The secrets to a successful family-run business or trust

by Pattrick Smellie / 01 July, 2018
Photo/Getty Images

Photo/Getty Images

RelatedArticlesModule - how to run family business

The ongoing prosperity of a family business or trust calls for a fund of fresh ideas, succession planning and even dodging lawsuits. 

My uncle plumped himself down in the rental car at Dunedin Airport, looked me in the eye and asked: “So, Patt, is the feud over?”

It was August 2006 and the whānau were gathering for a historic reunion of four branches of a family dating back to the arrival of the original 36 Smellies in 1886.

Yes, 36 of them. With their own iron-rolling mill. The business model, roughly speaking, amounted to collecting scrap iron from the Otago gold rush and turning it into railway lines.

Today, the only clue left to that early industry is the sign for Irmo St in Green Island, a suburb between Dunedin and Mosgiel, named for the telegraph address of the Otago Iron Rolling Mills. A shed still stands that used to be part of it, too, if you know what to look for.

Another urban pioneering family, the Harraways, had been producing milled flour and oats from a site next door since 1875. The Harraways brand still adorns a grain silo there, though the family long ago sold to the Hudsons, another Otago clan once connected to a company called Cadbury Schweppes Hudson.

The establishment of minor business dynasties was common among early settler families in New Zealand’s newly forming cities. Leading the Smellies’ exodus to the Antipodes were William Orr Smellie and his wife Agnes with their four adult sons and their families. The business initially thrived, but tragedy struck early.

One year in, one of the sons, my great-great-grandfather, fell from a train near the Caversham tunnel and died, leaving a widow and three children, two boys and a girl. Within a couple of years, the widow had sold the shares she’d inherited in the iron-rolling mill back to the family and returned to Britain with only her daughter. Even 131 years on, family sensitivities prevent full disclosure of her reasons.

According to my branch of the Smellies, she was diddled: the family paid a low-ball price for the shares. Meanwhile, her two sons worked in the iron-rolling mill for the rest of their lives.

My great-grandfather rose to the rank of head roller, and in later years wore a tennis ball on a strap to contain a hernia earned from the hard, physical labour of extruding iron. Neither he nor his brother was ever made a shareholder.

Let’s just say there were resentments.

My grandfather spent years buying back shares in the company whenever they came up for sale, long after the mill itself closed in the 1950s and it moved into other lines of business. My father knew the story well.

To be honest, my crop of Smellies seemed to be at peace with the whole thing. After four generations, the feud was more entertaining as Pākehā whakapapa than a defining event.

Yet on that night in 2006, the events of the late 1880s still faintly reverberated in the dining room at the Fernhill Club, where the descendants of the Deep South’s so-called “Tartan Mafia” still gather.

Sir John Todd in 1979.

Family fortunes

Such is the economic power of one of New Zealand’s most common but commonly ignored sources of wealth creation: family businesses. Even a family managing a couple of rental properties, often in a trust, qualifies as being in the family business game.

At the higher end of the scale, a glance through the 2017 NBR Rich List, an annual guesstimate at the fortunes of the country’s wealthiest people, reveals that 59 of the 230 entries are for families rather than individuals.

Top among them are the Todds, whose sprawling family empire consists mostly of energy and property assets, both in New Zealand and overseas. The Todds’ estimated worth of $3.5 billion placed them third on last year’s list. Only that other well-known New Zealander, German-born American Peter Thiel, who was granted citizenship after spending only 12 days in the country, and list-topping Graeme Hart, are worth more.

Intensely private in their family dealings, the Todds are one of just a handful of families in New Zealand to run a family office, which professionally manages the web of business and family interests. Family members meet en masse for briefings at regular intervals and are involved in major decisions that affect the family. In young adulthood, Todd scions are pitted against one another in mock business games to prepare the next generation of family capitalists.

Other household family names include the Spencers, ranked 13th-equal last year with assets of $750 million, accumulated mainly through the Caxton Pulp and Paper mill, established in 1890 and long since sold.

At 18th were the Goodfellows, said to be worth $610 million, and descended from dairy industry pioneer Sir William Goodfellow. His grandson Peter is president of the National Party.

Far less visible, at 20th, are the Mansons, whose large-scale commercial property and apartment developments are everyday sights for Aucklanders.

Then there are the Caugheys, linked to Auckland department store Smith & Caughey; the Goodman brothers, whose names are associated with both food giant Goodman Fielder and Goodman Property; the meat, fish and food-processing Talley family; the Fletchers of building and construction fame; and the Bayleys, Barfoots and Thompsons, whose names adorn real-estate signage, to name just a few.

Many of the remaining individuals featured in the list are also arguably from family enterprises: the Simunovich food and fishing business; jewellery-store chain Michael Hill International, now chaired by founder Michael Hill’s daughter Emma; and the Stevenson, Higgins, and Fulton and Hogan families, all of whom are associated with heavy engineering, road-building and property development.

Then there are the families whose businesses make the news for the wrong reasons. Among them is Equiticorp founder Allan Hawkins and son Wayne, who were both directors at various times of Budget Loans, a company fined $720,000 last month for “cynical and deliberate” repossession tactics when collecting on loans it had bought from two failed finance companies; the Huljichs, racked by a court battle over money involving three generations of the family; and the children of late construction and property investor Hugh Green, who amassed more than $500 million, who took a dispute over a family trust to the Court of Appeal. In that case, the court noted that everyone involved claimed to know their father’s wishes, but that “one thing is beyond all doubt: Hugh would not have wanted to see the children he loved embroiled in wasteful and destructive litigation”.

In July last year, the Greens reached a court-approved settlement.

Survival strategies: Family Business Central chief executive Philip Pryor. Photo/Hagen Hopkins

Survival strategies: Family Business Central chief executive Philip Pryor. Photo/Hagen Hopkins

Potent brew

Family Business Central chief executive Philip Pryor describes family businesses as “that potent brew of love and money” that can bring out all the good things that family businesses foster: wealth creation, personal security, long-term focus, fast decision-making unhampered by public disclosure requirements, and resilience in adversity. But they also carry the potential for conflicts rooted in personal history to shatter not only the family, but the business, too.

Intergenerational arguments can be particularly difficult. Pryor calls them STDs – sexually transmitted disputes: “They just keep passing them down.”

A cursory Google search confirms the kind of advice many family-business experts end up giving. “How To Run A Family Business Without Killing Each Other,” is a typical headline.

“I’ve had my job described as a guidance counsellor more than once,” says Wellington-based Owen Gibson, a partner at accounting and consulting firm PwC.

Its 2016 report on the state of New Zealand family businesses – a rare attempt to scope the sector – found close to half were planning to pass the business from one generation to the next within the following five years. However, the number of family businesses with no succession plan was rising.

“That’s a huge problem, especially as the current generation of owners aren’t getting any younger and need to consider how they will transition to the next generation.”

International studies repeat broad claims about the low likelihood of a family business surviving to the third generation, either under family ownership or at all, although the exact definition of a family business is a little hazy. PwC’s study found 42% of family firms were first generation, 39% second generation and 10% were third generation.

Statistics New Zealand has no family-business ownership measures because there is no standard definition.

However, Gibson says 20-30% of the businesses he advises are family-owned firms that have traded for more than one generation. “I’ve got a number of multigenerational companies and that’s probably what you’d call a true family business. What distinguishes them from founder-led [businesses where a family member started and runs the business alone] is that you have multiple generations working in the business.”

It’s more common in traditional industries, he reckons. “I do a lot of work in the tech sector and it’s certainly not common there,” says Gibson. “It hasn’t been around for long enough to have multiple generations.”

If anything, the PwC report worried that too many New Zealand firms remain “weighted towards first-generation” ownership.

Pryor, a returned expatriate Kiwi who has combined careers as a family psycho-therapist and corporate consultant to establish Family Business Central, wants to help people plan ahead to avoid the pitfalls that family-owned businesses often experience.

From his fund of anonymised anecdotes, he relates a recent case in which a father told his son and daughter he intended to split the family firm 80/20 in the son’s favour, since the son was running the business while his sister was uninvolved.

“The daughter just absolutely hit the roof,” Pryor says. “The parents had no intention of upsetting their daughter. They want everything to be fair, but they didn’t realise how strongly she felt. The whole family were just stunned by this reaction.

“That’s an ongoing conversation to deal with now. You look at the rational numbers: the son had built the business up, had worked there for 20 years, and the father was repeating history saying, ‘That’s what my father did to me and my sister’.”

The son, however, could see he’d been paid and received bonuses as he expanded the business, and that if he hadn’t been a family member he would have no right to any shareholding at all.

Although it might make sense for him to be the majority shareholder, other family assets might need to be made available to the sister to balance the equation.

Pryor urges a fluid approach to the concept of a fair outcome.

“Fairness is not an independent thing that sits out there. Fairness is something that you literally have to look at how people feel about things, about the meaning of things.”

That process often requires family members to get clear about their role. Are they just shareholders? Do they want involvement in the business? What skills do they need to become either employees or directors? Do they simply want to draw cash from the business and let someone else do the work?

Not making sense also can’t be ignored. “The irrational may make no logical sense but it has to be dealt with,” says Pryor.

Dame Alison Paterson, one of the country’s most experienced public and private company directors, has served on large family-company boards, and cut her teeth as a farm accountant. She warns that family-owned farms can face different issues from other types of businesses (see box story, opposite), but in the main they’re similar. “The common challenge is to ensure that the urgent does not subsume the important,” a process often helped by having at least one non-family director.

“Pragmatic decisions regarding competence are necessary and care should be taken that the role is appropriately remunerated to maintain equity among the children.”

Owen Gibson of PwC. Photo/Hagen Hopkins

Family disruption

Identifying sources of growth and risk are as important for family firms as any other, Paterson says.

The potential for industry disruption to up-end long-established family businesses stands out as a risk for the sector in accounting firm PwC’s survey.

Gibson says he has seen cases where a business is stuck because the founder won’t hand the reins on.

“The patriarch is still in there and the children are in their sixties. Full control still hasn’t passed across but he’s not working day to day in the business, so people really are just counting time and the risk is they go off and do something else or they make bad decisions because there’s a lack of forward planning.

“Someone at that age is unlikely to make big strategic decisions – take on a big new debt, buy a new piece of machinery, open a new business. Disruption and succession can become more fraught; to put aside what grandad or great-grandad created.”

PwC’s research also found a worryingly large proportion – eight out of 10 – family-owned New Zealand businesses expect to be earning revenue from the same products in five years’ time. That suggests complacency among older owners about disruption.

According to AUT senior lecturer Paul Woodfield, who has conducted some of the only research in this area in New Zealand, the next generation needs to be seen as “the emerging experts as they consider stepping up in the business”.

However, moving from one generation to the next is rarely straightforward. It comes with additional challenges when the business is reaching a size that its operations need an injection of professional, possibly non-family, management or directors.

“The people who run that business have to know their stuff and being a family member is less important than your knowledge and experience,” says Pryor. “When a family business starts moving into that space, then they’re starting to think more in terms of legacy than inheritance.”

Global management consultants McKinsey note that a family business reaching this stage of maturity will often also start to “give back” by establishing a philanthropic fund or supporting particular causes. Such activity can also create career opportunities for family members outside the business.

Liquidity events

The other common development in a family firm moving from the control of one generation to the next is the so-called “liquidity event” – a polite of way of referring to taking cash out of the business as a way of realigning family interests.

“When a family business passes down a generation, there is quite often a reorganisation, with siblings either being bought out or diluted down,” says Gibson. “That can often create some challenges because a liquidity event often requires debt.

“The business can be highly successful, so buying out a sibling who owns 25% can be quite a lot of money.” It’s a classic breeding ground for suspicion, envy and misunderstanding.

“Often the technical issues are not a problem. To find some debt and liquidity, that’s generally straightforward,” says Gibson. It’s finding family consensus on the outcome that can take time.

“Sometimes the best answer is for people to exit the business and trigger liquidity. Sometimes it’s putting in place better governance arrangements. Sometimes it’s salaries – where one sibling is paid substantially more than another.

“Sometimes it’s just, ‘I want some money out of the business and if I can see that, I’m okay. I don’t like how you’re running the business but provided X happens, I’m okay with it.’”

In those circumstances, Pryor appeals to the family’s sense of itself. “Pretty much every family says they’d get rid of the business if they thought it was damaging family relationships. Of course, how many actually do is another story, but the sentiment is clear – family relationships are incredibly important.”

The best way to avoid as much of that drama as possible is to plan ahead, he says. He recommends the use of a constantly evolving “family charter” and a structure for the family to meet and make decisions.

“If we don’t have that time and there’s a lot of emotion there, that’s where you’ll get the explosions and people will say things that they can’t unsay and all hell breaks loose.”

He offers a final anecdote. “I’m working with a family of six where there were issues that we knew were going to be very difficult and it was around financial support for family members. I was meeting with them for three days in a row.

“We didn’t get to the really difficult stuff until the end of the second day, because I wanted them to get used to being able to make decisions and have discussions about easier stuff so that we built up a sense of momentum.

“They were saying, ‘When can we get to the financial stuff?’ and I said, ‘When I think you’re ready’.

“The conversations took about an hour and a half and it was far less of an issue than they feared. They actually got it resolved and came up with a really elegant set of ways forward that everyone was happy with and no one was expecting.

“That’s the nice thing, where we actually come up with solutions that work brilliantly.”

This article was first published in the June 23, 2018 issue of the New Zealand Listener.

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