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-1990s and since then the business has been run by my friend and an 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 latest one is getting the best of them, however.
Market conditions are so bad 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, so they are staying afloat thanks to 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 have always 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 is really 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 is probably 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 driving trucks. This is destructive not only to sibling relationships, but to non-family employee morale. Make sure 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 thought he or she knew best 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 a lot more than he did working in the maxed-out family business.
10 Golden Rules
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.
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 are still 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.