They
are the backbone of our country, and of your industry, but oh those dilemmas!
This
article grows out of a task I’ve taken upon myself to help a good friend put
together his résumé. My friend is the same age as I am – 63 – which, in itself,
presents a large challenge when it comes to finding new employment. Another
difficulty is that my friend has narrow experience acquired with only one
employer his entire working life – a residential remodeling business started by
his father way back in 1933 during the depth of the Great Depression. His
father passed away in the mid-’90s, and since then, the business has been run
by my friend and his older brother, who share ownership and CEO duties 50/50.
Also employed in the business is that brother’s son, my friend’s nephew, who
represents the third generation of family stewardship.
Until the last couple of years, the business was a shining success that had
employed at a peak more than a dozen family and non-family employees. For
three-quarters of a century, they experienced the normal ups and downs of our
construction economy, and had managed to weather many recessions. This last one
is getting the best of them, however.
Market conditions are so bad that their projects have shriveled almost to
nothing. My friend has not issued himself a paycheck in months, and it’s
increasingly clear to him that the only choice ahead is to liquidate. They are
largely debt-free, and own the building in which the business operates, which
also provides some rental income from other tenants, but overhead is eating up
cash rapidly, and eventually will consume all savings and assets. Liquidation would
prove heart-wrenching emotionally, but it is the only thing that makes sense
from a business standpoint, according to my friend’s
assessment.
Except that’s not how his brother sees it. In numerous discussions over the
past year as business dried up and their savings drain away at a worrisome
pace, the brother refuses to give up hope that a turnaround is on the way.
Given the state of our housing and loan markets, few realists would
agree.
This is as good a place as any to begin a review of challenges facing family
businesses, and some potential solutions.
Business socialism doesn’t work. My friend and his brother share deep family
bonds, and always have gotten along personally. In fact, they still celebrate
the holidays together, despite their current business dispute. But in any
situation where more than one person is in charge, nobody really is in charge.
In any organization, a clear-cut chain of command is essential. Co-CEOs are a
recipe for indecision, stalemate and being chained to the status
quo.
Even if family members have equal ownership of the business, it’s important to
anoint one as CEO charged with the tie-breaking voice on critical business
decisions. Alternatively, a family business can appoint a board of directors,
comprised of family members or non-family, or a mix of both, to intervene in
case of stalemate. (Just make sure the directors add up to an odd
number.)
Many family businesses that I’ve observed during my career face the opposite
challenge:
Dictatorial ownership. Usually this stems from the founder of the business who
refuses to let go of the reins. Sometimes it’s good that he doesn’t because the
kids who succeed him don’t have as much business sense. However, just as often,
I’ve seen cases where an energetic succeeding generation gets stifled by
dinosaur thinking.
The only way to end this kind of business dictatorship is to have a definitive
transfer of ownership, and that means buying out the older generation
completely via cash or loans the same way you’d acquire an outside business.
Many – if not most – family business transfers take place via piecemeal private
financing, whereby the seller remains on the payroll and retains the risk if
the business for any reason can no longer meet its obligations to him. In those
cases, like it or not, the “old man” has the right to interfere to his heart’s
content.
Sibling rivalry.This probably is the most common challenge facing family
businesses with more than one heir. Typically, the eldest sibling gets put in
charge, even though age does not necessarily equate with talent. More talented
younger siblings are bound to feel resentful. Sibling rivalry also may have its
roots in family dynamics.
Whatever the reason, the best solution I have heard of for eliminating or at
least minimizing business sibling rivalries is to set up a merit-based
structure for management. Succession should be a business-first decision,
rather than a family-first decision. Family members should have job
descriptions and performance reviews just like any other employee. Although
ownership stakes may be split equally, pay scales should vary according to job
responsibilities, experience and performance.
Speaking as a father and grandfather, I readily understand why an owner might
want to guarantee a job in the family business to every close kin who wants or
needs one. But guaranteeing a job is different than guaranteeing a title. The
family business world has too many Fredo Corleones strutting around as vice
presidents when they are better suited for unloading trucks. This is
destructive not only to sibling relationships, but also to non-family employee
morale. Make sure that every family member appointed to a management role has
the requisite education, talent, experience and track record to justify
it.
One of the best family-business practices I’m aware of is the requirement for
anyone entering the family business to spend at least a year or two working for
an outside employer. It’s humbling, and opens eyes to different ways of
thinking and operating.
Too many mouths to feed. I mean this in two contexts – both the number of
family members on the payroll, and having family members with ownership
positions who do not work in the business. This challenge becomes more acute
the longer a business sustains itself.
I remember a conversation many years ago when the fourth-generation president
of a plumbing supplies distributor that had been around for a century let his
hair down over cocktails with me. By this time, his business had dozens of
heirs with a piece of the action. Only a couple were employed by the company,
but the president had to deal with a meddlesome family board and shareholders
who each had a say in how the company should be run. The president had spent
his entire career with the family business, working his way up through the
ranks, and he helped steer it into one of the most successful companies in his
industry. Yet he was on the verge of quitting because of all the
interference.
Most top family-business consultants look down upon granting ownership to
family members not working in the business. Owners may choose to split their
estate equitably, but there are ways to do that using non-business assets, as
well as stock in the family business.
Also, there needs to be a semblance of reason in how many family members a
business can employ in relation to its size. My friend in the remodeling
business faced that issue years ago when it supported not only himself, his
brother and a nephew, but also an older sister and his own son, who had
recently graduated from college. The co-owners’ wives also worked part-time in
the office, drawing pay for their services. Even though this was during the
height of the construction boom a decade ago, their business found itself
stretched to provide all of them, plus non-family employees, with a decent
living. My friend’s son perceived the problem and left of his own volition. He
now works as a project manager for a commercial-industrial construction company
and earns far more than he did working in the maxed-out family business. (The
older sister passed away a few years ago. Had she survived, it would have
complicated the current dispute about whether or not to shut down the business
even more.)
A good friend of mine, Al Levi, formerly operated a successful family business
that he sold out to his brothers. For the past decade or so, he has operated
Appleseed Business (www.appleseedbusiness.com) as a consultant to small
businesses. He is a fountain of wisdom, and compiled what he calls “10 Golden
Rules for a Family Business,” that he has permitted me to share with all of
you.
10 Golden Rules for A Family Business
1. Have a written set of guidelines for how the next generation will enter the
business.
2. Have a written job description with a corresponding list of
responsibilities. A company organizational chart is needed, even if your name
appears in every box on the outline. Then, agree on who responds to what
emergencies, provides backup coverage and, finally, have everyone sign off on
it.
3. Coordinate when vacations are permitted, how much time off is paid for, the
amount of salary taken, how bonuses will be paid, and what legitimate expenses
are to be put through the business.
4. Have a neutral party in place to act as an arbitrator before you reach an
impasse.
5. Remember that at the end of the business day you still are family. So, act
like it and mandate non-work-related designated time
together.
6. Create a buy-sell agreement, and keep it current.
7. Have weekly scheduled meetings to discuss current and long-term projects and
to set priorities.
8. Have an agreed-upon business plan and operations manual.
9. Hire the best-qualified accountant and lawyer you can afford to advise you
as a group.
10. Pay special attention when extended family members and friends are involved
in any area of your business. Whether they work in the business or are
customers, agree on what procedure to follow should you need to get rid of them
either as a staff member or as a customer.
ND
