Family Business Audiocast | Episode 16 | David Werdiger | The UHNW Institute

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About Our Guest:

David Werdiger is a consultant specializing in family businesses and high-net-worth households. With the publication of his bestseller, Transition, David has established himself as a trusted advisor, adept at navigating the intricate dynamics of wealth transfer and family governance across generations. His expertise encompasses a comprehensive range of critical areas, including succession planning, shared vision and governance, managing family conflict, and providing strategic guidance to ensure smooth transitions within family enterprises. His unique skill set and insights make him a valuable asset to families seeking to manage their wealth and maintain harmony across generations.

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[Transcript]

R. Adam Smith: [Intro] Welcome to the Family Business Audiocast on LinkedIn. I am R. Adam Smith, creator of this audiocast series. As an entrepreneur, investor, founder, investment banker, and board leader the last 25 years, I am fortunate for my many experiences within the family firm industry.

A warm thank you to our live audience on LinkedIn today – and for those listening in the future.

A brief comment on why I created this broadcast: private companies are a passion of mine, having grown up in a family of entrepreneurs, and having engaged for two decades in deals, strategic transformations, investments, and boards, with an array of fascinating family enterprises, family firms, and family offices. I founded this series to offer a useful platform for listeners to hear from veterans, academics, and leaders in the vast family firm ecosystem. Whether you are a family business owner, building, running, or advising a family office, or just expanding your family office activities, I hope these conversations are useful and enlightening. And now, it is time to turn our attention to our [01:00] accomplished guest on today’s episode.

I am pleased to host my friend David Werdiger from Australia, I presume, today. David, welcome to the audiocast today.

David Werdiger: Thanks very much, Adam. It's lovely to be here.

R. Adam Smith: Where are you today? Definitely in Australia?

David Werdiger: I'm in Australia and it's tomorrow.

R. Adam Smith: I'm going to brag about you briefly and then we'll jump in.

David Werdiger: Thanks.

R. Adam Smith: A few words on David. David is one of the world's most astute consultants to family businesses. He works also with high-net-worth families and their businesses on succession planning, as well as shared vision and governance, managing family conflict, and generally offering strategic advice. He's also a published bestseller of Transition, and he has assisted many ultra-high net-worth families to navigate the complexities of wealth transition with family governance over the generations.

[02:00] His extensive commercial experience together with a confidential relational approach to the challenges of family-related business issues, including transactions, succession planning, governance, etc., has allowed him to facilitate unique solutions for clients, tapping into his personal knowledge and highly resourceful professional network. It's really great to have you on today.

David Werdiger: Thanks again, Adam. It's good that this is an audiocast; people can’t see me blushing from that intro.

R. Adam Smith: No, it's great. I enjoyed meeting you the last couple of months and having a conversation on family businesses.

Let's start with talking about common challenges you see among the alternate-worth families and the family offices when it comes to succession planning and governance; and what type of conversations do you tend to have with them?

David Werdiger: Yeah, so with succession, probably the biggest issue I find is what's called the “sticky baton.” So, we can think metaphorically of [03:00] the incumbent generation handing, passing the baton to the rising generation like I imagine a relay race, and the young rising-gen family member is grabbing that baton. And — I'll say his father, because most often it is — and his father just doesn't want to let go. And I've had situations where families say, you know, the incumbent says, "Yes, I want a succession plan," but they don't really; something's holding them back, usually emotional because very often, particularly with the first generation, their identity is so tied up in the family business, the family enterprise, they've never thought about what happens after, what their life looks like after. If your entire life is your business, what is your life without that business? And so, a lot of what I do is about helping families overcome that by helping the [04:00] incumbent generation imagine design their life beyond being deeply involved in the family enterprise.

R. Adam Smith: And that also includes transactions when they sell their business ultimately…you've also been part of selling one of your businesses the last decade, I think.

David Werdiger: Yeah, so, I’m a founder as well. I’ve founded several businesses, so I've been on this journey myself. Starting a business is akin to having a child. When you have a child as an infant the child needs you 24/7. You’re up at 4 o'clock in the morning dealing with whatever you've got to deal with. It's like that in a business in the early days. But at some point, just like your child grows up, your business grows up, and you need to change your relationship with the business so that you can treat the business like an adult and eventually give it wings and let it fly.

So, in preparation for M&A, for a business exit, the big consulting firms will help you prepare [05:00] structurally and financially and organizationally. I help you prepare emotionally. My goal is to make sure that the day after the settlement when the owners have a lump of liquidity in their bank account, they don't have a matching hole in their hearts because something's missing from their lives.

R. Adam Smith: Yeah, I like that analogy. You've published a book called Keep the Founder’s Entrepreneurial Spirit Alive in Future Generations. I've talked about how I’ve dealt with private companies selling their business and continuing their entrepreneurial journey within that company, but also moving on to other companies. And in past conversations, we've also talked about legacy with Christina Wing, also with Matthew Hughes, and with Alfredo de Massis, some of our colleagues in the academic world and the consulting world. So, it's quite interesting to talk about entrepreneurialism.

So, [06:00] maybe talk about the mindset that can be fostered for future generations to support the legacy, if, that family business has a legacy indeed to continue.

David Werdiger: Yeah, so, I did a master’s of entrepreneurship a number of years ago and that sort of led me to this third career in the advisory space, and I wrote that paper about continuing the entrepreneurial spirit because I think it's something that a lot of families don't think about. So often founders will start a business, exit the business, and then tell their children not to do all the things that they did that led them to success, and it's quite bizarre, no? The ingredients for entrepreneurship — you need an appetite for risk, obviously, you need to have a bit of a spark inside you. And so often families, after the liquidity event, go into, oh, we have to protect the wealth [07:00] at all costs, don't take risks, but it's the very risks that got them to where they are. So, I think it's actually a mistake.

I think it's important to continue that entrepreneurial spirit because I think that's something that can be conveyed to the next generation.

And the way to do it — I mean, my own story, my father was very successful in business, and I had that in me because I saw that growing up. But I didn't want to be part of the business, I wanted to create my own businesses, and that's the path I took. So, a lot of it is about telling stories, making the stories of the family's journey of entrepreneurship, celebrating those, celebrating the positive, celebrating the values as well.

One thing that came up actually in the discussion I was in yesterday is how to convey to children an appetite for risk because you can convey to the rising generation the need to keep [08:00] building it and doing something new. You can't necessarily instill in them the appetite for risk because if they're already coming from a space where they have wealth, they don't have the financial need to build on that wealth necessarily. They may want to to make their mark on the family, but it's not necessarily financially material in many families, so you have to find other ways to light the spark, so to speak.

R. Adam Smith: Right, well money can be funny because it can be both motivating to have more of it, but it can be also this disincentivizing if you have too much of it.

David Werdiger: Yes, and that is the big challenge. If you've got too much, then what motivates you? The other thing about money is that every generation has got their own money story. The first gen that may have started without, and now has, has a particular attitude, a psychology of money that they form [09:00]  in early years, and that tends to stay with them for life. On the other hand, their children who are born into wealth, they have a different attitude to money, not necessarily a scarcity, but more an abundance mindset. And that can be difficult to reconcile because they view the world very differently, they view money very differently.

In some families, that second generation can have a negative approach to money because they might see an absent parent who's so involved in the business, they don't have time for the family, and they may form the view that money is a bad thing because money is what kept them from having a close relationship with their parent. And this psychology of money is very often below the conscious level so part of the work is to help people think about it and bring it into the consciousness so that they can at least be aware of it and possibly, [10:00] if they want to, they can change it as well.

R. Adam Smith: I think we see a lot of entrepreneurialism in family businesses thrive and continue, when there's a mission to scale and the mission to continue to build that single core company and to include the next generation in that journey.

This is particularly relevant for the conversations that we have as bankers, also private bankers, also tax planners, also trusted states, even family psychologists have to discuss - what is the glue between the generations to keep the business going? Sometimes there isn't a glue and the first generation, or whoever owns the business, has to sell it.

So, share a bit more about that entrepreneurialism and how it can flow through the generations, and also perhaps in seeding entrepreneurs for other activity.

David Werdiger: [11:00] Yes, so back to the shared values and mission and purpose, that really is the foundation of family continuity and legacy. And the business — I like to use the broader term family enterprise because it's not necessarily one business that has to continue. People throw out this statistic about businesses failing transition through generations, etc., and there's a difference between a specific family business and the broader family enterprise or family wealth. Not all businesses should keep growing or should stay the way they should forever. So when we step back and say, okay, let's think about what is the family purpose? What's it all for? What does it mean to be part of the family? What is our collective purpose as a family? And that goes to things like social capital, you know, what can we do together? [12:00] And what do we want to do together? And what do we want to do separately? And when the family has those discussions and is able to articulate it, that can really drive how the subsequent generations express that vision and purpose.

And again, they can share the same vision and purpose, but they can find different expression for it. And that's a very important thing to allow in entrepreneurship. The incumbent generation might be in a particular business line that has an underlying purpose. One of their children might say, I share that purpose, but I want to express that differently in a different business. And that's okay.

R. Adam Smith: Yeah, that's thoughtful. And talking about transitions and selling businesses, you are consulting, very actively, private companies that are selling. What do you talk about preparing them? You've got the financial side, you've got the operational side, the psychological side, the wealth side. [13:00] What do you start with and what other parties do you need to bring to the table to prepare for a private company sale?

David Werdiger: I often work with entrepreneurs on their business, again mimicking the journey that I've been on, and it's multifaceted. So, because I've got business experience as well as family dynamics experience, I can help them set up a board, establish governance within business, work on their own role within the company, and I think that's really important because the company should be worth the same with them and without them. That's the goal. The goal is to have the company sale-ready so that if you want to sell, if somebody comes knocking at the door with an offer that you can't refuse, the business is capable of executing a transaction. And that requires all of the dimensions, as I said before. [14:00] So, it's also the structural, it's the governance, it's the role of the owner. And that's very important because too many owners spend time in the business and don't step back and spend time on the business — it's an old adage from Michael Gerber, but it's so true.

And by helping the owners create that space and look at their roles and try to imagine, well, what does the business look like in the future without me? Who does my job? What are the roles that I do? How are they replaced? And this sits in governance because it's about business risk. It's about business continuity risk, it's about key person risk. All of those risks are dealt with in a business at the governance level. And that's one of the things I help business owners do. And I work at multiple levels within the business. And then at the appropriate time, we'll bring in  M&A people, your accountants, because I'm not either of those and I don't wanna be.

R. Adam Smith: Yeah, I tend to come in towards the end, either buying or selling a business. So, [15:00] how early on would you prepare from the very beginning, in having a conversation to hold the hands of the entire process? How far back do you go? 'Cause we have on the call…we have bankers, we have consultants, we have investors, we have lawyers, we have advisors, so everyone has a different piece of it. If you go all the way back, just walk us through the cycle starting from the first conversation.

David Werdiger: The first conversation is, why are you doing this? What do you want your life to look like? What do you want your life to look like in 10 years? And you can take a positive spin or a negative spin. The negative spin has happened to me. What if you get hit by a bus? I didn't get hit by a bus, but I had a prospect ask me. And that had me asking questions about the value that I was creating in the business. So you ask those deep questions. What is your business worth? What is the value you're creating? And you start as early as possible. And whether or not they've got an exit in mind — this is what I always emphasize — [16:00] it doesn't matter. It's about helping owners create genuine value.

And what is genuine value? Genuine value is something that can be monetized, that is worth something to somebody else. And that is a goal in itself. Not, I want to sell in five years or ten years or two years. That's not the discussion. The discussion is, I want to be ready to sell tomorrow.

Let's get to that point where this business is ready to sell so when the banker comes knocking on the door — and part of that might be also identifying strategic buyers, but it's more about making sure that the value of the business is realizable. I don't set a timeline on it. It takes probably at least two years to do it, depending on the nature of the business, so that's a minimum, but I don't want them running against the clock and I don't want them doing this under stress.

R. Adam Smith: Right. So, both to prepare with the luxury of time when there's [17:00] no rush and maximize the process, but also to avoid any negative outcome if something happens, if that makes sense.

David Werdiger: Yeah… because it's about risk. If somebody says, I want to sell in six months, we'll look at the business and say, not going to happen. Got to be realistic about it.

R. Adam Smith: Right. Having been in private equity and banking in my career, I've seen a significant amount of situations where the founder role is sometimes tricky and can impede a transaction or impede a transition for the private company, particularly when there's not investors. It gets a bit easier when there's investors in the company with the founder and the founder starts to learn governance, right, and relationships with those that have fiduciary duty and different goals of making money as opposed to the company.

But talk a bit about how a [18:00] company can reduce reliance on its own founder and what are the steps of that process? It's quite tricky when the founder really calls the shots.

David Werdiger: Yep, it is tricky. I recall in my own business; I was 100% owner for a number of years and then the CEO became an owner and overnight everything changed. I realized that I couldn't make the decisions I was making previously with the same level of autonomy. So, I think it is useful for businesses to have additional owners, whether they're through an ESOP or shadow equity, just to introduce the mindset of stewardship into the founder so the founder realizes this isn't mine, I'm the person who's responsible for this asset for as long as I'm responsible for it.

So it's about, again, viewing the business as [19:00] something that is not you intrinsically. It's a reflection of you, the owner and founder, but it isn't you. You are far more than that business. And sort of creating that emotional space between the owner's identity and the business identity so that the owner can start looking at life beyond them being owner and what that looks like. And then you come to start to lead it into what your roles in the business, you know, doing exercises like stepping back from the business and seeing what happens, empowering others.

Some founders find it very difficult to delegate, partly because they can do things better than everybody else, partly because they might find it hard to trust people. So, learning how to delegate, learning how to trust people, building those trust relationships so that you can be confident that other people will do things in your absence.

And the other thing is about business systems, [20:00] because the value in a business, again, going back to Gerber, is its systems and repeatable processes. So again, getting those ingrained in the business so that when anybody is absent, the knowledge in the business is able to keep the business running as it normally should.

R. Adam Smith: I think there's such a large amount of family businesses out there that are typically under-appreciated. And there's a lot of wealth built up, liquid wealth, right, in the operational company. So, if majority of these companies have a single founder or family founders, what do you see happening when investors come in in terms of that succession and transition? Do you feel like, okay, once an investor comes in, they've done a lot of the hard work, and that implicitly means that there is going to be more likely to sell? So it's sort of changing the game.

David Werdiger: [21:00] The very important thing about this is getting the owner to put themselves in the shoes of the investor. A lot of owners will say my business is worth whatever it's worth. And often they'll have an inflated sense of what their business is worth because they put their heart and soul into it and put so much effort into it. But they've got to set that aside and say, what's it worth to somebody else? Imagine that you're not there, what are they actually buying? What's the value that they're buying? So, when they get external investors, those investors are saying, first of all, what value am I buying? And second of all, very often investors are going to be looking to an exit beyond this first transaction. So, there are some buyers of a family enterprise who are buy and hold, but the majority of private equity are really buying to set up a next exit. So, we've always got to have that next step in mind.

[22:00] And the family, depending on who the acquirer is, they may be able to maintain a minority stake for a long time. They may be able to have an initial transaction that leads to an IPO and they can continue to have a holding in a listed entity for a long period of time. But even if they do, they're shifting from being owner-operators to just owners, and that's a very important shift, both in terms of the mindset and also what it means to be just an owner as opposed to an involved owner.

R. Adam Smith: What are some of the larger family-owned firms in the world out there that you admire that continue to be family-held but also growing substantially at the same time, despite the realities of family business?

David Werdiger: I like Hermes. I think they've done a fantastic job of growing, of maintaining their brand, [23:00] of using scarcity to maintain the value proposition of their brand rather than going mass-market. A lot of people think that you need to sell millions of something to make a lot of money. No, you don't. You need to really put a premium on what you're selling and the value you're delivering, and if you do that, you can do that to a small number of customers and still build a huge business. So, I really like the way they've done that. And they've been able to sort of fend off hostile buyers and still maintain control of their business. I like that. It’s a great story.

R. Adam Smith: Apparently, making very expensive handbags can be very good for gardeners as well. It's good to be a gardener. You might want to start a gardening business and work closely with family offices.

[24:00] What about in Australia? Tell us the most admired company, in your opinion, in Australia.

David Werdiger: Oh, I'll tell you a lovely story about a business called Baker's Delight, which is a franchise, a baking franchise. So, they've got all these franchisees, and they have a fantastic relationship with them. And the family received what you call an FU offer to buy the business. And they looked at it and said, you know what? We do not feel that another owner will look after our network, our community of franchisees, in the same way we will. And on that basis, they rejected the transaction, and that speaks to something called socio-emotional wealth. [25:00]

The value of the business is more than the financial value for many people, particularly for families.

You've got a lot of old European families who are the major employer in their town, and they see themselves not just creating wealth for the family, but creating jobs for the hundreds or thousands of people that they employ. That is something that is tremendously valuable to the family and that's something that shouldn't be discounted, particularly when you're looking at M&A. That doesn't mean the family have to earn 100% forever, but it can often be an argument for families to stay in controlling role, perhaps through share structure or some other means, so that they can continue to have that value that the business delivers to its stakeholders rather than just its owners.

So I guess, you know, we're going to, [26:00] what's the purpose of business? Is it maximizing shareholder wealth or is it the broader view of stakeholders? And so a lot of family businesses do think about the stakeholders. I think about it in my business.

R. Adam Smith: Whole another conversation on that one for sure….

David Werdiger: Mhm. It doesn't mean the transaction can't happen. It means the transaction has to bear that in mind, and that the family pivots its relationship with the business and still has an ongoing role but wanting to perpetuate the values of the business.

R. Adam Smith: Thank you. So, let's talk about the multifamily office briefly and the bigger platforms. I work closely with many multi-family offices, and the majority of them are really wealth management businesses. But an increasing number are leveraging the dynamic nature of the single-family or leader of the multi-family office and working together to [27:00] acquire or build or scale with their companies or just doing interesting things together. What do you see in that regard, especially out there in the Eastern world?

David Werdiger: In Australia? I go to the US a little bit and I'm part of a non-profit group there. so I have a good view of the US market and we are decades behind. The US MFO market is just so sophisticated and I'm not just talking about, you know, you mentioned a lot of multifamily offices are just financial-focused vehicles for co-investment, and I agree with you on that, but even beyond that, there's a level of sophistication in the US market because of scale, because people have been doing family offices for decades longer than here. And the Australian market is very immature and developing. And so, [28:00] from my perspective as somebody who works with Australian families and others outside Australia, I think we've got a lot to learn from the US market to deliver better quality advice to families.

R. Adam Smith: Right. Let's talk briefly about sustainability and on the climate side, especially — I'm gonna bring my good friend Ruby from France, up on stage and she's going to ask a question.

Ruby Hugueny: Hi, Adam. Can you hear me?

R. Adam Smith: We can hear you now, yeah.

Ruby Hugueny: Okay, thank you. Hello, everyone. Well, I don't know how to put this.

These days, I'm constantly approached by investors in order for me to bring my clients to invest in climate change corporations. [29:00] How do I convince them to invest in climate change without expecting benefits or return on investments right away? Well, this is an issue I have. I don't have to put this question on the table when I see my clients.

R. Adam Smith: I understand. There's a huge ESG- and climate-investing world out there, but it's also quite confusing given the volatility and the mercurial nature of ESG from what investors are perceiving. But David's a little more active than I am on the investment front and what families are putting money into. What do you think, David?

David Werdiger: What we're seeing is a sort of, you know, a generation gap on the view on ESG. [30:00] So, what you see within families is the encumbered generation — this is how we've done things for decades and it's worked — and the rising generation having a very different view on ESG, on climate. And it's potentially a source of conflict within families where the younger generation will say we either shouldn't be investing in that, so we can get blacklist or whitelist, and the way to deal with that is to bring the family together around what they do want, what their shared values are. And again, within the family, you'll have the things that they want to do together and the things that they’ll want to do separately. And that's okay. The family doesn't have to do everything together.

But if you can draw things back to shared value to say, we all believe in this, therefore, we should shift our investment focus to that, then you can say, okay, there's a separate argument about [31:00] the return profile of ESG, whether or not they have to take a lower return. That's not necessarily the case for a lot of the investment out there. And what the family is able to do from an asset allocation perspective is they can have multiple buckets. They can have the ESG bucket without just using it as a filter and looking for market returns. They can have a separate bucket where they're willing to accept lower returns for purpose. They can have a social enterprise bucket. They can have a philanthropy bucket. And by segmenting their asset allocation in this way, they can create the space for investment in ESG that still meets the specific investment and ESG goals.

R. Adam Smith: Good. One more comment about the family businesses and the competitiveness in the world. I certainly see a lot of activity these days with [32:00] family offices and family businesses competing at a larger scale with institutional players. Do you see the family businesses continue to be disadvantaged versus conglomerates and large strategics, or do you see them more catching up a bit?

David Werdiger: Certainly, family offices are able to compete in investment with the institutions. And this is where the co-investment and multifamily officers are so important because it gives families the scale to be able to do the sorts of deals that the large institutional investors are doing. And sometimes the multifamily offices are actually getting into their money and getting on the same side rather than being in a competitive situation.

So, I think that's good, where families learn how to cooperate with each other and co-invest, I think that's very valuable for families. The other thing, I think families actually have an advantage here because as long as the families are aligned on their investment [33:00] horizon, they have the flexibility to act in ways that institutional investors don't. From time to time, when you have market corrections, you'll have the institutional investors doing stupid things that, from an investment perspective, don't make sense, but because their investment policy and their SAA said they have to be allocated x% of this and y% of that, well, they've had a drawdown in this asset class, therefore they've got to rebalance. And that's actually an opportunity for families to come in and take assets off their hand below the market value because you always want to be on the other side of somebody who’s mispricing an asset or selling for the wrong reason.

So, I think in this case, families have an advantage over institutional investors because they're not bound by the sorts of rigid investment guidelines that the big institutional investors might be.

R. Adam Smith: Right. That's good. I like that point.

Well, I'd like to do another conversation with you on [34:00] capitalism and the purpose of the corporation, so I appreciate you brought that up. That's a very complex one and enjoyable conversation.

But today we'll wrap up. I'd like to thank you all for attending today and also our esteemed guest  David Werdiger. You can reach him, of course, on LinkedIn and also at his own website, and follow his own podcast as well as his books.

So, David, it's great to have you here today.

David Werdiger: Thanks so much for having me. I really enjoyed our chat.

R. Adam Smith: Me too. Great.

This is R. Adam Smith signing off. Stay tuned for the next episode of the Family Business Audiocast on LinkedIn.

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