My father wants me to go back home to help him run the business. I welcome the invitation, but I want to go about it professionally and businesslike. I want to treat this as a business transaction.
I want to make a statement that if I join the business, as I am putting in sweat equity, I want to have a say. I don’t want to end up a “tea boy.” Do you have any advice for me?
Experts’ replies:
After digesting this reader’s plea for advice, a thousand questions come to mind. Bully for him for going about this potential arrangement in a professional and businesslike fashion. It is a businesslike transaction, and it should be viewed as such by both generations. The reader should expect his father to be a bit confused by his objective approach, and this is understandable because he’s made what appears to be a generous offer, albeit an offer with no definition.
Here’s what we recommend for the junior-generation member. First, he must clearly understand what his dad means when he says he wants “help.” He should work with his father to develop his role and responsibilities based on his expertise and outside business experience. He should clearly understand what his scope of authority is—what he is and is not responsible for. He needs to work toward a realistic base compensation plus incentives and understand what it takes to receive compensation increases in the future.
From a big-picture perspective, he should analyze the company’s business plan and future business prospects. He must review the organizational chart so he’ll know who else occupies key roles and positions within the company. Because he wants to go about this transaction professionally, it would be wise to undertake due diligence of the last few years’ company financials so he’ll know exactly what he’s getting himself into. If he’s expected to come in and turn around a declining or dying business, that requires a different set of skills than piloting a high-growth, high-profit enterprise.
He should do an informal SWOT (“strengths, weaknesses, opportunities and threats”) analysis of the company and talk to his dad and key managers. He should brainstorm the issues and challenges the company is likely to face in the next few years and take the temperature of the management team to see if it’s dominated by one person or a tiny handful of people, or if the team functions together in a synergistic way.
It might also be wise to undertake a bit of research to find out what the customers actually think about the company (vs. what insiders say the customers think) and to make sure it is not too dependent on one or two major accounts. Finally, he needs to discuss future ownership (all of the issues above have to do with operations and management) of the company. Will he be expected to share the company with siblings or other insiders in the future? If so, he needs to know how he’ll be compensated in the long run for his “sweat equity.”
Dad or the senior managers may be impatient with all this due diligence. Be understanding and patient, and help them understand that family love, trust and respect are wonderful things but no substitute for hearty due diligence and crystal-clear understanding between the generations.
— Wayne Rivers
Rivers is co-founder and president of the Family Business Institute Inc. in Raleigh, N.C. (info@familybusinessinstitute.com).
If you want to enter your family business as an employee, the first step may seem boring—to ask for a written job description. Apparently you have worked elsewhere and may have skills and knowledge to contribute, but finding the right niche, the right job, in a small business is critical.
A job description can help you define whether you are successful or not, and to whom you will be accountable. The right job is “life-giving”—it gets you out of bed in the morning and helps you gain energy as the day goes on. The wrong job feels like a burden; it depletes energy, and you end up watching the clock inch toward quitting time.
I hope your father is not creating a job for you, to lure you back home. Whether you eventually become an owner, through sweat equity or by gifting or some other agreement, remains to be seen, and perhaps that is a conversation you want to have with your father before you buy your one-way plane ticket.
The family business successors who do best, in my opinion, work elsewhere first, develop some pertinent skills or experience, and also demonstrate a willingness to learn the business from the bottom up, especially from competent, long-time employees who don’t ever expect to inherit stock. Whether you will have “a say” that will be taken seriously depends on what you have to offer—besides your last name— and how you offer it.
— Ellen Frankenberg, Ph.D.
Frankenberg is a Cincinnati-based family business consultant who facilitates family meetings and coaches executives and successors (ellen@frankenberggroup.com).
As you note, this invitation from your father is a business decision, and it should be approached as you would approach any other business opportunity. Both your father’s and your expectations should be discussed thoroughly. Your statement about “sweat equity” suggests that you want to be able to earn ownership as part of your compensation. And your comment about being more than a “tea boy” indicates you have concerns about your father’s willingness to delegate or share authority. You and your father should define roles and responsibilities, and discuss how future ownership and leadership can be achieved before you accept this invitation.
While your prior knowledge of your father and the business can help you conceptualize what your potential role could be, your father may have a different vision. Your different ages and experience levels may influence how each of you envisions your role within the business. If you have acquired skills prior to entering the business and have reached an age and stature for leadership, you may have less tolerance for a prolonged apprenticeship. If your father is in his prime, he may not be ready to evolve to a reduced role, but he may be able to share leadership. Some research suggests that a founder past the age of 70 finds it more difficult to relinquish authority to a successor.
How you would be compensated also is an important part of your discussion. Experts usually recommend that salary for family members should be in line with market value. Others have suggested that there may be an additional reward for the extra work that family members often perform. However, it is clear that you are interested in achieving ownership, not just fair compensation.
Frequently business founders have not considered their vision for future family ownership. If the business is relatively small, you may wish to combine your sweat equity with other ways of purchasing stock —such as shares rather than cash bonuses—before the business grows too large. If the business already is substantial, it is possible that you and other heirs will inherit ownership interests. If your father wants to groom you to be his eventual successor, you will need to prepare for leadership in the business as well as among other potential shareholders. Good communication with other family members may facilitate your acceptance in this leadership role.
The conversation you are initiating with your father is the beginning. The degree to which you and your father share values, a vision for the future and a desire to communicate will help you evaluate your ability to work together easily. A shared vision and values are the foundations of business planning, which eventually may involve other family members, advisers, and current and future employees. Your approach to this business transaction is very professional and appropriate.
— Margery Engel Loeb
Loeb, president of Loeb & Associates LLC, consults nationally to families in business on transition, change, communication and planning (mloeb@loebgroup.com).
Ask the Experts: The successors who lack a planWhat do your experts say to a situation where the second generation passed away, but left absolutely no instructions whatsoever about succession, which involves two brothers and a sister, all active in a moderately sized ($150 million) real estate company?
Experts’ replies:
This is, unfortunately, a familiar scenario: a senior owner-executive in the family company unexpectedly passes away, leaving no succession plan, not even a hint of his preferences for the future of the business. Whether the omission is due to oversight or procrastination, the effects are usually the same: Family stress added to the sadness, uncertainty within and about the business, possible conflict and, in the worst cases, loss of the business’s strategic direction and even loss of the business.
It’s happened here, and now hand wringing won’t help. It’s time for decision making under crisis conditions and without the guidance of the former top officer. In the absence of a succession plan, I suggest a backup procedure that might require the assistance of a professional adviser or facilitator.
Step One is to get a mandate from family owners and stakeholders to initiate analysis and planning (do family shareholders really want to continue in the business?) and to agree on a process for making decisions and on who’s going to lead it.
Step Two is a thorough, thoughtful analysis that will involve reviewing documents and talking to people to get a fix on the business’s current status and on its ongoing management needs and the family’s ability to meet them.
Business analysis: What factors account for the company’s past and current success? Can those factors be sustained, and what kind of management will be needed to sustain them, to grow the business and to respond to marketplace changes over the next ten to 20 years? Key company agents and staff, and confidants in the business community, will be especially important sources.
Family analysis: What are the roles and responsibilities of the three family members currently active in the business? What are each one’s skills, talents and track record? What’s the potential of each one to take on the business’s management and leadership successfully? Is there a natural, if undesignated, CEO among them? Also, what are the expectations and needs of family members outside the business for financial benefits? For a continuing sense of family heritage?
Alternatives analysis: What are the realistic options for action the family might take? Select and prepare a family successor and a management team? Reconfigure the company to bring in outside senior managers or move to an ESOP? Prepare the company for sale? Consider other alternatives?
Step Three is to select a course of action, based on the findings and conclusions of Step Two, that makes both business sense and family sense. Then operationalize it and wholeheartedly support it.
No family in business with a serious expectation of staying in business should let itself get into such a situation. But many do, and others will in the future. To avoid the pain and pitfalls of being unprepared for an unexpected loss of leadership, every family business should have a clear succession plan. At the very least, every family business should have a backup procedure for surviving without one.
— James W. Lea, Ph.D.
Lea, a professor at the University of North Carolina at Chapel Hill, is a family business speaker and adviser (james.lea@yourfamilybusiness.net).
Tragedies such as this are all too common. Proper family business succession planning includes a buy-sell agreement among the owners that defines the benefits and responsibilities of all active members. It is the responsibility of each member to have a will, which should be aligned with the buy-sell agreement. The buy-sell agreement and the wills should be the result of much thought and planning, giving consideration to family, legacy, values and responsibilities together with the best interests of the business so that its value can be maximized pursuant to the succession plan.
If a will does not exist, the disposition of the deceased’s interest would be decided in accordance with state law and would therefore be in the hands of “strangers.” If a will exists but leaves the deceased’s interest to third parties, additional complications would arise, causing major emotional issues within the family that could interfere with good financial decision making in the best interest of both the company and the three children now active in the company.
Presuming a will exists and does not leave the deceased’s interest to a third party, this situation demonstrates the importance of solving problems before they arise. The ownership team should have made a priority of creating a business plan for the company that defines its goals and methods of achieving them, as well as the role and responsibilities of each family member to maximize continued growth. If they did not tend to corporate governance issues because they had a close but informal relationship, this is unfortunate. If the reason was lack of practice in communication or inability to communicate easily, it is imperative that this be worked on going forward.
In the absence of a succession plan, hopefully the example set by the deceased, combined with the education, training and mentoring to date, will allow the next generation to work well together with a code of conduct reflecting respect, problem-solving skills and an understanding of the business so that its success is ensured. Because of the lack of formalized planning, the remaining owners must now work in crisis mode, either by themselves or with the help of outside consultants or facilitators, to create a business plan that spells out the goals of the company and defines how each of them can work to their strengths to accomplish these goals. This presumes that because the children are active in the business, a realistic decision was made by the deceased parent that the children have the wherewithal or potential to bring the business forward. A buy-sell agreement must be created that addresses what would happen in case of death, disability, voluntary or involuntary terminations, and retirement. As the siblings deal with the provisions regarding these issues, they will also have to deal with financing each of these arrangements, as well as valuation of the company in each of these cases.
Hopefully the deceased provided for the financial needs of his spouse and the funding of estate taxes. The children or the company may have to redeem or buy out the company shares from the estate. Unless the children have personal wealth or the company is cash-rich or has insurance coverage, funding will have to be obtained for this. However, the company itself has its own working capital needs independent of this new tragic occurrence. Often, when the deceased has not preplanned, the business must be sold just to meet the responsibilities of the estate (taxes, etc.). This further reflects the importance of preplanning.
— Paul Rich
Rich is a principal with the Rothstein Kass Business Consulting Group in New York. He specializes in assisting closely held and family-owned businesses (prich@rkco.com).