This article originally published in Corp! Magazine, September/October 2018
Especially in a family business, the single best way to avoid conflict is to anticipate issues and resolve matters before the proverbial pot boils over.
When times are good, the tendency is to put conflict on the back burner and let it simmer. The longer it simmers the more difficult it becomes to separate the ingredients and mine down to the underlying issues. When times are good, and money flows easily, we are inclined to disregard the fundamental complications that plague family business.
If the pot simmers too long, the ingredients become an embroiled burned mess at the bottom. If it’s left long enough, the mess might become uncleanable, and you may have to toss the pot. That’s a very heavy price to pay for not paying attention to a simmering pot.
Don’t let your pot simmer.
Instead, separate the ingredients and address them individually before they get all stirred up – unrecognizable and inseparable. That’s what happens when you wait—conflicts become complicated and difficult to resolve.
Struggling with what’s next
A recent family business client consisting of a senior brother and sister (50/50 ownership structure) was struggling with “what next.” The siblings were in their late 60s and had no exit strategy. The sister’s only child, Jane, had been employed in the business for 15 years and served as the general manager. She was the daily tactical manager of the pet store, she did most of the hiring/firing, customer service, and facility management (the business owned the building). She expected that she would become the sole owner upon the retirement of her Mother, Mary, and Uncle Joe. Mary acted as the purchasing agent, and Uncle Joe did the “back room” (HR, payroll, accounting, banking, and general administration).
One day, after receiving a disappointing bonus, Jane asked her mother, “Are you and Uncle Joe ready to sell me the business?” Mary was surprised. She had not anticipated the question and had never seriously discussed it with her brother.
Uncle Joe had three adult children. One was a successful professional, another was a struggling artist, and the youngest was a stay-at-home mom in a bad marriage with two toddlers. None of Uncle Joe’s children has expressed interest in the business, although they had each worked there at some point.
Uncle Joe was a hard worker. He put in lots of hours and was somewhat upset with his sister who was in-and-out doing “who knows what.” She too was good at her job, and they were a good team with complementary skill sets. The business seemed to run on automatic especially in these good times. But it wasn’t always that way.
There had been a third partner, a sister (now deceased) who hadn’t fit in. She was the store manager but fell short of expectations and was asked to leave. She was eventually bought out and then sued her siblings for more money and a nominal settlement was reached. This all happened just prior to Jane entering the business.
Jane came to the table at the right time. The business needed a store manager and she had the skills, disposition and experience necessary. She fit right in and did a great job lightening the load of Mary and Joe. Jane has been a vital part of the business success, bringing new energy, ideas and pizazz to the store. Sales and profits have grown in part due to her efforts while Mary and Joe have entered the “slow down” phase of their careers.
This pot is simmering, and about to boil.
Mary expects that both she and Joe will sell the business to Jane on a buyout over time. Joe expects to cut back on his workload while taking the same compensation. He went through a messy divorce and has not recovered financially. Jane expects to buy them both out at a reduced price because of her years of “sweat equity,” and she expects Mary and Joe will “fund” the buyout by allowing her to use future profits. No one has considered how the business might run with Joe and Mary in reduced rolls.
Joe also wonders if his children may want to get involved in the business, and he would like to offer them that possibility—especially his struggling daughter and starving artist. No discussion of Joe’s entry in the business has ever ensued.
Business has been good, and it has experienced steady growth. The growth has been a combination of good management, a geographical rebirth and an uptick in pet ownership (as well as how pets are treated). Mary, Joe, and Jane are being well compensated, so no one wants to stir the pot, except maybe Jane. But the pot simmers. To add some heat, one of their competitors has made a very attractive unsolicited offer. Unfortunately, the amount of debt the business carries makes a sale unattractive as the owners wouldn’t walk away with enough of a payday.
Let’s separate the ingredients by asking some key questions that need to be answered.
What family members, if any, should be allowed to “enter” the business, and what does entry mean? Is it a job, a career and/or a path to ownership? Are there any requirements? Is there some time-line after which the door closes? Who decides? What do outside stakeholders expect?
Is there a transparent compensation policy? How are profits factored in?
How does ownership structure the management of the business and empower the managers? Who decides what, and how? How will the owners decide on family entry? How will ownership, if there is more than one individual, make their decisions—like selling the business? Is there a structure for decision making?
When key stakeholders enter the “slow-down” phase of their career, how will their roles and compensation be addressed? Who decides?
Fair vs. Equal
It is common for family businesses to do things equally, but is that fair? Should siblings get the same compensation, drive the same car, and work equal hours? How will that protocol be passed to the next generation?
Should the business own the real estate used by the business? If not, and that is the existing situation, what can be done? What are the tax implications? Can rent revenues be used to fund key stakeholder retirement?
Ownership Transfer Restrictions
Should owners – partners – be restricted on what they can do with their piece of the pie? Commonly this is handled through a Buy-Sell Agreement, but what if one doesn’t exist, hasn’t been updated, or has terminated. What then? And what if a current agreement no longer fits the situation for everyone signatory?
Keep or Sell
Ultimately every business either gets dissolved (bankruptcy or liquidation), sold or transferred. So what’s the game plan? If the business is to be transferred internally, where does the money come from? How will the purchase price be determined? What’s next for the stakeholders? How does current management operate with the new ownership structure? If it’s sold, how will owners and key stakeholders make out financially? Will there be employment agreements for current managers?
The questions can continue indefinitely and they all need to be addressed. In good times, don’t ignore the underlying issues that need to be addressed – they don’t go away. Instead, develop a strategy to address issues so that conflict can be resolved before it boils over.
Good advice from professionals can make the simmering pot cool down to a festive meal for all to enjoy.