Pay bonuses based on cash flow
DeNean Stafford III
Stafford Development
Tiston, GA
DeNean Stafford III has four businesses to juggle: hotels, fast food, commercial property development, and tractor dealerships that raked in combined sales of $60 million last year. But he also has to juggle the opinions and input of his two sisters, Mary Jane Theden and Sally Stafford Perez, who are equal owners but do not work in the firm.
Before he took over from his father in the early 1990s, DeNean’s salary and his sisters’ dividends were a moving target. “My sisters had to call Daddy every time they needed money, and Daddy treated all three of us differently,” he explains. So one of the first things DeNean did after taking the reins was realign his salary and shareholder dividends. DeNean, 43, gave himself a base salary he considers fairly low, plus a bonus based on cash flow. The percentage climbs as cash flow increases. All three also receive a two-part shareholder bonus. One portion is a fixed amount; the other is a percentage of cash flow.
Although the result was more predictable—and actually means more money for DeNean and his sisters—he has had a tough time selling them on the changes. “My biggest hurdle was convincing them that I should collect a paycheck on top of the fixed and variable amounts we share as owners,” DeNean says. “I had to understand what their expectations were and how the three of us were going to work together, and help them understand and accept what kind of return they should expect as stockholders.”
Part of the problem was their father having “hammered into their heads that you can’t take anything out of this business or it will collapse. He felt you have to have every nickel you can say grace over to grow the business. They felt it was a burden to pull so much money, in all these forms of compensation, out of the business at once.”
Unable to come to terms, the three hired consultants Mike Cohn and Leslie Dashew, both of Phoenix, to help them sort out the issues. To placate his sisters, DeNean has agreed to defer a substantial portion of the shareholder bonus for five years. At that time, DeNean will be able to draw half of the money. Meanwhile, he and his sisters can borrow up to $30,000 a year. “I think we’ve made tremendous headway,” he says. “It’s not perfect because we still think differently. My sisters ask a lot of questions, and their decision-making process tends to be protracted. I’m kind of used to making decisions fairly quickly. In this environment you have to.”
The new financial policy is not just about placating inactive shareholders, though. “I wanted something for my children and their children, to have a blueprint of family policies about the way we’re going to run our business, who’s going to run it, and how they’re going to get paid to run it. I don’t want them to have to go through what I did.”
Good salary, but no more
Whitney Grisaffi
Ted Brown Music
Tacoma, WA
Whitney Grisaffi admits she thinks she’s overpaid for her work as general manager of the five-store chain of musical instrument retail stores (soon to be six). “I’ve never shopped the market for someone who does what I do, so I honestly don’t know. But I have more than enough.” She and sister Stephanie, office manager and computer trouble-shooter, are content to plow profits back into the business just as their father, Warren Brown, always did.
After she worked for two years in the mortgage finance industry, Grisaffi was lured back, partly with a higher salary than she was earning before. She was the lowest-paid manager at Ted Brown Music, but she’s quick to point out that she was also the least experienced. After 11 years in the company she now runs, she is one of the highest-paid managers. Yet she could certainly afford to pay herself and her sister more than they pay themselves—especially since their father, who turned 65 in October and still works about 35 hours a week, took a cut in pay so he could qualify for Medicare.
Two other sisters work outside the business and don’t own shares. “Mom and Dad took out life insurance and named the other sisters as beneficiaries. Stephanie and I get the risky thing,” Grisaffi says with a laugh. “They have to wait for their inheritance, but at least theirs is for sure.” Although Grisaffi and Stephanie are equal owners (their parents jointly own a minority stake), they choose not to pay themselves dividends. They prefer to invest profits back into the business, especially with two ambitious plans they have made. The first plan is to open that sixth store this spring. “Dad is really good about going by the decisions we make,” Grisaffi says. “Even though he doesn’t want us to do this, he told us, ‘You voted yes. Now what can I do to help?’”
Their second plan is to raise a new building for the main store, which is now in a space the business rents from their father. “My father is financing it, but the idea is that with part of our compensation we can buy him out at some point, or buy an interest in the building we’ll be building.”
At the moment the siblings and their parents have no shareholder agreement. “Stephanie and I both consider we’re here for life,” Grisaffi says, apparently surprised when the topic came up. “But maybe we have to address that.”
Find liquidity in other sources
Jerry Hanauer
Pacific Coast Feather Co.
Seattle, WA
“Liquidity has never been a particularly important matter before,” says Jerry Hanauer, chairman and grandson of the founder of one of the two largest North American manufacturers of feather and down comforters, pillows, and mattress pads. “We always had adequate salaries and everyone was always interested in making this company grow, so we left money in the business,” he explains.
Easy for him to say. Hanauer, 72, and other family shareholders—one son, Nicolas, and Hanauer’s ex-wife, Lenore—are also original pre-IPO investors in Amazon.com, whose stock has soared about 1,000 percent since they purchased shares at pennies apiece. Nicolas, Lenore, plus Hanauer and his other son, Adrian, also have stakes in Nicolas’s Internet advertising company, Avenue A, which went public February 29 at $24 a share and was trading at double that price in March.
No family members work full time in the business now. Hanauer comes and goes as he pleases, although he can be found in his office most days. But he insists liquidity wasn’t even an issue before their propitious outside investments. “We get the normal perks that management of companies get, but nothing out of the ordinary,” he says.
When Hanauer and his wife divorced in 1984, they each got half of Pacific Coast Feather, but have since gifted most of their shares to their children. “I own 3 percent and Lenore, who is still a board member, owns 7 or 8 percent. My two sons each own 35 percent, and employees and management own about 20 percent.”
After his own divorce experience, Hanauer put a buy-sell agreement in place to keep ownership of the company within the family and its management team. The buy-sell agreement has never been exercised. “I can’t even discuss the terms intelligently. But we are extremely successful and growing rapidly,” says Hanauer, who proudly points out that the company, which had $1 million in sales when he took over in 1972, expects to go over $300 million this year. “People want to hang on to their assets in the company and derive cash from other sources.”
Some years ago the company did have an ESOP, which currently owns about 7 percent of Pacific Coast. “It had a particular purpose, to let the company buy back some of the shares with pretax money,” Hanauer explains. “The ESOP killed two birds with one stone. We got some stock to employees and got some stock back cheap. But it was never intended as a means of getting money out of the company.”
Dividends to all, bonuses to some
Roger Muselman
Dynamic Resource Group
Berne, IN
“We used to always be family first,” says Roger Muselman, third-generation chairman of the family management company that owns printing, publishing, and fulfillment businesses. That attitude led to paying each of the then six working family members at nonmarket rates, regardless of their position, experience, or performance. Each family member also received a nice car. That led to a distorted sense of entitlement, says Muselman. “Things weren’t running so great emotionally. It was never a money thing, like we were going belly up. But so few family businesses survive.” He and his cousin Tom “presented a strategic plan to the rest of the family, saying, ‘Let’s beat the odds.’”
So two years ago, when leadership passed from two second-generation members to Muselman, they switched from a family-first to a business-first attitude. That led to changes in compensation of the four third-generation members—Muselman; his inactive sister, Karen Thomas; cousin Tom, who is president; cousin John Muselman, treasurer; and the second-generation directors emeritus, Carl and Arthur Muselman.
Muselman describes the four levels of compensation he and Tom put in place. First is an ownership dividend that all shareholders receive; second is an allowance that they can each use however they want—a new computer, health insurance, charitable giving, home maintenance. “With the policies we now have in place,” he says, “if you want to spend your money on a fancy car, you can do so at your own expense. Before, it was loosey-goosey, though it wasn’t actually abused.”
The third level is a salary, which is based on each person’s experience and position. That meant raises for some (including Muselman) and cuts for others, although Muselman is quick to point out that the total compensation each family member receives is pretty close to what they got before. Then there’s a bonus based on meeting specific goals. Two-thirds of total compensation comes from this performance-based bonus.
The next step was to put in place a buy-sell agreement, for the first time in the company’s 75-year history, along with prenuptial agreements for any new marriages in the third or fourth generation. “It’s hard to talk to a future spouse about that,” Muselman says, “but at least they can say, ‘My family did this years ago. It’s not because of you.’”
Muselman adds, “We made the decision to make these changes, with lots of blood, sweat, and tears—and consultants. And everything’s going great right now.”
Refuse to skim the cream
Ig Vella
Vella Cheese
Sonoma, CA
Ig Vella, 71, pays himself $1,000 a month in salary and refuses to skim any cream from his firm. “What’s the value of bleeding the business and giving it all to Uncle Sam?” he thunders. Given that attitude, it’s no surprise that Vella distributes no dividends for himself or other family shareholders.
Nonetheless, his standard of living is higher than his $12,000 annual salary would allow. His wife, Sarah, supplements this meager income with her savvy investing.
When Vella’s father, Tom, who launched the company in 1931, stepped down in 1982, he spun off the land, buildings, and improvements into a separate corporation he owned. He then divested himself of the main business, Vella Cheese, which makes award-winning jack and specialty cheese. Tom distributed 23 percent of shares of Vella Cheese each to Vella and his three sisters, who work as part-time sales reps in various cities. Sarah owns 6.5 percent, and the couple’s daughter, Elena, works full time as office manager, but is not yet a shareholder.
Tom also installed bylaws and a buy-sell agreement that allows stockholders to buy or sell shares to each other. If no shareholder wants to buy tendered shares, the business can repurchase them.
Despite the provisions, Vella says, “My sisters thought that if they sold their shares to me, my father would not have approved. Even though I was in a position and willing to buy their shares, he didn’t want them to sell. It came back to me that he didn’t want me to have control of his business.”
But even since their father died in 1998 at age 100, the sisters have not been lining up to sell out. They’re not holding on in hopes of finally earning a dividend—they all voted against dividends so the company could put cash back into the low-margin, $2 million business. “We’ve kicked the idea [of paying dividends] around at stockholders’ meetings. I put no pressure on them,” Vella insists. But they seem to have confidence that their frugality will pay off in the long run.
Sell, and redeem the shares
Eva Hotard
Hotard Coaches
New Orleans, LA
Try keeping the peace when the family includes nine siblings, seven of whom currently work in the business. The Hotard clan, owners and operators of their $18 million tour-bus company, seemed to be doing just that. So why did they suddenly decide to sell the whole thing late last year to Laidlaw Inc.?
Although they made it tough on each other to liquidate their shares, and did not take advantage of other ways to spread cash flow around, Eva Hotard, president, insists money wasn’t the main motivation.
A buy-sell agreement her parents installed in 1984 permitted any of the shareholders to sell shares back to the business, but only at book value, with payments stretched out over five years (plus nominal interest). If the company could not afford to purchase the shares, shareholders were allowed to tender stock to other family shareholders. If there were still no takers, a seller could try to find an outside buyer. The agreement was created to prevent any future widowed or ex-spouses from becoming partners with the business clan, but the low value they could command for their shares also served as a deterrent to selling out. In the 16 years the agreement existed, only one family member, in 1993, sold shares back to the company.
Two subsidiary companies that owned the company’s 83 vehicles, both subchapter S corporations, did pay dividends, but only enough to pay those subsidiaries’ corporate taxes, which are payable by the individual owners in a subchapter S corporation.
Before the sale, the sibs had discussed other ways to offer more liquidity to shareholders, such as board fees, partial purchases, and consultant fees. None were implemented. “We didn’t really reject them,” says Eva Hotard, 39-year-old CEO (and fourth child), “but as the consolidation wave went through our industry, there was always the thought: ‘What if we just sold the company?’ We were still exploring the other options and would have picked one, I’m sure.”
In the end, the decision to sell was based less on the family’s desire for liquidity than to avoid liability. A big bus accident in New Orleans last summer, which did not involve Hotard Coaches, concerned Eva. Had they been involved, she says, “it could have wiped out our whole family’s assets in a second. There was a tremendous amount of emotion that went into running this business. Almost every decision I made, I found myself thinking about how this was going to impact my entire family. I’m not going to miss that part. It made me very conservative. We probably could have grown faster if I wasn’t worrying about wiping out the family.”
The seven siblings are still at the company, working under a five-year contract. Hotard gives no indication of seller’s remorse. In fact, the main emotion she says she feels is relief. “It’s nice now to be able to make pure business decisions. I’m looking forward to running the company as a corporation.” And the newfound liquidity from the all-cash deal doesn’t hurt. “I’m pretty conservative, so I’m sure I could be set for life. We have others who like fast cars and boats and they may not be.”
Jayne A. Pearl contributes regularly to Family Business from Amherst, MA. She is a columnist for Oxygen.com and author of Kids and Money: Giving Them the Savvy to Succeed Financially, Bloomberg Press, 1999 (www.kidsandmoney.com).