“Can You Pass the Turkey … And How Much Money Did We Make Last Month?” The Pitfalls of a Family Member Investor
Ahhh the holidays are among us again (I have no idea how!). Next week, most of us will gather to give thanks for all that we have, as we sit around a table full of turkey, stuffing, sweet potatoes, gratitude, and laughter. And if you’re an entrepreneur with a family member investor in your business, that table may also be filled with some difficult questions, uncomfortable conversations, and awkward silence.
As an entrepreneur, starting a new business is about excitement, courage, and dreams on one hand and anxiety, uncertainty, and often, a lack of funds on the other. And when it comes time to getting those funds, some look to their inner circles first. In many instances, it’s the only viable option, and family and friends become the lifeblood of the new venture. In fact, it has been noted that over one-third of startups have raised money from friends and family – to the tune of $60 billion per year.
Family Member Investors – Some Advantages; Some Pitfalls
There are, of course, several advantages to having a family member invest in your business. First, he or she knows you personally and is likely investing in you more than your venture. This level of trust and familiarity is something you won’t have with other investors.
A family member or friend will also likely be more flexible with the terms of the deal (although, as discussed below, there needs to be strict boundaries). They may agree to a lower rate on return, longer repayment terms and a lower interest rate (if debt is part of the deal), and less equity, and/or have fewer overall demands.
While the above factors can be extremely advantageous to any start-up, issues often arise when the disruptions of an early-stage venture cause entrepreneurs to mismanage these relationships, including overpromising, undervaluing, and lacking communication overall. Additionally, the family member investor may begin to think that they are entitled to everything under the sun, including every piece of information and much more of the money.
How to Avoid that Uncomfortable Conversation over Turkey
You’ve decided to move forward with a family member or friend investor. So, what can you do to have a nice Thanksgiving? First, awareness of the potential pitfalls of having those closest to you invest in your business is key. Most of what you can do comes down to communication and keeping them well informed not only about the business decisions you’re making, but also about how you are allocating the money. With that in mind, here are some tips:
Always treat your family member or friend just as you would any other investor.
Provide a well-thought-out and strategic business plan for them to review.
Stay confident, but don’t overpromise. Enthusiasm is great; overpromising is not. They need to understand the risks (hint: put them in writing).
Set boundaries on both sides. Yes, they’re family and friends, but now they’re also investors. There needs to be some boundaries. Remember – keeping them informed does not mean unfettered access to you or your business.
Don’t take money from those who can’t really afford it (even if they want to give it to you). This investment should never come from their life savings or retirement accounts, which will create an enormous amount of pressure on you. The question should be – What can they afford to lose?
Invest yourself. Family and friends (and any investor, for that matter) want to see you have skin in the game.
Don’t take money from family to invest in your business (especially a C Corporation) and then use that money to pay personal expenses.
Set up a meeting to discuss the specific conditions and expectations of the investment. Some questions to consider:
Is the money an investment, a loan, or a gift?
Are they getting equity? If so, how much?
How are you valuing the company?
What rights do they have with regard to decisions and to information?
How is the money going to be used – product development, marketing, salaries?
Clearly agree on everything, and put it in writing (preferably drafted and/or reviewed by attorneys on both sides).
Set regular meetings to keep your investor informed (at intervals decided upon in your agreement).
Keep with the data and the facts. Don’t embellish.
Provide them with all relevant information – they should know about the struggles, just as much as the successes.
These practices will let your investors know you’ve thought things through, while giving them the satisfaction that they’ve helped make a real difference in your business. But, at the end of the day, before you decide to go down this road, consider if you want your investors asking you questions about business as you carve your turkey next year.
Barker Associates has extensive experience in investor deals and management. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
The Impact of Management Practices on Business Outcomes New Research Shows Direct Correlation with M&As and Financial Performance
It’s no secret – good management is good business, plain and simple. But is it possible to actually quantify the impact on business outcomes, such as mergers and acquisitions and financial performance? According to research conducted by the Harvard Business Review, we can.
In an effort to determine whether there is a direct correlation between management practices and certain business outcomes, researchers used data from the US Census Bureau to examine the practices of 35,000 manufacturing plants. And while it is well established that much of management may be subjective, including leadership styles and how they align (or don’t) with various team members, objectivity can be found with the right questions.
Quantifying Management Practices
According to the article discussing the research, studies were conducted using more unbiased, neutral questions, leading to more definitive, measurable answers. For example, questions such as how much managers tracked employee performance, if they used the data found to improve practices, how production goals were set, and if they utilized standardized incentives are a few variations. Other questions included:
How many key performance indicators (KPIs) were monitored at this establishment?
What best describes the timeframe of production targets at this establishment?
What were non-managers’ performance bonuses usually based on?
Answer choices provided were specific and assigned a value. As noted in the article, “For example, responses to the question ‘What best describes what happened at this establishment when a problem in the production process arose?’ were: i) No action was taken, ii) We fixed it but did not take further action, iii) We fixed it and took action to make sure that it did not happen again, and iv) We fixed it and took action to make sure that it did not happen again, and had a continuous improvement process to anticipate problems like these in advance.” The results were gathered and quantified to define more structured management practices as those that were more specific, formal, and frequent.
Impact on Mergers & Acquisitions
Researchers then tracked mergers and acquisitions among the companies included in the management practices study with additional data from the U.S. Census Bureau. The intent of this comparison was to quantify the extent to which management practices influenced outcomes in mergers and acquisitions and overall financial performance.
The findings included the following:
Companies with more structured management, operations, practices, and procedures are more likely to become acquirers in an M&A.
Companies even one deviation higher in management score were 7.5% more likely to become acquirers.
Companies with less structured management and fewer standardized policies and procedures are more likely to be targets.
A mere one deviation point lower in management score resulted in companies being 2.8% more likely to become targets.
There is a strong spillover effect post-acquisition. A target company is more likely to adopt more structured management practices, similar to the acquirer company.
The management scores of target companies increased by an average of 26% post-acquisition, including additional KPI monitoring, goal setting, and incentives.
There is a direct correlation between improved management performance and productivity. “[F]or plants whose management scores increased by one standard deviation following their acquisition, productivity increased by an additional 3.3%, while value added per employee, value added per worker-hour, and profit margins increased by an additional 3.13%, 4.19%, and 1.16% respectively.”
Ultimately, the last point is what we should all take out of this research. It’s about much more than the effect management practices have on mergers and acquisitions. Rather, it exemplifies the importance of structure in management practices that affect the day-to-day operations and productivity of a company. Simply, it adds value, which will inevitably improve business outcomes – whether its M&As, increased profitability, or looking more attractive to investors who understand that implementing stronger management practices now is an effective strategy for long-term success later.
Barker Associates has extensive experience in both specific CFO needs and more general management practice ones. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Attention CFOs: Financial Targets Don’t Motivate Employees Tips on Motivation Minus the Numbers
Without a doubt, as CFOs, our language is the language of numbers. Simply, numbers make sense. So, it’s probably no surprise that we use them more often than other people. And while it seems intuitive to us that numbers are a great way to motivate employees, that thought process tends to be counterintuitive to others.
Most people appreciate having a clear-cut goal to meet—something to strive for and work toward. However, financial targets don’t generally motivate employees in the same ways. Financial results are the outcome of hard work, performance, and productivity, not the cause of it. As such, when we focus on the numbers, employees don’t feel as if they have control over achieving that goal and ultimately begin to feel less motivated. In fact, using financial targets has actually been said to decrease morale among employees.
This is not to minimize the importance of financial targets and metrics. Let’s face it—we’re CFOs, to us, there isn’t much else that is more important. And logically, we know that if we don’t hit those numbers, we may not be able to pay those employees we’re so worried about. But just because financials are important to the company does not mean they’re an effective motivational tool for employees. Rather, if we want to motivate, we need to bolster support for our organizational purpose, emphasize the value the employees bring to it, and focus on their specific impact on customers or the community.
Three Tips to De-Emphasize the Numbers in Motivation
Reevaluate what you communicate.
Put the metrics, measurements, and dollar signs aside for the time being. Instead, communicate goals over which employees have some control. They should be able to clearly see what they can do to help achieve company goals. Of course, some numbers will likely need to be included, but be cognizant of keeping the focus where it needs to be. Increasing focus on numbers will decrease focus on what actually needs to be done and dilute the overall strategy.
Be specific and use emotion when you talk about customers and clients.
Employees are more likely to go the extra mile when relationships are built, and they can see individual, specific, and actual impacts on those relationships. They want to know what impact they are having on customers and the community. Employees want to feel good about what they are doing, so show them the impact they are making, not in the aggregate, but in specific instances.
Do not overshare every metric.
Employees generally don’t need to know every single item that is being measured regarding financial performance. When all they see is numbers, they feel as if they have to figure out how to get there when really it should be the other way around. Tell them what they have control over and then the goal that was met because of what they did to get there. Think about where you want to direct their attention and remain focused there.
A Harvard Business Review article described it best, “You cannot spreadsheet your way to passion. With ambitious goals on the horizon, it’s tempting to double-down on financial metrics. But hitting financial targets requires employees who are excited and care about their work.” This has never been as true as today. Employees want to feel appreciated by leadership. They want to have joy and pride in their work. And as we talked about previously, they are far less likely now to tolerate anything less.
Barker Associates has extensive experience in both specific CFO needs and more general leadership ones. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.