Jonovic Proposes Major Restructuring of Outside Advisors
by Shel Horowitz
It felt a bit like Comedy Night at a local club, as Don Jonovic kept Family Business center members rolling in their seats with one quick one-liner after another. But underneath the laughter were some very important messages.
Jonovic, with 25 years experience consulting to businesses and his name on the cover of seven books, spoke to the Family Business Center at the Inn at Northampton September 15. Despite his talk's title, "Surviving Family Business Whitewater: Strategies for Achieving the Real Purpose of a Family Business," he wasn't discussing rafting and he wasn't discussing President Clinton.
Rather, he focused on setting the core agenda for a business: the overall goals that will inform every decision, every day.
And, he pointed out, many business owners go about this all wrong.
Take the goal of tax avoidance. It's near and dear to many business owners' hearts, but looking only at that goal is short-sighted in terms of the company's future. "Now we have hundreds of thousands of businesses owned by 10-year-old kids; you cut the value of the business in half." So while taxes are cut to the bone, the worth of the company, both in itself and in its ability to be leveraged, is sharply compromised. In other words, what Jonovic calls "owner value" is hurt.
Tax avoidance has to be balanced among other equally important goals: meeting the owners' needs, protecting owner value, fairness to the heirs, even managing disasters (or staving them off ahead of time through good planning). For instance, if a CEO doesn't trust the children's relationship partners, a solid prenuptial agreement may be more important than avoiding taxes.
Also, many businesses suffer by structuring meetings that exclude important players. If stockholders-or family members outside the business-are affected, they should be part of the decision making process. "The longer we go with owners who are unsophisticated" about financials, the more you court disaster.
So, he says, make shareholder education a priority. "By leaving shareholders ignorant, the potential through destroying your business through inaction is significant. If you're not willing to learn what that investment means, let me buy you out." He decried the "mushroom strategy": bury your head in crud and keep everyone in the dark.
Jonovic identifies seven key survival strategies for any business. In his words:
- Understand who we are
- Decide why we're here
- Combat anarchy
- Check the hermetic seal
- Prevent procrastination
- Avoid the semi-retirement scam
- Compensate strategically
A couple of these need a bit of explanation. The anarchy has to do with competing points of view-such as entrepreneur, investor, and manager, all of whom have appropriately different goals and strategies-as well as destabilizing influences from such players as children's spouses-whose strong agenda may not be based on real-world knowledge.
Why does he call semi-retirement a scam? Because he sees it as a lose-lose compromise. The next generation is faced with retired Dad coming in and countermanding everything form the position of the couch to major questions about expansion, product line, suppliers, etc. And the senior generation, coming back from their extended Florida vacations, no longer has the day-to-day knowledge base.
One of the issues: "We all become increasingly incompetent at what we do best; we know too much!" In the beginning, we business owners are "too dumb to know" our goals are impossible-so we achieve them. later, conservatism interferes with our decision making.
And the hermetic seal is secrecy, which Jonovic sees as highly dangerous. Whether you hide your failures in the early years or your successes later on, you can't get meaningful advice if your advisors don't know your true situation. "It's really interesting when we get together with someone to plan our estates and don't want them to know our net worth. You don't want anyone to know anything so you DO IT ALL YOURSELF! It's OK to take off all your clothes-the net result is a joyful thing. The same is true in a family business."
And that leads to Jonovic's strongest suggestion: get yourself a real, highly functional advisory group, and actively solicit their advice. Include your attorney, your CPA, and your insurance/estate person. But don't use them in the traditional ways! "Professionals hesitate to give a direct answer because they're flying blind. If you educate them and they [still] say, 'it depends,' you've got a right to slam their head against the wall and say, 'that's not good enough."
Throw away the old model of having them work individually, in a vacuum, while you watch the clock because you're paying by the hour. Hourly fees are "like buying an automobile by the pound." And this interferes with the relationship between the advisor and the client.
Rather, he suggests:
Force your advisors to work as a team, with regular quarterly meetings, advance agendas, action steps, and minutes-and the client doesn't have to chair these meetings! Let them educate each other on what they need to effectively serve on the board.
Put them on retainer for the "learning and thinking time" of board service (but pay them per task to implement their recommendations-so if, say, your advisors suggest creating a trust, your attorney gets compensated for actually putting the documents together).
Set and evaluate objectives at least annually.
Among the advantages Jonovic sees in this model:
- You've created a team while controlling the cost.
- Your experts learn a new business (yours), which will help grow their practices
- They gain a significant opportunity for larger billing, as they create the instruments necessary to carry out the board's recommendations
- They must work cooperatively to recommend and vet solutions; they avoid competition
- Because they want additional referrals from team members, the quality and productivity of their work is higher; "add 10% to the normal good quality of their advice," as they each strive to show how good they are in front of the others. (He refers to this as "appendage matching.")
So..when are you setting up your advisors?