Transcript

Matt Heine (MH):

Hi, welcome to this episode of Between meetings. Really excited today to be joined by Phil Pryor from somewhere between Australia and New Zealand. I'm not sure where you are today, Phil. Yeah, mid Tasman I think somewhere. Yeah. Thanks for joining today. Looking forward to this topic, which I know is incredibly relevant to not only a lot of our clients, but certainly a lot of friends and in some cases also personal situations. So do you want to give us a little bit of background on who you are and what you do?

Philip Pryor (PP):

I work with family owned enterprises of one sort or another. So it could be a family business, family office, or it's a family where there's a transition of wealth, of significant wealth in one way or another. I'm unusual in that most advisors working in the space, accountants, lawyers, financial people. My background is psychology, so I trained actually as a family and in fact child psychotherapist gave that gig up a long time ago. But my focus is around how do we sort of manage and align the family in whatever they're trying to do here, whether it's a formal succession event, whether they're building a long-term, multi-generational family business or family office, or whether they want to better manage that wealth transition. Well, you've probably heard it as more times than me, these families, they want good to come out of what they've done. The risk is that in fact you'll get jealousies happening or a sense of unfairness and conflict and it can really blow the family. So my job in a nutshell, I describe my work as preventing future family conflict.

MH:

It sounds tough. So how did you actually get into this specific part of the market? As you say, you haven't come through I guess the normal channels, there's normal rate. No. Did it just sort of happen organically or was it something that you saw an opportunity and decided to go after?

PP:

No, it's a little bit of both. So when I left the whole clinical practise in my early twenties, I was really interested actually in change and I did my masters in the US and a lot of that was around systems thinking, how do we influence and change complex systems, whether that's a family, whether that's actually an organisation. I was lucky enough to work with the team in London for probably over 10 years and learn this extraordinary methodology around how do you intervene in complex organisations. And those days it was mainly organisations. So how do we solve very difficult problems? How do we, in many ways it was the beginning of a lot of the work around the nudge, what's the thing that we need to do that will allow the changes and so on to happen? And then I'd moved to live back in Australia in the mid nineties and then in the early 2007, 2006, I was asked to help facilitate a group of family businesses and I suddenly realised this was the melding of my two lots of skills, really that family side, that business side.

I'd done nearly 20 years of a business advising by that stage. I mean I really enjoy the space. You've got really smart investors and business owners doing amazing things all below the radar. The stats on family enterprises are remarkable when you look at it and I'm working with the owners and people who can really do something. It was a breath of fresh air from the large corporates that I've been working with because actually we got in and we did stuff. And so I've really over the last 15 to 18 years just moved my whole business to focus on that. So that's why hence New Zealand as well as here.

MH:

When you came back to Australia, even though you had been working with I guess larger corporates, were you surprised at how immature the market was? Unlike the US and Europe, we don't have multi-generational families or dynasties. It's very much first and second generation and to some extent the market is still trying to work out what does a family office do or mean? What's the size that you need and what are the sort of people that you need involved?

PP:

Yeah, that's very true. I was at a conference in New York last year with family firm advisors, so I'm sitting in a room with a hundred, 150 other people all doing very similar to what I do. I would struggle to get five or six around the table in Australia on that. And so there is a lot of work around getting family enterprises of whatever type and understanding of what they need to do. A lot of them, some of them are actually going overseas now. We've got some pretty good talent here. At the same time, what I heard in New York, we were already doing in Australia, but there is not that awareness within the families themselves of what they can do and in fact in some cases what they need to do on that. So I'm writing a book at the moment called Risking It All and I'm really saying you're combining your two most precious things, your family and what that means as well as your business or your investments, which is identity and income and all sorts of things. And you've actually got to that carefully. There's got to be a plan rather than going, we love each other, it'll all be fine. That's where the problems will occur.

MH:

What's the typical of profile of the businesses and families that you're working with? Is it typically smaller enterprises with maybe father, mother, son or daughter, or are you talking sort of much larger families that you're working with and bigger dynasties if you like?

PP:

I work with some businesses that are huge. A couple are in the fourth, fifth in one case, sixth generation. And then there are a few which are really small. So I work with a couple of small manufacturing businesses in New Zealand where it's a bit of a passion project for me because I'm very keen that we maintain manufacturing in New Zealand. It's that full range and gives a really interesting contrast in some ways. In many ways the issues are very similar. It just depends on how expensive their lawyers are when things go wrong,

MH:

If you take out the trust structures and maybe the money, presumably the issues that you're dealing with and the way in which you go about it is very similar regardless of size,

PP:

Really similar. Yeah, yeah, yeah. And I see founder syndrome in a 10 million business and in 500 million business you've got all the family dynamics which are a very similar and even going back to some of even the parenting issues that are there. So the amount of money is less the issue and it's what they want to do with this and the potential is huge, but there's just a few things they've got to get in place.

MH:

I remember someone once said that the CEO of a family officer is one of the hardest jobs and that CEO actually stands for chief emotional Officer.

PP:

Oh yeah, absolutely. I set up quite a lot of boards for my clients and you have to really select well, and sometimes they'll want to go for the big corporate experienced person. I know a number of examples where that just hasn't worked very well because as the chair of the board or the CEO, you have to be able to deal with the messiness of what is family. I use that phrase hasten slowly. They'll want to often we just need to do it or make the decision or whatever it is. And the family's going, no, no, we need to think about this, we need to talk about this. Or they'll get emotional. One of the things I say is even for family members who are not involved in the business, they are emotionally very connected. And so there is that sense of you have to be able to deal with that messiness. It's not always cut and dry. I mean the other irony of course is that when families really get going, I mean they'll make decisions faster than any corporate I've seen. I've seen some where direct competitors to listed companies and they've been able to get together within a week in a crisis sort things out and get their plan in action where a month later the two listed corporates hadn't even had a board meeting at that point. There's some interesting dichotomies in that.

MH:

I imagine you're dealing with a huge array of different situations, but some of the common ones that you'd be facing into I imagine are that founders first generation are looking potentially at liquidating or creating liquidity for the family. Can you just maybe talk through the sort of a process that you would go through to maybe get the family ready for that event and then what you see as being really critical post event, I can't remember what the actual numbers are, but the number of small businesses and medium sized businesses coming onto the market over the next five to 10 years is extreme.

PP:

It's huge. So there's a number of factors that a business that's owned by family need to really think through. And the first is they've really got three choices for founders. Part of this is actually facing their own mortality. There's a good deal of denial at times around that. So they've either closed it down and most that's obviously just a silly option. They either sell it or they go down the succession road. Now both are completely viable. I don't have a problem. In fact, I've got one right now where the plan is it will be sold in five years time and it's getting its sale ready and all that sort of thing. But it does take a lot of conversations around and again, it's this emotional messy stuff around, okay, so if we sell, what does this actually really mean? And sometimes I'll need some time to really sit and think that one through and eventually you moves into a cell event and I know a couple of families where they sold and then there was some golden handcuffs for a year or two and that sort of thing by key family members.

And they found that extremely difficult because previously they were in charge, it was their gig, they did it and when they, we've got the golden handcuffs on, they report to somebody. That was a very tough one. And of course the other issue is then you've got this money, you've got this cash liquidity event. What do we do with that? And so there's questions there around do we keep it as one big pull and from an investment perspective that makes the most sense, but that means working together. And so interestingly, we set up a family charter and a succession plan for family businesses. If into the family office space, then we need to be doing something quite similar around how are these investments going to be managed and things like if there's trust involved, who's the appointor and what's the succession of appointor ship if you like, for trust? So selling is fine, but actually it doesn't solve all the problems. There's still things to be discussed and thought about.

And the other question, I mean I've got clients where their businesses are pulling out, I dunno anywhere between 25 and 30% returns each year, year on year. And so there was a discussion with one of them. It's like, well, okay, if we sell where on earth are we going to get those sort of returns with that level of risk on that? And I know private equity is very keen on a lot of these businesses and there's some actually some quite interesting other models that are coming through around this. For a lot of founders, it's all around the control issue. It's a big that put 30, 40 years of their lives into this. And so there's often a real time issue to help manage that. And of course if the family decides not to keep the pool together, then they go their own separate ways. And again, I've got one of those at the moment and the key thing was, okay, so if we're splitting this up and divvying it up four ways, five ways, whatever it was, how do you maintain the family relationships? So how do we have those discussions and the complex discussions, there's tax issues, there's all sorts of things that, loans that need to be repaid and all that sort of thing. So how do we still remain as siblings and with nieces and nephews across the various families and maintain those relationships because sometimes that can explode and again, this is where we've got to take care and manage that process well.

 

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MH:

So presumably in that scenario there's no right or wrong. It really is a matter of having the conversations and understanding where the relevant strengths are of the people sitting around the table.

PP:

It is. There's no right or wrong particularly it's actually being able to have the discussions, raise the issues, find a way through those issues. And so when I'm doing that, I normally stagger conversation, so we'll have maybe half a day or a day of conversations and then a break for a couple of weeks and then have another one so that people have a chance to let that all those details sort of filter through and think through the impacts of that. And so it does take time. And the other probably the key thing is, and I've talked about this quite a lot, is people have got to see that it's fair and this fairness, particularly between siblings is a huge issue. It fair does not mean equal and nor does it mean necessarily the amount of input that you might've had. It's an emotional thing, it's a perception thing and it's something that the family really has to negotiate and talk about because it's not just some sort of independent thing out there. And often I'll say to families, the money's one thing, it's actually how you feel about it. That is really the crucial conversations that we've got to have and we've got to resolve with that.

MH:

When you say fair does not always mean equal, what do you mean by that?

PP:

I've got a couple of examples where one a family, it was a farming situation and farms are always tricky, right? Particularly when they get very big. One of the sons wanted to take on the farm and the reality was he was going to be gifted. Make a long story short, probably seven to 8 million worth of farm. Even him taking the biggest mortgage he could, the father and the parents didn't have another seven or 8 million to give to their other four kids. And yet when we talked and did the negotiation, the kids were delighted he was taking the farm. And in negotiation we talk about what we call elegant currencies. They weren't at all concerned about the financial difference, but what they wanted, what was important to them was access to the farm, what was important to them that it wasn't sold to somebody else, that it was still in the family. And they did some profit sharing stuff around pine plantations and the father had a couple of other investments that she was able to help the other kids with. So in terms of equal, they were miles away, but from a fairness perspective, they were all pleased with that. And that deal, you write those things down and review them, but those sort of things can really hold water for a long period of time.

MH:

In that scenario, it sounds like the discussion started off fairly amicably or was that the result of many days and weeks of discussion?

PP:

A bit of both. The father was particularly worried as all parents are, right? They don't want, no parent wants to see your kids arguing with that. And that either kicks in one of two reactions, either it gets handled very badly, which makes it worse, or there's a classic head in the sand and don't mention the war sort of thing right now. That's where people like me are really useful because we can actually structure those conversations. And interestingly in that one, it was nowhere near as bad as the father was worried that it would be right. He was really catastrophizing in terms of, oh, what's going to happen and I don't want my kids upset. And of course all these things that parents want and we got it resolved relatively quickly around that it helped having that independent person who can have those conversations and actually see where the common ground is because often they'll only see their perspective rather than the overall big picture, which is where I come in.

MH:

So where you have seen these situations play out effectively, what are some of the key ingredients that you try and put in place or structures that you try and put in place for them?

PP:

There's a number there. There's often historical things that get really caught up. We call it rebalancing at one level, I'm not interested in history because I can't change it. It's happened, it's done, things have done, but actually how people feel about it is often very strong and often pretty much all the time we're relying on memories, but these things can get really in the way of progress being made. They're still fighting the previous war if you like. So there's often a negotiation within the family around, okay, what do we need to do to better to put a line in the sand from a historical perspective, and I'm often say, you may not be delighted by it, but it's got to be good enough that you can move on so that actually we can really build because the future is very bright and often it's very bright for these families.

They've just got to get resolved some of this historical stuff. So there's that sort of thing. We need to be able to have what I call the honest conversations. I'm constantly on the lookout for where are the landmines, I need to know where not to step, but I also need to know when I need to raise one of those, where it is and what it means and how do we start resolving it. That honest conversations mean the family being able to sit around the room and have a conversation being prepared. They're often worried about that and usually more worried than they need to be and they often express go, oh, that was easier than we thought on that. And then there also needs to be a level of transparency. So when I'm working families, I'm looking 40 years ahead, one of the questions I'm asking particularly parents is going, well, what do you want this wealth or this business or these investments, whatever it is to do for your great-granddaughter that often rocks 'em back on their heels a bit.

But it's a really powerful question because it means that often we're seeing through one succession event and we're potentially looking at a second one, that second one could well be done by that stage if we have the conversation. Now, if we address some of these issues now, then we only really need to do it in such detail once because the second one, the third one, the fourth one hopefully will be relatively straightforward. It's a matter of being clear around expectations. Values are really, really important. I had the honour of meeting a member of the Mars family in New York last year. All she could really talk about was the values, the five values that they have and how that just drives so much of what they do and how they do it. And if we get a lot of that in place and then we create documents and a lot of the documents I develop are emotionally binding, they're not legally binding. They'll have a legal aspect, a shareholders agreement, wills and trusts and all that sort of thing, but the other agreements are emotionally binding. So they have to work, they have to be fair because otherwise people are just going to say nothing to do with me or I don't agree with it on that.

MH:

We've talked a lot about what happens once a business is sold, haven't spent much time talking about actually working in a family environment. So I've been fortunate, as you may be aware, I've worked with dad for 23 years now. We've had a great experience and it's worked well. Not everyone has the same experience and often families working together can be a complete disaster. Love to hear some stories of where you've seen it maybe work well but maybe not so well in what you'd recommend.

PP:

Congratulations, you've done a very good job 20 years with your father. This is where it gets really interesting and there's really no rule that says siblings have to get on and let alone parents and their kids at times. One of the big things we talk about is hats in terms of when immediately when you start working in a business together, you've got multiple hats going on. So you've got sun hat, business manager, business owner, hat your father has similar hats, but dad hat, all that sort of thing. And often we just completely confused with conversation we're having. I mean I have to say my daughter works for me as well. At one point she was living with me, she was my daughter. We ran the office from home, what could possibly go wrong? And so we had some very simple rules. We only talk business in the office and so if we had a business conversation to have, we would go and go out to the office and talk about that there.

So we would never have a business conversation around the dining table, things like that. When I'm on the phone to her, I'd start the conversation with it's dad here. So she knew there was a context marker of we're having a dad daughter conversation rather than a Phil Cat conversation around that. That actually worked remarkably well. Pretty simple stuff actually. But it really kept us clear around what conversations we're having. I mean, I've been in family businesses where now they'll be in a board and board meeting and they start talking about Christmas decisions and I'm going, no, no, no, this doesn't happen here. This is a business conversation. And for a lot of families they'll often go, yeah, we never stop talking about the damn business. And they don't. And so the parents miss out on actually being parents and the kids miss out on just being their kids around that.

So that's really important. And then there's also a few general things. So we look at merit as a really strong foundation and family business. Just because you're the oldest son or the favourite daughter, whatever it is, doesn't mean you get the gig. It merit is really important and it's one of those ways of managing fairness around that. I spend a lot of time doing what we call next generation development plans. So if you want to put your hat in the ring, say in a senior role or a leadership role, here's what you need to learn. This is the experience you need to gather or if you want to be on the board, well to be a director, this is the sort of knowledge and experience you're going to get. And the other thing is that succession is made up of three parts. You've got succession of ownership, which often is in for a lot of families is via testamentary trusts and that sort of thing.

You've got succession of directorship and people often forget that one directors die just like everybody else. So how do we get people ready to take that role on? And of course succession of leadership and that's where that well merit for both of those actually is really important. So simple things like that help enormously and help also setting up sort of clear expectations around what is expected. If you want to be in the business, then these are the expectations. This is what you need to be doing or demonstrating. I remember a family I worked with and the son had come back from overseas and very keen to be involved and take over the business and his father said, well, yeah, you, you'll need to go and work in all the different parts of the business and get your head around that. And he said, well, but if you can't win over the staff and the senior management and you can't get their respect, then you can't get the gig.

Over eight years he did and he got the gig. I had a very sad story of a family in Western Australia where the parents had built a very successful series of businesses and their two sons just weren't up to it. And the mother confided to me and said, I know that if my husband and I died tomorrow that our staff, our suppliers, our banks, everybody involved with our business has no confidence in our sons. They were probably more interested in the latest Ferrari or something rather than actually running the business. Very hard to find a solution to that one on that.

 

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MH:

And to that point of merit and fairness, not everyone's going to be excited or want to be involved in managing a portfolio or a business. What do you see in that situation? How does that typically play out?

PP:

So that's part of both the conversations and the transparency. They're always going to be part of the family even though they don't work and don't have any interest in the business, they don't have any talent for the business. They're always part of that family. And I've got a family where you've got seven, eight in the next generation and there are probably three who are interested and in fact working there. And a couple of them are musicians and they have nothing to do with the business. They're not interested. They like that legacy element. What we do is we have three levels around next generation development. And the first level is, and particularly when you get to cousins, this is the really challenging one because everyone talks about shirt sleeves to shirt sleeves in three generations. My belief is that it's pretty true, but the challenge is that we don't prepare that cousin generation enough.

And if you think about it, you've got mom and dad and then they say there's three kids and then you've got, I dunno, six or seven cousins, but those are three families that those cousins are from and they don't have that strong identifier or that strong glue. That first level of next generation development is actually events and learning that everybody in the next generation, if they're going to be, it doesn't matter whether they're a musician or whether they want to be the CEO, they're involved in that. I mean, and that's family get togethers could be learning, could be a whole range of things, but it's a broad general knowledge. They might sometimes sit in and observe some board meetings for example, but that's for everybody. Now, for the musician, that's all they need. But for the one who wants to be the CEO, then you've got another level of development which is around let's look at your professional development so that in what you need to learn and do if you're going to want to go for that for the top gig.

And that's a separate thing. And then the third one of course is if they're going to be owners. And that ownership split is interesting. I've got families where there are five in the next generation, two who run the businesses, three who don't. They've got their own careers, but the agreement in the family is that it's 20% each in shareholding absolutely equal shareholding. That's my general advice, particularly if you want to build a long-term, multi-generational family business around that. Because again, it's managing that fairness thing in the long term, which is, as I said, I have 40 year viewing of things.

MH:

So that exposure to the business link's really interesting way to do it. And just having that observer role, something that we're very passionate and big on at Netwealth is around next generation financial literacy, but also capabilities. So teaching them the basics. How have you seen that effectively done? Is that in conjunction with the parents' financial advisor or wealth manager, or is it something that you do independent?

PP:

So this is where the financial advisors are really important because in that first level of next generation development, they need a level of financial literacy. I mean, they don't have to be gurus at it, but they do need to know how to read a p and l and understand investing and so on. And the financial advisors are, I think, really important in that, whether that is working directly with say the group, the next generation group and doing presentations, and I know some financial advisors who will actually run small workshops for the next generation and go through without their parents there and go through, okay, these are the investments, this is what we are doing, these are the types of returns, this is how we manage it, and so on and so on. And again, you might have different levels. You might have a broad overview for everybody, so everybody understands where they're coming from and those who really want to dig into it.

It might be a separate programme for that, but financial literacy is critical sometimes. Well, it's why we often get them sitting in as observers to the board, particularly if they're on the board, you're looking at upcoming investments, how they analyse that diversification strategies, that sort of thing. And while they're not directors and they're purely observers, so we don't get into that whole shadow directorship side of things, it's phenomenal learning for them. I know some big family businesses that are getting 18 year olds sitting in observing. A lot of families will baulk at that one, but actually I'm generally in favour of the start earlier rather than later.

MH:

The stats are quite terrifying actually, for financial planner is currently suggesting that out of nine clients, only one of them will stay with their parents' financial advisors.

PP:

There's a lot of work there and a lot of potential upside to build those relationships. I do know a couple of financial advisors that have done really some brilliant work building those relationships with that next generation. And in our work, I certainly know for me, my biggest asset is trust. And so if you build that trusted relationship with that next generation, then again all sorts of really cool things can happen.

MH:

What of the areas that's often debated is when is the right time to open the books to your children? What's the appropriate age? Do you have a view?

PP:

Yeah, I do. I generally suggest earlier rather than later. I mean with my background, I'm really interested in parenting and parenting was wealth. It is a challenge. I'm always amazed actually at how amazingly, well kids, teenagers manage a lot of this having wealth, lots of opportunities, but also there are real responsibilities around this. The not telling kids about your financial situation and then something happens, and I'm sure you've seen this where suddenly it's like they've just got this enormous amount of money in their lap and they have no idea what to do and who to talk to. It's the same with anybody who wins the lottery. Most of them tend to just lose it. I think we need to having these conversations with our kids earlier rather than later and build up their financial literacy and also be really clear around confidentiality. I've had 15 year olds in five days of family meetings where we are talking about everything from succession to how they're managing their property portfolio to their business, to their other financial investments.

And these kids were incredible. And it wasn't like they had special advantages or anything like that. These are just normal kids going to the local schools. There was that sense of this is actually what it means to be in this family with that. So yeah, earlier rather than later on that, and I know what parents worried about is spoiled brats. That's the thing they'll constantly talk about. And there are ways that you can manage that. And a lot of that is the parenting stuff. Of course, when you have wealth, you can give your kids everything, which is not helpful and not good for the kids, but you can manage that in other ways for them having an understanding of what's going on and what that might mean for them, that is important I think. And then philanthropy also helps with that too, to be frank.

MH:

Maybe looking for some free advice on that. What are some of the most effective situations you've seen where you've seen families really have? Well-grounded kids that have got good social responsibility and a good understanding.

PP:

I mean, the key thing is just don't give kids everything. Make them earn pocket money. Get them a job after school, the value of money and also appreciating actually what they have. And that's in some ways where philanthropy becomes really useful because you get the kids involved with that and go out and actually just see how some people live and what that means around that. Kids need all kids limits, boundaries, clear messages, all of that sort of thing. I don't think we can outsource our parenting. The worst spoiled brats. I mean in the US I worked with a range of, the Americans are very good at screwing their teenagers up. You could just see massive amounts of money being given to these kids, but actually not love, not limits, not boundaries, not care. Those are all really important. They need you as parents around that. And I'm always amazed at how kids actually rise to the occasion and they start learning and they take the cue from you in a lot of ways. The big issue I think these days is of course social media. There's some terrifying statistics that the Economist has come up with, which is really worrying stuff. There's a psychologist called Jean t Twinge who's written some great stuff on this. All of that sort of adds into the mix here, but it's sort of keep it real, I think, in some ways with our kids.

MH:

That's great advice. Phil, we're about to run out of time, unfortunately. You mentioned earlier in the podcast that you're in the process of writing or finishing a book.

PP:

Yes.

MH:

Do you want to tell us a little bit more about that and when it's likely to be out?

PP:

Sure. So it's called working title at the moment is Risking It All. It's for families and business or family offices or families with wealth. It's starting at this premise of you are risking your two most important assets, if you like, can call a family and asset, but things you care about. And so it really takes people through, family members through around these are the issues you need to be aware of. Then how to actually address that. So there's a big section there around communication, around managing conflict and what is succession and what does that mean and how do we manage all that fairness and transparency around that. So it's aimed at, it's not a technical book, it's not how to invest or how to grow your business. It's all around the how do you work with your family. Big section in there around hats and also expectations that we put on our kids in terms of managing the expectations that we may have, which may not be realistic for them as they go through this. So I'm hoping it'll come out in April next year. I'm thinking of doing a couple of the chapters as separate papers as well and start getting that out. I mean, it's interesting. A number of my referrals come from Daughters-in-Law. They're completely freaked out, and so this is the ideal book for them. It's read this, this actually will give you some really good advice on what to be thinking about and how do we manage it going forward, and obviously sharing within the family.

MH:

Phil, I'm sure this conversation has piqued the interest of not only a lot of our wealth advisors, but maybe some of our customers as well. What's the best way for them to get in touch with you,

PP:

Philip, with one l@familybusinesscentral.com is probably the easiest. I'm on LinkedIn or they can look at the website, which is family business central.com. So yeah, I'd be delighted to chat with anybody around this stuff. I mean, it's a great area. I mean, I love it. I really do.

MH:

Fantastic. Phil, thanks so much for joining us today and hopefully get you to another event in the near future.

PP:

Yeah, that'd be great. Thank you, Matt. It's been really fun. Really enjoyed it.