Keeping The Family Business On Track - Management
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Keeping The Family Business On Track

Construction Equipment Distribution, January 2006.

Article Date: 01-01-2006
Copyright (C) 2006 Associated Equipment Distributors. All Rights Reserved.

Family business consultants provide some real-world advice on solving seven common workplace problems.

All aboard the family business express! In this article, seven family business consultants show how to keep common problems from turning a scenic tour into a train wreck.

Now that your son has proven his management skills at another employer, you want him to take a top position at your business. But you're afraid to alienate your veteran non-family managers who may want the job.

Your managers have invested years building their skills at your business and now they have to report to somebody who gets the job because he's family. That could create an attitude problem, not to mention costly defections by quality people.

You can solve this problem with a good communications strategy, says Paul I. Karofsky, director of the Northeastern University Center for Family Business, Dedham, Mass., a membership-based educational forum for families working together.

Karofsky suggests a three-step approach.

  • Interview all the players and ascertain their feelings about the expected appointment. "Have open discussions that clarify the company's policy and your entry criteria for family members," says Karofsky. Emphasize that family members must jump higher hurdles.
    "It is extremely important that family candidates be more qualified than others for a position," he says.
  • Demonstrate the need for the position your son will fill. "If it's not a demonstrated need, you're asking for resentment," says Karofsky.
  • Break the ice by getting your son to work with others right away. "Create project task forces that require the interaction of your son and key non-family executives to help build relationships," says Karofsky.
Tip: Maintain a continuing dialog among top managers regarding family business dynamics, emphasizing that family members are respected not for who they are but for how well they perform.

You feel a longtime, trusted employee would make a great coach for your child, but are afraid the employee might feel intimidated.

No one wants to train their replacement and that goes double for a career employee who may feel trapped by your request for stewardship.

"Unless they are incredibly mature, any employee would feel threatened about training a next-generation family member," says Nancy Drozdow, principal at the Center for Applied Research, Philadelphia, Pa. "It's natural for them to ask, ‘What does it mean for me?' The solution is to put your employee's fears to rest by talking about the subject."

Communicate your admiration for the employee's skills. Emphasize that your son will be working in another capacity at the business.

"If you plan for the second generation to take over the business, provide a time frame," says Drozdow.

Tip: Consider assigning a coach from outside the business. Work out a "mentor exchange" with another family business in your area.

Your daughter wants you to sell the business at a discount to her husband, who has been working at your business for many years.

This situation, in colorful variations, is as common as it is tricky to solve.

"You need to answer three questions when approaching this issue," says Mike Cohn, president of Cohn Financial Group, Phoenix.

First, what's the real value of the business? "Has an outside appraiser determined fair market value?" says Cohn. If not, you don't know what a reasonable "discount price" is.

Then, what do you need to be able to retire comfortably? "Will the first generation need continuing income from the business?" says Cohn. Money from a sale may not be enough.

And finally, are you ready to let go?

Next, consider promises and expectations. Are there any grounds for selling the business at a discount, other than from the goodness of your heart? Perhaps the founder has promised to let the second generation have 10 percent of the business in exchange for sweat equity. Consider, too, whether the son-in-law was paid a fair market salary during his years at the business.

Often family businesses will underpay the second generation, with the assumption that "some day this will all be yours." The difference between actual pay and fair market pay could determine a discount.

Tip: Make sure your transition plan accounts for the disposition of the business in the event your daughter and son-in-law divorce.

Family shareholders not employed by the business are questioning too many of your decisions in an effort to protect their dividends.

Should you pay dividends or re-invest cash in the business? That is the question. And people who are not on the business scene every day can get nervous about risky but necessary initiatives.

Solution? Clue ‘em in!

"Even if management is making wise decisions, outside family members need to feel they are part of the business," says Peter Baudoin, a Lafayette, La., family business advisor who hosts a radio show on the subject. Baudoin suggests providing three things:

  • Information. Educate outside family members about what is going on. Informed individuals feel more in control of their destiny.
  • Guidance. Establish policies about which family members can participate in the business. Note that any family member who wants to apply for an open position must meet certain experience and education hurdles.
  • Liquidity. Provide a vehicle for selling shares in the business. "A dissatisfied family member with 2 percent of shares should have a way to sell out," says Baudoin.
Tip: Establish a family council, comprised of family members inside and outside the business, to review business results and decide how much cash to distribute as dividends to non-employed family members.

You feel it's time to pass the management torch to the second generation. Problem is, several sons and daughters, now in their 40's, want the president's chair.

Time to bite the bullet and name a successor, even if you anger some of your sons and daughters, says Robert O. Middleton, a partner in the Chicago law firm of Nisen & Elliott.

"Decide on a succession plan, communicate it to everyone, and supervise its transition," says Middleton.

This solution is attractive because the second generation will readily fall in line with what the founder decides. "There is a heritage established: people understand ‘this was the founder's wishes,' and forward they go," says Middleton.

Nonetheless, rough waters lie ahead. "Some sort of sibling competition inevitably gets uncorked once the parent steps away," says Middleton. "The new leader will not get the unquestioned respect, obedience, and loyalty that was granted the founder."

Tip: Avoid retaining business ownership after transition. Your successor needs the power that comes with ownership of voting stock - balanced by a controlling authority such as a board of directors.

Your 16-year-old son, starting to work at your business, wants to be treated like everyone else. But employees treat him with kid gloves and that makes him uncomfortable.

Your son should approach this problem on two fronts, according to Susan Lazar, president of Susan Lazar Consulting, Minneapolis. He should:

  • Go beyond the call of duty in work habits. "Your son should work hard to do what is asked of him and avoid anything that would lead people to the conclusion that he is demanding special treatment in how he is assigned and completes responsibilities," says Lazar.
  • Interact properly with fellow employees. Says Lazar: "Hang out with other employees at lunch time. Be careful never to discuss personal things at work." It's also wise to refer to the parents not as "Mom and Dad" but with the same names used by other employees.
Experience in the outside world can also help. "I recommend children get experience elsewhere before they come into the business," says Lazar. "Then they have a sense of their own work history and something of their own to offer the business beyond a name. They have less to prove to employees because they have a track record."

Tip: Don't assume your son or daughter knows what you expect. State explicitly that you expect them to work harder than other employees and to keep longer hours.

Your sons and daughters seem to be rebelling against what they say is your authoritarian rule. When-ever you turn around they seem to be circumventing your orders.

This scenario is typical of communications breakdowns in family businesses, says Aron Pervin, present of Pervin & Co., a family advisory in Toronto, Canada.

"Families rely on ambiguity in home life," he says. "They are reluctant to be clear when they communicate, because they have a fear of not being loved."

When this attitude carries over into the workplace, individuals behave in destructive ways to express feelings they could not vocalize. In this case, the children were building up tremendous resentment that they were afraid to communicate.

"A family cannot start fresh when they move to the workplace," says Pervin. "Family members bring along old wounds and resentments."

Pervin says the solution is to work out the expectations each family member has of others. "Encourage each family member to discuss recent critical business incidents that caused them to feel anger or resentment," he says. "Encourage them to express their feelings. Side-stepping issues rather than dealing head-on in a respectful, caring and fair manner is tantamount to a death knell for the family business."

Tip: If the patriarch will not change his oppressive style, hire a non-family manager as a buffer between the father and the second generation.


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