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Family Business: Third Generations Tensions

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DOCUMENT DESCRIPTION
When it is time for a family business to bring in a new generation, the ensuring complexity can pose a threat to survival. Every chain is only as strong as its weakest link. The old adage remains apt for family businesses whose weakest link is typically between the second and third generations of ownership. It is at this point when the dispiriting seeds of value destruction take root. In fact, only 13% of family businesses make it past the third generation.

What makes the transition so difficult? In a nutshell, siblings in successful second-generation firms are confident in the benefits of family cohesion and are able to manage collective ownership. They are adamant about following the traditions of the founder and preserving the legacy of his or her outsize personality.

However, when the transition to cousins and third-generation owners begin, this dynamic begins to change. The owners become more numerous and more diverse. There are a number of tensions that a family business must resolve to effectively make it past the third generation.

This presentation discusses the 4 critical tensions in the third generation of a Family Business and the 4 core areas when tensions must be called out and defused.

1. Family Values
2. Exit Planning
3. Portfolio Management
4. Talent Management

Having a comprehensive understanding of the Tensions in the Third Generation will allow family businesses to better strategize how to approach these tensions and successfully conquer them to achieve a successful transition.

This deck also includes slide templates for you to use in your own business presentations.

Publicado en: Empresariales
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Family Business: Third Generations Tensions

  1. 1. This is an exclusive document to the FlevyPro community - http://flevy.com/pro Framework Primer Family Business: Third Generations Tensions Presentation created by The family must define and, where necessary, revitalize its values to provide cohesion. The family must create ways for family members to access their wealth, and even exit the business while preserving economic value for the remaining owners. The family must find a corporate strategy that reflects its unique circumstances and needs. The family must strike a balance between its needs and those of the business, through a plan that aspires to meritocracy while allowing family involvement. TENSION 1 2 3 4 Family Values Exit Planning Portfolio Management Talent Management
  2. 2. 2This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Contents Overview Tensions in the Third Generation Core Areas of Tension Templates The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  3. 3. 3This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Tensions in third generations of Family Businesses can pose a threat to survival Presentation Overview Having the ability to deal with these 4 core areas of tension can improve the family business’s competitiveness and family cohesion. When it is time for a family business to bring in a new generation, the ensuring complexity can pose a threat to survival. Every chain is only as strong as its weakest link. The old adage remains apt for family businesses whose weakest link is typically between the second and third generations of ownership. It is at this point when the dispiriting seeds of value destruction take root. In fact, only 13% of family businesses make it past the third generation. What makes the transition so difficult? In a nutshell, siblings in successful second-generation firms are confident in the benefits of family cohesion and are able to manage collective ownership. They are adamant about following the traditions of the founder and preserving the legacy of his or her outsize personality. However, when the transition to cousins and third-generation owners begin, this dynamic begins to change. The owners become more numerous and more diverse. There are a number of tensions that a family business must resolve to effectively make it past the third generation. This presentation discusses the 4 critical tensions in the third generation of a Family Business and the 4 core areas when tensions must be called out and defused. Having a comprehensive understanding of the Tensions in the Third Generation will allow family businesses to better strategize how to approach these tensions and successfully conquer them to achieve a successful transition. This deck also includes slide templates for you to use in your own business presentations. 1 Family Values 2 Exit Planning 3 Portfolio Management 4 Talent Management The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  4. 4. 4This document is an exclusive document available to FlevyPro members - http://flevy.com/pro A Family Business is an engine for Change and Innovation, requiring a longer horizon of execution How Family Businesses Differ A Family Business is a classic example of “patient capital” and an invaluable counterbalance to the short-termism of many non-family businesses. Family businesses are unshackled from the quarter-to-quarter pressures of non-family firms. Family firms can invest for the long term. They allow good ideas the time needed to prove themselves. Source: The Missing Middle, PwC, 2016 Stronger cultures and values Measure success differently – more than just profit and growth Decision making is faster/more streamlined More entrepreneurial Take a longer term approach to decision making Need to work harder to recruit/retain top talent Take more risks Find it harder to access capital 32% 40% 48% 55% 61% 71% 72% 74%74% 72% 71% 61% 55% 48% 40% 32% The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  5. 5. 5This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Contents Overview Tensions in the Third Generation Core Areas of Tension Templates The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  6. 6. 6This document is an exclusive document available to FlevyPro members - http://flevy.com/pro The weakest link in family businesses is typically between the second and third generations of ownership Tensions in the Third Generation – Overview The changing dynamics and change in business are causing family firms to go off the rails during the third-generation transition. The disheartening seeds of value destruction take root as quickly in the transition between second and third generations of ownership. Only 13% of family firms make it past the third generations. The transition becomes difficult as siblings in successful second generation have reached a certain level of competency. They are confident in the benefits of family cohesion and are able to manage collective ownership. They are adamant about following the traditions of the founder and preserving the legacy of the founder’s personality. They tend to value the family as the best vehicle for investing their wealth. Only 13% of family firms make it past the third generations. The transition becomes difficult as siblings in successful second generation have reached a certain level of competency. They are confident in the benefits of family cohesion and are able to manage collective ownership. They are adamant about following the traditions of the founder and preserving the legacy of the founder’s personality. They tend to value the family as the best vehicle for investing their wealth. The dynamics in the transition to cousins and other third generation owners are also different. Owners are more numerous as cousins are many compared to siblings that are few. There is diversity in terms of age, geography, needs, and interest. From a close-knit group, the ownership takes on more of a broad partnership. The dynamics in the transition to cousins and other third generation owners are also different. Owners are more numerous as cousins are many compared to siblings that are few. There is diversity in terms of age, geography, needs, and interest. From a close-knit group, the ownership takes on more of a broad partnership. Business is also changing. It has become larger, more diversified, and increasingly complex. It presents strategic challenges at the moment when the firm’s management capabilities are under stress. Business is also changing. It has become larger, more diversified, and increasingly complex. It presents strategic challenges at the moment when the firm’s management capabilities are under stress. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  7. 7. 7This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Whether the policy on family employment be strict or relaxed. The business as a source of employment and power versus the need to have a meritocracy in order to be competitive. Whether to have consensus or speed. Whether the family wants to continue to operate its business or step back to become investors first. The family must resolve 4 Critical Tensions when cousins enter the stage Tensions in the Third Generation – 4 Critical Tensions The 4 Critical Tensions may have been present all along in the family business but are suppressed in the name of family unit. The crucial transition to the third generation often exposes or causes 4 critical tensions. Whether the family own a company together or not.The business as a source of pride and an unquestionable tradition vs. the business as a financial investment. The comfort of consensus and collective needs vs. individual freedom, agility, and the delegation of power (which requires great deal of trust and common purpose). Growth, risk taking, and wealth creation vs. liquidity, risk aversion, and wealth preservation FUNDAMENTAL ISSUE FUNDAMENTAL ISSUE 2 1 3 4 The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  8. 8. 8This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Critical tensions emerge in the transition from siblings to cousins Tensions in the Third Generation – 4 Critical Tensions (Comparison) Family members having to manage multiple roles can also be a well-known source of difficulty. Tensions may result from the surge in size and diversity in the ownership group and the emotional distance between the third generation and the founder. Source: Building a House that Lasts, McKinsey, 2014 Source of pride Wealth creation Collective needs Source of employment Source of wealth Wealth preservation Individual needs Emphasis on meritocracy VS VS VS VS The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  9. 9. 9This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Contents Overview Tensions in the Third Generation Core Areas of Tension Templates The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  10. 10. 10This document is an exclusive document available to FlevyPro members - http://flevy.com/pro There are 4 Core Areas of Tension that emerge in its most addressable form 4 Core Areas of Tension – Overview Companies dealing with the 4 Cores Areas of Tension improve competitiveness and family cohesion. There are 4 core areas of Tension that will build over time if left unaddressed. This can defeat even well-laid plans for ongoing success. The family must define and, where necessary, revitalize its values to provide cohesion. The family must create ways for family members to access their wealth, and even exit the business while preser- ving economic value for the remaining owners. The family must find a corporate strategy that reflects its unique circumstances and needs. The family must strike a balance between its needs and those of the business, through a plan that aspires to merito- cracy while allowing family involvement. TENSION 1 2 3 4 Family Values Exit Planning Portfolio Management Talent Management The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  11. 11. 11This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Values are beacons that illuminate the company’s direction and guide its high-level strategic decisions Family Values – Overview Lest values be seen only as abstract concepts, values must be made visible and put into action. AREA OF TENSION Family Values CONDITIONS The positive values that may date back to the founding of the enterprise can be fundamental to survival. Values communicated clearly creates a link between the past, present, and future; unify owners and managers; and define the corporate culture. Values are intrinsic to the company’s competitive advantage. SUPPORTING FRAMEWORK Both generations are involved towards agreeing on a set of values. Family business values must be put to work in the business. The values of transparency and two-way communications must be upheld by initiatives. Engaging in philanthropy provides a platform to bring family owners and nonfamily employees together in an informal and inspiring way. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  12. 12. 12This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Exit Planning is essential to maintain cohesion and minimize disruptive battles as the business grows more diverse Exit Planning – Overview Rules must be codified and communicated in a shareholders’ agreement to prevent surprises or disappointments. AREA OF TENSION Exit Planning CONDITIONS Without a release valve, individual shareholders may become disgruntled and cause ruptures detrimental to both family relationships and business performance. SUPPORTING FRAMEWORK The overall philosophy is ownership. The interests of those who stay and maintain control in the family must be protected. Sale of shares should take place between family members. Family shareholders must get full economic value relatively easily and quickly. Shares can be sold at a discount to protect remaining shareholders. Families can set caps on how much stocks can be sold at a time to prevent mass exodus and depletion of firm funds. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  13. 13. 13This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Family businesses have many options as they build a policy for members to access assets and exit the business Exit Planning – Parameters of Consideration There are no cut-and-dried rights and wrongs about how to do this; the choices depend on the family and on business preferences. Once the ownership philosophy is clear, families can then address issues of timing, buyer selection, funding, and valuation. Source: Building a House That Lasts, McKinsey, 2014 Timing Prioritization of buyers Funding options Valuation methodology Ad hoc: At the seller’s request Structured buyouts: Periodic liquidity event every few years or once a generation Minimum shareholding limit: All shareholders below a certain threshold (eg, 3%) are forced to sell Inheritance for non- eligible owners: Forced buyback Any eligible shareholder Own branch, then other branches Own branch only Market value: Assessed by a 3rd party Pre-agreed valuation formula: Multiple of key financial metric (eg, 4x earnings before interest, taxes, depreciation, and amortization) Book value (or multiple of) Company funds: Equity or debt Redemption fund: Liquidity pool managed by the company Seller credit: Staggered payment (up to 5-10 years depending on the amount) Internal market: Facilitation between sellers and buyers Parameters Loose control Tight control The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  14. 14. 14This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Portfolio Management must be able to accommodate family and individual needs Portfolio Management – Overview Family members must accept a no boundaries view when it comes to making choices. AREA OF TENSION Portfolio Management CONDITIONS Third-generations owners were not involved in the original division of the company. Emotional ties to the businesses are weaker than the siblings’ bonds. Cousins have divergent needs and desires; some may want a cash flow from dividends while others want to build something the way their fathers and grandfathers did. Cousins will have more of a financial-investor mindset than siblings. Family businesses have more than 90% of their wealth tied up in business. Diversification is achieved through a mix of businesses that the family pursues. SUPPORTING FRAMEWORK A corporate strategy must be created that looks at the entire puzzle. A stable and rationalized portfolio of businesses must be developed. This entails the concentration of authority and influence in company management and board of directors that are invested with real power. The corporate strategy must be a combination of top- down and bottom-up guidance. The top-down work gets shareholders to agree on a set of aspirations and definition of success. The bottom-up work deals with the business operational reality. It entails the evaluation of the current state of the business and its capacity. Aspiration and assessment must be brought together to find a common ground. The choices include either selling businesses, investing in businesses, going into new sectors, or exiting altogether. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  15. 15. 15This document is an exclusive document available to FlevyPro members - http://flevy.com/pro The family business portfolio can contain a range of assets to meet everyone’s needs Portfolio Management – Parameters of Consideration A distribution of capital across operating companies, financial investments, and real estate can help the family meet all its collective and individual needs. The final tasks of classic corporate strategy development include developing a portfolio and financial investment plan, allocating capital, and setting performance metrics. There are critical parameters for the construction of a portfolio and the allocation of capital. Source: Building a House That Lasts, McKinsey, 2014 Description Levers Measures Where group allocates capital Operating companies Controlled Non-controlled Financial investments (excluding real estate) Real estate Cash, equities, fixed income, funds, and other financial investments Income-generating properties Family real-estate assets (used by family and often managed by group) Land bank Sector-focused operating companies where the group has full control Sector-focused operating companies where the group has a relevant but non-controlling share Value Stock and investment selection Capital allocation Trading (land) Development Access Active ownership Actualization of synergies Capital allocation Return above benchmark Yield for income-generating assets Value appreciation Net income growth EVA ROIC Appreciation Dividend payout ROIC The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  16. 16. 16This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Talent Management focus on striving for meritocracy while balancing family needs Talent Management – Overview While meritocracy is difficult to achieve, family businesses can build this on their culture. AREA OF TENSION Talent Management CONDITIONS Nepotism exists in family-owned businesses. Growing up around a vocation or a business can create a powerful sense of commitment. Hiring family members is not a problem; hiring the wrong family member is the problem. Family members who are weak managers can bring down even a strong company. SUPPORTING FRAMEWORK Third generation employment policy must be defined around criteria such as education and outside experience. Family members must be evaluated, promoted, and paid based on the same criteria as the outsiders. Another approach is up or out method which offers jobs to all competent family members. After 5 to 8 years of service, the family council determines whether the family members have the potential to rise to high level executive positions. If not, they leave the group. The differentiated long-term financial incentive is another approach where incentives go to family members who rise to leadership positions. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  17. 17. 17This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Families have adopted different models regarding members’ employment Talent Management – Models of Family Employment Whatever the policy of employment, the next generations must be exposed to it so that they can manage expectations and have a sound basis to make life and career choices. Few family businesses have built truly meritocratic cultures that are able to attract, develop, and retain the best talent, either from within or without. Family businesses can adopt either of the 4 common models to achieve total meritocracy. Source: Building a House that Lasts, McKinsey, 2014 Clear separation between business and family Strict selection of future top executives Up or out Description No family members in the business Most common Inclusive Only the most capable family members who have the potential to become leaders can join the business Once they join, they are groomed to become top executives Less strict entry criteria However, the criteria to move up the hierarchy are strictly meritocratic, and those that don’t meet the bar are counseled to leave Any family member can join the business The criteria to be promoted are meritocratic, however, family members can stay in midlevel positions if they don’t meet the high-level bar 4 common models The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  18. 18. 18This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Contents Overview Tensions in the Third Generation Core Areas of Tension Templates The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  19. 19. 19This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Insert headline 4 Critical Tensions in the Third Generation – TEMPLATE Insert bumper. Whether the policy on family employment be strict or relaxed. Whether to have consensus or speed. Whether the family wants to continue to operate its business or step back to become investors first. Whether the family own a company together or not. The business as a source of pride and an unquestionable tradition vs. the business as a financial investment. The comfort of consensus and collective needs vs. individual freedom, agility, and the delegation of power (which requires great deal of trust and common purpose). Growth, risk taking, and wealth creation vs. liquidity, risk aversion, and wealth preservation FUNDAMENTAL ISSUE FUNDAMENTAL ISSUE 2 1 3 4 The business as a source of employment and power versus the need to have a meritocracy in order to be competitive. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  20. 20. 20This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Insert headline 4 Critical Tensions in the Third Generation – TEMPLATE Insert bumper. The business as a source of pride and an unquestionable tradition vs. the business as a financial investment. Growth, risk taking, and wealth creation vs. liquidity, risk aversion, and wealth preservation The business as a source of employment and power versus the need to have a meritocracy in order to be competitive. The comfort of consensus and collective needs vs. individual freedom, agility, and the delegation of power (which requires great deal of trust and common purpose). Whether the family own a company together or not. Whether the family wants to continue to operate its business or step back to become investors first. Whether the policy on family employment be strict or relaxed. Whether to have consensus or speed. FUNDAMENTALISSUE 1 2 3 4 The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  21. 21. 21This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Insert headline 4 Core Areas of Tension in the Third Generation – TEMPLATE Insert bumper. TENSION 1 2 3 4 Family Values Exit Planning Portfolio Management Talent Management •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  22. 22. 22This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Insert headline 4 Core Areas of Tension in the Third Generation – TEMPLATE ALTERNATE Insert bumper. CORE AREAS OF TENSION Family values Exit Planning Portfolio Management Talent Management The family must define and, where necessary, revitalize its values to provide cohesion. The family must create ways for family members to access their wealth, and even exit the business while preserving economic value for the remaining owners. The family must find a corporate strategy that reflects its unique circumstances and needs. The family must strike a balance between its needs and those of the business, through a plan that aspires to meritocracy while allowing family involvement. 1 2 3 4 The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  23. 23. 23This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Family values Exit Planning Portfolio Management Talent Management Insert headline Insert bumper. The family must define and, where necessary, revitalize its values to provide cohesion. The family must create ways for family members to access their wealth, and even exit the business while preserving economic value for the remaining owners. The family must find a corporate strategy that reflects its unique circumstances and needs. The family must strike a balance between its needs and those of the business, through a plan that aspires to meritocracy while allowing family involvement. 1 2 3 4TENSION 4 Core Areas of Tension in the Third Generation – TEMPLATE ALTERNATE • Insert filler text, filler text, filler text, filler text. • Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. •Insert filler text, filler text, filler text, filler text. The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  24. 24. 24This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Download 100s of similar frameworks from the FlevyPro Library: https://flevy.com/pro/library/frameworks The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  25. 25. 25This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Need more frameworks? Download our Complete Business Frameworks Reference Guide, a 350+ slide compilation of 50+ frameworks, on Flevy The Complete Business Frameworks Reference Guide is a best selling document on Flevy. It is 350+ slides--covering 50+ common management consulting frameworks and methodologies. A summary is provided for each business framework. The frameworks in this deck span across Corporate Strategy, Sales, Marketing, Operations, Organization, Change Management, and Finance. This reference guide is great for those who need a refresher on common frameworks, as well as be introduced and learn new useful frameworks. You can find this document here: http://flevy.com/browse/business-document/complete- consulting-frameworks-toolkit-644 The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  26. 26. 26This document is an exclusive document available to FlevyPro members - http://flevy.com/pro Flevy (www.flevy.com) is the marketplace for premium documents. These documents can range from Business Frameworks to Financial Models to PowerPoint Templates. Flevy was founded under the principle that companies waste a lot of time and money recreating the same foundational business documents. Our vision is for Flevy to become a comprehensive knowledge base of business documents. All organizations, from startups to large enterprises, can use Flevy— whether it's to jumpstart projects, to find reference or comparison materials, or just to learn. Contact Us Please contact us with any questions you may have about our company. • General Inquiries support@flevy.com • Media/PR press@flevy.com • Billing billing@flevy.com The content on this page has been partially hidden. FlevyPro members can download the full document here: http://flevy.com/browse/flevypro/family-business-third-generations-tensions-3793
  27. 27. 1 Flevy (www.flevy.com) is the marketplace for premium documents. These documents can range from Business Frameworks to Financial Models to PowerPoint Templates. Flevy was founded under the principle that companies waste a lot of time and money recreating the same foundational business documents. Our vision is for Flevy to become a comprehensive knowledge base of business documents. All organizations, from startups to large enterprises, can use Flevy— whether it's to jumpstart projects, to find reference or comparison materials, or just to learn. Contact Us Please contact us with any questions you may have about our company. • General Inquiries support@flevy.com • Media/PR press@flevy.com • Billing billing@flevy.com

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