and say let’s do this? And they just start to do it, and they don’t know really where it’s going to take them, and hopefully, if they’re successful in their endeavours it takes them in the right direction, and it evolves into a true family business. I guess the perils there are the things that can get in your way of actually running it like a true business.

Fiona: And what are they?

Phil: Well, putting your disciplines in place, like you would in any business. So, it’s very easy to slip into that comfortable mode when you’re in the family environment, because you’ve got that very comfortable, friendly relationship, and, that’s okay – that’s often the beauty of a family business. But I think you’ve also got to have the disciplines in place. So you have to truly put in place the right systems and processes, have the right leadership skills, have the right focus as any business does – because it’s no different to any business – in order to truly be successful. And ultimately, you then have a business which is a true business, which, down the track, if that’s the objective, is saleable, and people can actually see that it is a true business. So, if they’re coming to buy into your business, and they’re not family members, they can treat it like any other business which has value – and pay you accordingly. And, you know, it’s a challenge. It really is a challenge. Another challenge is having the right resources in place. It’s very easy to employ people because they’re family members, particularly if it’s generational, and they come through and they believe that they have a right to actually have a role in this family business. They don’t really have that right – it’s a privilege. And so they have to earn that privilege.

I was at a function yesterday where Frank Costa spoke, and you know, he’s got a massive business – massive. And it’s a family business. And he has a philosophy that family members really can’t be employed in that business until they’ve gone elsewhere and got external experience. He allows them to, while they’re looking for a job after university, to work there casually, but no more than 12 months, which I think is very sensible. Then they’ve got to go out there and prove themselves, and learn and advance in an external environment. That has a number of benefits. First of all, it doesn’t give this ‘right’ to these people – they’ve got to earn it. It also means that they’re developing new knowledge, which perhaps they wouldn’t develop in the family business, which benefits both them and the business – because if they do come in, they bring that fresh knowledge, which is fantastic. But also it strengthens the whole, the whole longevity of that organisation. So I support that. But it’s not always easy to put that in place. And lots of family businesses don’t reach their potential because of, I guess that comfortable, happy-go-lucky type of environment – which is nice, but doesn’t necessarily align itself with good business practice.

Fiona: That was a question I was going to go towards, which is – is there a different talent economy that goes on in a family business, and with Frank Costa, obviously no – he’s figured out a way to create merit, or make sure that family members joining the business bring something extra to it. But I would have thought that it is very easy to slip into, ‘I’m here, I’m related to you – now give me a job’. Does that happen a lot?

If you don't have discipline in your family business, you could find yourself stuck on board a disaster with people you can't get along with

Phil: Absolutely, absolutely. And I’ve got numerous situations where that’s happened, and I think – particularly for the patriarch who developed the family business from nothing, and he really wants one of his children, one of his offspring, to grow to greater heights in that organisation, and to take control. And that’s sort of, if you like, part of the patriarch succession plan, which is a whole different area to talk about. But they really want that son or daughter to assume that role and take it over… but, unless they’re skilled and unless they’re aligned, it can end in disaster. I’ve seen it end in horrible, horrible situations where father and son don’t talk, where they’re out of the business and their personal relationship falls over. It can be very tenuous. So there has to be a lot of trust, and there has to be a lot of practicality in the way you approach these things, and, you know, I think that’s part of the values that the family business has to have. You’ve got to set that up very early – that individuals who come in, need to bring something. And that’s a challenge.

Fiona: When it comes to accounting and tax, where do family businesses usually go wrong?

Phil: I think it’s more on the commercial side of things, where people just see it as a big pot – and everybody just grabs out of the pot, because it’s family money. And that’s okay, I mean look, it can work… but I think you’ve got to draw those lines. Proper salaries, or salaries or distributions need to be made for reward for effort, and what’s leftover after that, is the true profit, which then has to be allocated among family members in some shape or form. From a tax perspective, obviously there’s flexibility there in managing that allocation. But there are hurdles you’ve got to get over – you can’t just simply just allocate things without being conscious about what the legal ramifications of that are. Because if you make an allocation of profit to a particular family member because it makes sense – perhaps from a tax perspective – those individuals have a legal right to receive those funds. Care has to be taken.

So, it certainly creates a much friendlier environment to manage perhaps the tax position for the family, which is what we try to achieve, a better tax position for the family, but it can lead to other complications, particularly generationally, where you’ve got children and they get married, and they have kids and spouses who perhaps don’t work on the same value system… So it becomes difficult. I think that’s where a lot of complications in family businesses comes in – it is in the next generation. Particularly if it’s a successful business, people see it and want a piece of that, and it needs to be managed carefully.

Fiona: Is it then possible to make a robust family business go on indefinitely?

Phil: Look, there’s no doubt that that can happen. I was with a new client the other day and they’re in partnership with a family who have been in business for over 150 years. Which is phenomenal.

Fiona: Extraordinary, yeah.

Phil: Phenomenal, really, 150 years – I can’t even fathom that. But this company has been around for 150 years. And so, they’ve achieved it. There’s lots of examples of businesses. But don’t forget – we don’t really have a huge amount of examples of that, there are examples, but in Australia we’re largely a new country, with new people from different parts of Europe and other parts of the world. And a lot of those people came with nothing, and they’ve built up their businesses into empires. And you’ve got lots of examples of those businesses going on, in different shapes and forms, who’ve split them up… There are lots of examples of high net worth family who have developed things out of nothing, who have floated, or split it up into different divisions, into different family members. I think it is achievable, I think the commercial merits need to be there. I don’t think you can go on running the ‘family milk bar’ forever. Ultimately, it becomes more than that – if it’s successful.

Fiona: Thank you for your time today, Phil.

Phil: Thanks, Fiona.

Fiona: I’ve been speaking to Phil Grant, from boutique accounting firm Nexia ASR, and Phil talks to us regularly about money matters and the entrepreneur.

Photo: flickr .candy

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