(TMA International Headquarters)
Being part of a family-owned business certainly has its pluses and minuses.
On the plus side, family members can take comfort in the fact that professional
opportunities are available to them. If the family is smart, rises above petty
jealousies, and works together, generation after generation can be assured of
earning a good living or, in some cases, a great living.
On the minus side, family-owned businesses run into the same types of
problems that other businesses encounter, but the family dynamics involved can
also exacerbate the troubles. In some instances, disputes have become so
acrimonious that businesses are destroyed or family members refuse to speak to
each other for years afterward, even if they continue to work together.
As business fortunes decline, disputes among family members in family-owned
businesses become more frequent and intense. Although a turnaround professional
called in to deal with such problems faces a real challenge, a successful
turnaround in such a situation can be extremely rewarding.
Sources of Trouble
Businesses fail for a variety of reasons, including product or service
obsolescence, incompetent management, a failure to change with the times, and
insufficient capital to support the business. But other factors are
particularly applicable to family-owned businesses. They include:
- Incompetent Successors. Many times family
members don’t have the capability or interest to drive the family business,
but the company is either thrust on them or they feel it is their duty to
carry on the tradition.
- Holdouts. Founders are sometimes reluctant to
turn over the reins of the business to the second generation. The Shoen
family, which owns U-Haul, had a very public fight between Joe Sr. and Joe
Jr., which culminated in the father literally being carried out of corporate
headquarters by security guards.
- Family Rivalries. Competition among relatives
for control can sometimes get out of hand. The owner of a large food
distributorship handed the business he founded over to his two sons, one of
whom had good sales skills while the other had good operational skills. The
son who had sales skills, however, insisted that he should be president
because he believed he was smarter and more capable than his brother. The
ensuing tension eventually drove the two brothers and their families apart,
and the sales-oriented brother bought out the other sibling. The business went
under five years later due to lack of controls.
- Cashing Out. A problem that often pops up in the
third generation of a successful business is that some family members want to
liquidate their stock and reinvest their money in other ventures. Often the
family business can’t afford to pay for the stock without severely impacting
the cash flow of the existing business. The only alternative is to allow
outsiders to buy the stock, something family businesses are often loath to do.
- Inbreeding. Family-owned businesses often only
employ family members in key managerial roles. It is not uncommon for a family
member to enter the business having never worked for anyone else. This
inbreeding can lead to stunted or malformed growth.
Boosting Odds of Success
Despite the potential pitfalls, there are many examples of successful
family-owned businesses in a variety of industries that have survived over long
periods of time. They include:
- Anheuser-Busch. The Busch family of St. Louis has been brewing
beer in the U.S. for about 100 years. The fourth generation is just starting
to take over.
- Dick Blick. The large provider of arts and crafts supplies is
owned by the Buchsbaum family of Highland Park, Illinois. The third generation
of Buchsbaums is now running Dick Blick.
- Ford Motor Company. Although the automaker is a public
company, the Ford family is the single largest shareholder bloc and, except
for a relatively short period, the company has been run by a member of
the Ford family. A fourth-generation Ford is now running the company.
- Hyatt Hotels. The hotel chain is owned by the Pritzker family of
Chicago. Third-generation family members are now working in the business.
To increase its chances of surviving through a number of generations, a
family-owned business can take a number of steps that have proven successful for
others:
Learn from Others. The Strawbridge family of Philadelphia
owned Strawbridge & Clothier, one of the most successful retail department
store chains in the United States. For more than 150 years, family members ran
the company until they were bought out by The May Company in 1996. No
Strawbridge was allowed to work in the family business until he or she worked
for another retailer for at least five years. The younger generations learned
what it felt like to be an employee, and they learned other systems that could
be brought in to improve the Strawbridge system.
Start at the Bottom. The owner of one company appointed
his son vice president of operations right out of college, even though the young
man had no experience. His only familiarity with the company consisted of
loading trucks and going out on sales calls during summers. Needless to
say, operations were a disaster until the owner rescued the situation with
more competent management.
In contrast, the Genuardi Family in Lancaster, Pennsylvania, which owns a
large regional grocery store chain, requires every Genuardi to start out by
bagging groceries, and they work for and are evaluated by non-family members.
Some family members are told they don’t fit in the business and must find other
professional opportunities.
Find the Right Fit. Each generation should hire an outside
firm to conduct personality and skills tests. Not every family member who wants
to enter the business is suited for it. If a good fit exists, testing can help
determine in which positions each would bring the most value.
Appoint Independent Directors. Many family businesses
pack their boards of directors with family members and friends because they fear
losing control. Family businesses have to keep in mind that the business exists
not only to support the owners’ family, but also to support the families of
employees. Developing an outside board and giving its members real authority can
provide independent analysis and fresh ideas that increase the chances of the
business’s long-term success.
Hire Mentors. Some people are good at nurturing others
and some are not. One owner brought his daughter on board to teach her about the
family business. Though smart and hardworking, the owner was a horrible
communicator. Worse, he held his children to much higher performance standards
than he did for others. That “mentoring” relationship soon dissolved by mutual
agreement.
It’s difficult for an owner to mentor his or her own children or other
relatives. Family-business owners should consider retaining outside
professionals or experienced non-family members of the management team to
serve as mentors and guides for other relatives. People listen better if there
are no emotional attachments or baggage brought into a business relationship.
Seek Different Perspectives. Most people think that for
continuity’s sake, it is best to stay with the same accounting, advertising, and
law firms. One family business used the same law and accounting firms through
two generations because they felt those firms understood their business
intimately. Although the presumption is logical, outside firms can become
complacent over time.
Coca-Cola recently changed advertising firms to inject fresh thinking into
its commercials, even though the old firm rotated different people onto the
account to prevent material from becoming stale. The problem is that all
companies have cultures that lead them to hire certain types of people. It
doesn’t hurt a business to change professional services firms every 10 years or
so to get different perspectives.
Compensate Only for Success. One business owner gave his son
a car, a large salary, and a fat expense account to compensate for spending so
much of his time building his business that he missed much of his son’s
childhood. When he brought his son into the business, he didn’t want him to
struggle financially.
Compensating the son based on parentage rather than his accomplishments built
up resentment among employees, and the son also complained that he had no true
gauge of his performance. Over time, employee resentment crushed the son’s
self-esteem and damaged his relationship with his father. The son left the
company to work for another business, where he could be judged on his own
merits.
Let Failure Teach Lessons. The son of a successful
entrepreneur has worked for his mother for some time. Every time she set the son
up in a business and the child started to drown, the mother dove in to rescue
him. He wasn’t allowed to work out problems or to fail on his own. Now in his
30s, he doesn’t have the skills to run his mother’s various businesses. Failure
can sometimes be the best teacher.
Look Outside. Henry Ford II, grandson of the founder of Ford
Motor Company, looked at the various family members involved with the automaker
and realized that no one was ready to take his position. He appointed an
outsider, one of several who ran the business until William C. Ford Jr. was
given control two years ago, 20 years after his uncle’s retirement. While the
company still has major challenges to overcome, most insiders feel William C.
Ford, Jr. earned the right to run the business because of the experience he
gained in his career both inside and outside the company.
Audit the Entire Business. Every company of any size has an
outside accounting firm to audit financial records and prepare corporate tax
returns. These reports let family members know how the business is doing
financially. The rest of the business should also be audited.
A consultant with specific industry expertise should be brought in once a
year to perform a qualitative audit of the sales, marketing, and
product development strategies. The firm should interview former and current
customers and employees to see if the leadership is heading in the right
direction. The results of the audit, along with the consultant’s
recommendations, should be presented to all family member shareholders.
Objective Analysis
Turnarounds require draconian financial cuts and thoughtful ways of
motivating employees and allaying the fears of customers. In an assignment that
involves a family-owned business, a turnaround professional must take additional
steps to enhance the company’s chances of succeeding. Attention to a number of
issues may help put the company on the road to recovery.
Before cutting employees and reducing salaries of non-family employees, a
turnaround manager should start by cutting family salaries and perks. Doing so
shows employees that they are valued and that the family is willing to sacrifice
on their behalf. One owner who refused to accept financial cutbacks himself
found that once that word got around, his best people left for new jobs. He
ended up selling the business for a fraction of what it might have brought.
A turnaround manager must determine whether management is to blame for the
troubled company’s problem or the company is in an industry that is in trouble.
Many businesses are suffering today because the market demand for their products
is weak. An outside firm can benchmark a company against similar companies
in the industry to see how its management is performing compared to the
competition. If it is below the competition, it is a good idea to consider
bringing in an outsider to either work with or replace the current leader.
One family-owned company thought it was only fair that older family members
should hold the most senior positions because they were more experienced. There
is some logic behind that idea, but it often isn’t the best staffing plan for a
business. Some older family members may not have as much energy, knowledge
of industry changes, or willingness to move the company quickly in another
direction as younger members would.
In a turnaround of a technology company, the owner/majority shareholder was
floundering. With the encouragement of some minority shareholding managers, he
realized he didn’t have the skills to fix the problems and move the business in
the right direction. At the encouragement of some minority shareholding
managers, he voluntarily stepped down, and a better manager was hired.
In another case, the founder and CEO of a successful clothing manufacturer
had brought in more family members to run different parts of the business as the
company grew. Although the CEO was a capable leader, many of the other family
members who held positions of responsibility were not. The CEO was told he could
either replace his brother and son-in-law or eventually watch the business
go under. He replaced the family members and hired a transition firm to help the
displaced relatives find new opportunities and to heal family wounds.
Fixing a family business has much in common with turning around any business.
But it has its unique aspects, too. As an outsider, a turnaround practitioner
can perform an objective analysis, free from personal feelings and jealousies.
Only with that objective analysis can the real problems be addressed.