#Family Business Advisor, #2008 Archived
Last month, we explored four common impulses that do not promote rational decision-making. In the sale or transfer of a Family Business, these impulses can often lead the client or Advisor off track or down blind alleys. In addition, we discussed a variety of strategies to counter these impulses. This month, we will review another four impulses that can lead us to incorrect conclusions.
- Lack of Preparation before the Sale or Transfer of the Family Business. Our fifth impulse is
the dread many owners feel prior to the sale or transfer of their Family business, unless they have
prepared for what they will do after the fact. Some owners travel, take up new hobbies or expand
the ones they already had. Once their circumstances change, their lives are typically neither as bad
nor as good as they had expected—another case of how bad we are at estimating. People adjust surprisingly
quickly. To counter this tendency: Anticipating the income needs of the Owner well before
the sale or transfer, so that the funds are available when needed. This discussion must happen
well in advance to direct the investments, and is the key to a successful transition.
- Desire to Conform to the Behavior and Opinions of Others. Our sixth impulse is a fundamental
human trait, and is an accepted principle of psychology. Many times, it is the opinion of an unknown
tennis partner or bridge player that dictates the subconscious direction of the Owner. Until
that opinion has been exposed to the light of day, it may be fruitless to discuss the matter
further. The pressure to follow the herd rather than rely on one's own information and analysis is
almost irresistible. To counter this tendency: Take the road less traveled. Many of the best strategies
break away from the trend.
- "Throwing Good Money after Bad." Our seventh impulse occurs when large projects overrun
their schedules and budgets, and the original economic case no longer holds, but companies continue
investing in it to complete the project. This relates back to the brain's impulse to support its
earlier inaccurate estimates. To counter this tendency: See #8.
The converse of this is the hesitancy to make continued investments in the business based on our
own subconscious withdrawal from the active affairs of the business due to health or other
Example: A person is extremely against committing any type of reinvestment in the
business, despite the willingness of other parties to purchase the business on very lucrative terms.
- Lack of Challenge for a Dominant Type Person's Strategies/Proposal. Our final impulse is the
tendency for people to project their way of thinking onto other people--assuming that everyone else
thinks the same way they do. Particularly when the Owner is a dominant entrepreneurial type individual,
many subordinates around the Owner will tend to tentatively agree or not oppose the
Owner's thinking. We can be easily influenced by dominant individuals and seek to emulate them.
To counter this tendency: We must be attuned to these potential impulses and obstacles. It is critically
important that Professional Advisors work cooperatively, communicate frequently, and
provide a counterbalance to this tendency toward false consensus. Every strategy needs to be tested
by a detailed refutation. A team member should be designated to identify the flaws in the strategy
being proposed by the team.
Steve Robison has assisted Advisors and Family Businesses in successfully navigating the sale or transfer
of their Family Business with the lowest possible tax impact and the greatest value for the parties
Warm appreciation for material prepared by Charles Roxburgh's "McKinsey's Study on Behaviorial Economics," London, UK