Featuring:

Samy Dwek, Chief Executive Officer, The Family Office Doctor

Matthew Semino, Senior Client Strategist, BNY Wealth

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[00:00:29] Matthew: Hi, I'm Matthew Semino, senior client strategist at BNY Wealth and the host of today's episode. Welcome back to Your Active Wealth. The sale of a business requires prudent planning, proactivity, and a team of experts to ensure it is executed smoothly. These factors grow in importance when contemplating the sale of closely held family business. In fact, most family offices that are established as a result of entrepreneurial endeavors will eventually need to navigate this process. While tax implications and other financial outcomes are understandably top of mind with any sale, family expectations are just as important, especially when the livelihood of the family is at stake. As a result, pre-transaction planning, which aims to determine how the proceeds will be used, must also examine the expectations of adult children, their spouses, and their offspring as they pertain to potential distributions. Samy Dwek, Chief Executive Officer of The Family Office Doctor, believes this is one of the most important discussions a family will have. As an experienced consultant, Samy has built a reputable practice out of helping families review their operations, in addition to helping them bridge generational gaps pertaining to financial decision-making. In today's episode, Samy will walk us through how family expectations can impact the sale of a business, as well as why it's so important to start the conversation early. He'll also provide anecdotes from years of experience to paint a detailed picture of how to overcome potential conflict that can arise from difficult conversations. It's my pleasure to welcome Samy, a returning guest who joined us last June. We're delighted that he will share even more of his valuable insights. Welcome, Samy. Hey, Matt. Hi, Samy, thank you for being here today. To begin, can you tell us a little bit about your experience working with entrepreneurial families?

[00:02:17] Samy: Absolutely. So, I was born into an entrepreneurial family. So, this isn't by happenstance or by education, it’s by life experience. I grew up in a family that created a family-owned business in the north of the UK. My late grandfather was the founder. His sons were the second gen. I am the third gen and no, I did not destroy value, but at a very young age had to work in the family business and was exposed to the different issues that impact families with a family business. In fact, in our case, because I took a decision early on, age 16, by the way, that I did not want to work in the family business and was very clear in my communication to my family, my father took the decision to exit. He said, well, what's the point if my son won't take over? One of my uncles then took the same decision. An MBO, LBO then ensued, company was delisted, and middle brother bought the business. That was my entree into this, probably unaware that my life would take me on this journey to where I am today. What was also interesting as I was surrounded by other families of a similar type that have family-owned businesses, then through, you know, working in finance, I was exposed to additional families across the globe. And it was very interesting because every family is different. Cultures are different. The way people communicate is different, but I've been very, I suppose, honored and privileged, to have had these different experiences that enable me to kind of help families talk through the potential issues that can arise, not just when deciding to exit the business, but throughout the whole process.

[00:04:01] Matthew: Fascinating. So then why, based on your experience, why is communication so important for families that are considering the sale of a closely held business? Are there lessons that you can share here?

[00:04:12] Samy: If you read my blog in the other conversation we had last year, you'll see that one of my probably core concepts, core thesis for anything in life is communication. It all comes down to communication. Families need it probably more than anyone else and especially in the context of a family run business. Because you may well, in most cases, you're going to find family members in the business. They're running the business that part of the business, they're helping grow the business. Hopefully they're not destroying the business but hopefully growing. And on top of that, you may actually have the in-laws involved in the business and I've come across a lot of families where the in-laws are involved, and we shouldn't forget the in-laws. The spouses should not be forgotten. They're the bedfellows of our kids and they have a say if it's not direct to you, it's indirectly to you. So have them part of a communication. Communication is everything. So, think of it this way. I'm founder of the business. It is no different than whether I had a baby. I've nurtured that baby; I've looked after that baby, I've helped see the baby grow and taking a decision to sell is a very difficult thing. Now, when it comes to selling a business, these conversations are critical. And I'll give you an example. I was dealing with a family who is in the communications business. Father had four kids, the youngest child was the one who was running the business. And for him, he saw it that when dad would retire and leave or exit, dad would leave him the business - assumed, never communicated, assumed. Okay, very important. Dad decided something completely different. Dad decided to sell the business. Dad did not consult with his kids, especially the CEO who was running the business, his son. And one day, son wakes up and Dad has sold the business, pulled the rug from under his legs, and this was traumatic. Traumatic for him, he felt betrayed. He believed this was his birthright. He's worked in this business; he's helped build it. And it's not about the payout. Dad was looking at the pay out, siblings were looking at pay out. He was probably interested to buy the business. He wasn't even given the option to bid to buy the business and that all boils down to a lack of communication. So, everyone talks about pre-transaction planning, I look at pre-family conversation planning, right? Have those conversations within the family of what are the expectations. What do we intend to do with the proceeds? Do we intend to distribute them? Do we tend to invest in another business? Like, what's the plan? Maybe, maybe dad doesn't want to give any money to his kids. He's under no obligation to give money, but they believe they’re due their share, and again, all of this, this lack of communication, that common thread, right? Then it's going to build into issues that could potentially pull this family apart.

[00:07:29] Matthew: So what you're highlighting, I hear, is differing family expectations at some points in time. So what should the matriarch or patriarch do if there's a major disconnect between their plans for the sale of the business or their distribution plans and the family's expectations or different family members' expectations?

[00:07:46] Samy: Well, I think the first question is, do they know if there's a disconnect because they probably don't, right? We live in our own realities and, and we assume, right. And that's a big risk. So, is it my reality or is it the family's reality? And this is where family meetings are just so important. That pre-transaction family discussion. Like, “Hey kids, I'm considering selling the business. What do you think?” or “Maybe I don't care for your input, but I'm making you aware”. And this the plan, lay it out. That's my nest egg for me and your mother. And when we're gone, we will determine how we want to split it because that is our right. Have you had that conversation? Do they know that that's your expectation? How about listening to what their expectations are? It doesn't mean you have to acquiesce, but you need to be aware. Because if you're aware and you don't just dictate, now we can start having a conversation and potentially diffusing potential situations that may arise down the road. But if we just summarily decide, well, “I'm doing this and that's it, thank you very much”, and you walk away, I will guarantee you there are going to be issues and potentially, if one of your kids feels very hard done to, it could end you up in court, whether rightly or wrongly, it's not relevant, it's emotional. This is emotionally driven. Family-run businesses are emotionally driven. Right. It's a family-owned business. It's personal. More personal to the matriarch and patriarch. They're the creators, but don't think the kids don't have some emotional element as well. They do, especially if they're working in it. It's very personal.

[00:09:29] Matthew: I'd love to dig into that a little bit deeper. So, do you have any examples or anecdotes of situations where family leaders fail to engage in these types of discussions in the pre-transaction planning with other family members?

[00:09:43] Samy: Let's take out the business for just one second. Let's make this very personal. You and your wife have a child. You bring up that child. You may have other children. Are they responsible for that child? No, you will always look at it as it is my child, me and spouse created this. We put the effort, we put the blood, sweat and tears, quoting Mr. Churchill. And then my other kids feel that they have a right to tell me how and what I should do with that child. And so there's this assumption, well, it's really none of their business, it is mine. I created this, I built this, I made this. So, I think in many situations there is a lack of communication. Now, there are families who are very well situated, i.e. they have regular family meetings. And if done right and you have these discussions, have hypotheticals, what if we were to sell the business? What would you do with the money? Are we going to give it to charity? I came across a South American family that in every generation they exit the business. And most of the money is given to charity and only a portion is gone to fund the next gen business operations to kind of keep them hungry that they don't become that third generation, there always the first generation, and there's some merit to that. So, people know from the outset that there is no expectation of expecting more than initial funding, but the matriarch and patriarch have to have those conversations of yes, we're cashing out. Hey, you want to start something? Let's have a discussion. Bring me a business plan. Let me see. I may put some seed capital, but I want to see you have skin in the game. Go raise your own capital. I'll give you direction because I've done this. I can show you where the pitfalls are. It's all about communication. It's about talking. But the kids equally need to raise to their parents. This is my expectation. And many families are concerned of having spouses at the table. But again, spouses have influence. And spouses have points of view, and it's going to impact the conversation. So, whether you keep them out or not, they're involved. I much prefer to have them part of the time at the table to hear their views. Have them voice it.

[00:11:56] Matthew: So obviously, navigating these familial issues can be quite challenging at times. If a family can't do it on their own, what role would external counsel play in helping resolve some of these issues?

[00:12:11] Samy: Yeah, one has to be very careful there. Let's be clear. I'm matriarch and patriarch. I've got my council. I've got my like board of advisors call it, right? I've got my lawyer, my banker, got my accountant, listen to the key word in my sentence - my lawyer, my accountant, my banker. Do the family members perceive them as yours or ours? Big distinction. The minute they're yours, they're not ours by definition. And they will be considered not to be aligned with the views of the family, but the views of mom and dad. Rightly or wrongly, that's how they're going to see it. So, in these situations, it is my personal opinion that as much as you can, you want a neutral third party to intervene because at that point you can manage to have conversations where no sides are taken. Think of it a bit like a mediation. You have everyone in the room together. You kind of set the scene, then you separate them out and you find a middle ground and you cut out the emotion. The minute you bring one of your advisors, it's emotional, it's your advisor. The biggest issue you will see in any industry with the next generation is, I want my people. I don't want your people. They're your view, they're your DNA, they're your background, they your generation, they don't reflect me, right? And we hear this in every generation by the way, right. I'm sure we said it to our parents. And now our kids are saying it to us, and their kids will say it to them. So as much as you can, you definitely want someone neutral, that the family sees as neutral, not that you see as neutral. They equally have to see them as neutral, very important.

[00:13:55] Matthew: Well, as we know, entrepreneurs and business owners, they put their blood, sweat, and tears into building these businesses frequently. So what are some of the emotional considerations that business owners should think about as they contemplate the sale of a business as they go through that process?

[00:14:13] Samy: I'm going to get really touchy feeling. It's personal. Everyone is personally invested. Even if you didn't create the business, even if you don't work in the business, especially if the business has your name and your legacy, you feel personally invested. In my case, the family business did not have a very unique name. It was Dwek group. It had our family name, so it was personal, right? If someone spoke about it, I'm carrying that name. If the business did something wrong, that reflected on me, even if I was too young to be involved. So it's totally emotional. Every discussion is emotional. Spouses are emotional, rightly so. They're invested. This is their nest egg for the future. Their husband or wife is working in that business, and they go at some point, we're going to have a cash out, we're going to have more cash in the bank, we can have quality of life, less concerns. Expectation is also emotional. So we need to manage all of those. And again, that comes through conversation. This is not a one meeting thing. This is meetings over years, right? Ongoing conversations, preparing the ground, you know, a family meeting should be an amalgam of so many different things. Who are we as a family? What's our values and our legacy? What do we represent? What's our structure? How does it work? What is the setup? What would happen if? Where's the money? What's going to charity? What's important in philanthropy? What are the pillars of philanthropy? It's all emotional because it's all personal and it's related to you as a family. A corporate, like a pure corporate. And I mean this respectfully, let's take BNY, you're a corporate. You're not owned by a single individual. You're owned by shareholders. It's much less emotional, it’s much more corporate. Family business is all about the family. The business is second. I just want to add one final thing. I wrote a paper a while ago of what type of family are you. Are you family first or business first? What takes precedence when you're looking at the business? You look at Estee Lauder. The brothers couldn't get on. They sat down and had a conversation. Are we family first or business first? And they decided family first. The integrity of the family was more important than the business, so they sold. They exited because for them, they didn't want to risk their relationship for the business, so they took that decision. And that's emotional. There's no right or wrong. You could be business first, say no. Family takes second seat, business takes priority seat. It's funding our life.

[00:16:58] Matthew: We've talked a lot about the pre-transaction planning and the considerations there. So now we have the great liquidity event, ashes to be distributed. You have a tremendous amount of experience in private banking, wealth management. From a brass tax practical standpoint, are there any strategies that families should consider to avoid conflict or lessen conflict in the distribution of cash proceeds following the sale?

[00:17:27] Samy: The first thing is you need to discuss it before the cash out, because if they're expecting $10 million, a hundred million dollars, a billion dollars to hit their bank account, and it doesn't boy, they not going to be happy. So don't forget, you've got to have that conversation. Now, when, when the deal is done, you've sold the business and hopefully the family members know beforehand. Now it's a matter of, well, okay, how was the transaction put together? And one of my strongest recommendations, and keep in mind I'm not a banker, I don't work in finance. One of my biggest recommendations to any family contemplating or in the process of selling a family business, do make sure your private banker is involved in the conversation. Investment bankers are thinking of the exit. Private bankers think about, well, how do you receive the money? And your attorneys, by the way, how are we structuring for it? How are we receiving it? If it's all cash, that's one consideration. And if it's cash and shares, you want to have a conversation around the lockup. Can I hedge it? Can I get a put? Can I do a 10B5-1? All these kinds of considerations you need to think about, right? Again, if you're selling to a big company and they give you some stock, you're now in a position where you are exposed to a company you have zero control over. And if the company does something bad, your value of your cash out can diminish very quickly. That's very important too. When you've done the cash out and cash hits the bank account, do me a favor, don't rush to invest it. Let the dust settle and just think for a second because your priorities are most likely going to change. You may not realize it because until you see the money touch your account, that new reality has not yet set in. So let the money hit the account, don't be in a rush to invest. And now start to plan. What is the plan? What do I intend to distribute? What am I going to gift? What is going to philanthropy? All those different buckets. And then each bucket is going to have a different time horizon and a different manner of investment. Am I keeping dry powder for new businesses? And until the dust settles and reality is set in, it's kind of like when you go for an operation and they put you under anesthetic, you're kind of numb and they tell you, please don't make any big decisions until it wears off. Same recommendation, right? You're still numb. You've gone through a very traumatic period. You don't realize it. It's traumatic because it's emotional and you're a little bit numb to what's going on around you and reality has not yet set in. Just take it easy. Let it set in, by the way, also keep in mind, what's my net that I'm going to have? Like, what are my tax considerations? When am I going to pay that tax? Because if you start investing everything and then, oh, April comes along. Oh, I've got to cut a check. It's all invested. That's a problem too. So just let the dust settle and start to build a plan. It's okay to make it take a bit of time. Don't be in a rush. Even if the market moves in the first couple of months, if you're a long-term player and your long-term families, over time you may have lost a good entry point, but it's so much more important to have it structured right. The wrong asset allocation, rushing to go, all these kinds of things can be so much more detrimental to your assets than thinking it through and having the right asset allocation and the right plan.

[00:21:00] Matthew: We're in a tremendously interesting market environment right now.

[00:21:04] Samy: Understatement.

[00:21:05] Matthew: We've seen a great deal of volatility over the last couple of weeks. And while we know that every family office is a snowflake, how do you see this environment and impacting considerations for families to sell their businesses?

[00:21:20] Samy: Families, I mean, they care a little bit about the environment. It depends how they're being valued at the end of the day. And it comes back to, I keep repeating myself, forgive me. It's an emotional decision for a family to sell. They have that kind of dollar amount in their head, and it may not always be rational. Sometimes they're forced sellers, right? There's something happening in the family, death in the family, kids don't want to be involved. Then they don't care about the state of the market. They want to cash out because if they hold the business because they're not the ones to run it, they could do more harm than good, so better to get more than less. Again, my perception has been, yes, markets can somewhat impact. It's that end of the day, it's dollar value. If they've got the mindset to exit, they've the mindset to exit and it's coming sooner or later, then it's of the right buyer at the right price. It's will someone pay me what I think it's worth? It's that simple.

[00:22:17] Matthew: So we sell the business, we have a large cash payout. Are you seeing any trends with families and family offices in terms of how they then put that cash to work at the next phase?

[00:22:29] Samy: Every family is different. You can't paint them with a broad brush. Some are open to illiquidity, right? I mean, if you're a long-term player, you should take the long play of illiquidity carefully, thoughtfully. If you look at a lot of family offices, I think you'll find they try to act a bit more like an endowment, so they have a portion in hedge funds and private equity, hard assets, like real estate. And commodities, and then the liquid assets so that they can fund their day to day. Look, the way I see this, you've got two types of people. You've got the trader wants to take advantage of these big market movements, very risky, very short term, and then you've got the long-term players. Most family offices are going long-term. I've seen a couple who are traders, but that's more the exception than the rule. Think of it this way. It's the same way I see wealth management. Wealth management is like a tanker in the sea. It takes a while to turn that tanker. You don't make rash decisions and just kind of throw the ship on halt. And even if you did, it doesn't just stop moving. You make tweaks to the course and the speed. A day trade is like speed boat. Families don't think that way. They're long-term players, just like they were in their businesses. Private equity is about IRR. They want to get into a business and out and get the highest IRR and the shortest period of time. Families aren't built that way because they're emotionally attached to their investments. They're long-term players. They're in for the long haul. They're not in for just their generation but future generations. So generally speaking, again, I think you'll find that as more family offices are coming up and family offices are built of ex wealth managers predominantly doing the CIO role. They are more and more built like an endowment or a foundation and they're looking at the long term, not short-term plays.

[00:24:34] Matthew: Well, we've covered a great deal of ground today, so I wanted to see if you had any final takeaways for our listeners on this topic.

[00:24:40] Samy: I can't stress this enough because it's just so important for people to hear this. If you listen to this podcast and go and take notes, you're going to hear that key theme communication. So those family meetings, so important. It's never too late. Don't go, oh, well, we've never done this before. Well, start it. Start implementing it. It's not just for you. It's for future generations. Hey guys, it's going to be hard. Building a family constitution, building a family kind of mission statement. It's a journey. It takes time. It's emotional. You've got to have your say. You've got to put your feelings on the table out in the open. Have those conversations. You may have some tears. It's okay. And don't poke fun at people for their views. That's bad. Listen to them, acknowledge it. You don't have to agree with everything. But you have to have a conversation, starts with communication, start laying out the plans. The more you can have that communication, the more you could lay out those plans, the less likely you are to have horrors, incidents, lawsuits within the family and break up. That would be a terrible eventuality. Maybe you find a family member who wants to take over the business and as long as they are offering no different than you can get in the open market. Why not? If that's what they want to do, that's on them. Have those conversations, be open to feedback - even if it hurts - work with your advisors, make sure that everyone buys in to your advisors. It should be the families’ advisors, not the founders’ advisors. I wrote a paper maybe four years ago, Founder's Office Versus Family Office. Shouldn't be a founder's office. It needs to be a family office. Not just what the matriarch and patriarch want. It's what suits the family. If you want to be authoritarian, that's absolutely fine. But then communicate that, make sure they're aware, make sure they understand you're going to be taking the decisions and that's it. Again, it doesn't have to be everything for everyone. Leaders take decisions.

[00:27:05] Matthew: Well, these are fascinating and extremely helpful insights, Samy. Thank you for joining us today. To learn more about key considerations when selling a closely held business, I encourage you to reach out to a BNY Wealth Manager. Thanks for joining, and we'll see you on our next episode of Your Active Wealth.

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