Life Association News

1 Oct 1998

As published in Life Association News

Fewer than one in three family-owned businesses passes from the first generation to the second and only one of those three conveys to a third. Sometimes this is for sound business reasons. Maybe the sons and daughters and even their cousins lack education on the specialized know-how. But more often, the problem is poor communication a faulty process for making decisions, worsened by family conflicts and sibling rivalries. When this happens, it's not just the business that breaks down, the family can fall apart. Witness the following situation:

For 40 years Harold Wojciechowski put every dime into his T-shirt screening and award-engraving business, working six days a week and a few hours more after church on Sunday while his wife Maria raised five children. Harold had three locations within a 45-mile radius. Seventy percent of the sales took place at the original location, with the other two generating the rest. Sons Al and Steve had worked in the company for 20 years. Harold's health was poor and twice in the last year he needed surgery. The second time, he was in the hospital for three weeks.

It was around this time Steve quit abruptly and blamed his brother Al. "It is absolutely impossible for me to work with my brother. No matter what I do, it's criticized. Al insists on making all the decisions, not even listening to my input. I've generated a great deal of business and improved our reputation, but I'm treated like a dog. My brother will tell you I have a drinking problem. I don't. He just never got over his own problem with it," Steve told his father.

Al, who was eight years older than Steve, countered that Steve not only drank to excess, but he dressed poorly and sometimes looked and smelled like he hadn't shaved or bathed in weeks.

"This gives our customers, especially people just locating in the region, a poor image of us," Al said. "I've asked my brother to do several personal things he just refuses to do. So I will not talk to Steve (he had not spoken to Steve for several months) until he joins alcoholics anonymous and solves his drinking problem."

Harold and Maria were distraught. Harold was too sick to return and run the business. The other three children lived far away and had other, more interesting careers. The youngest, Elaine, had just won a regular role on television series and came home only at Christmas. Even if the parents and the siblings could figure out an equal division of the business, the rancor between Al and Steve would hurt operations. The others weren't sure if Steve really was an alcoholic, but they say him drink heavily and suspected he used drugs at times. He often worked short days or didn't come into the stores at all.

As is typical, Harold had developed the business from just a kernel of an idea and spent his sweat, blood and the family's equity making it go. But the two brothers never resolved the conflicts and, most importantly, never learned to work as a team.

If you have clients who own closely held businesses, it's important to learn what you can about the internal dynamics and personal relationships. Otherwise you may find yourself trying to place complicated or expensive tax and investment strategies and large dollar amount of life insurance and retirement benefits to people who are preoccupied with whether Harold will get out of the hospital or if Steve will work hard enough to produce the revenue to fund all these trusts and benefit plans.

In other words, dealing with family businesses is not the same as working with straight-laced corporations run predictably and responsibly by managers and employees.

The Options

Succession of a family business is one of the most difficult events to plan for. It lends itself to procrastination and avoidance. The idea of talking to an outsider about one's mortality, retirement date and stepping down from the top spot in an organization is never easy. When asked why they have not set out a succession plan, business owners typically plead lack of time or maintain that planning a transition too far in advance limits their flexibility.

So time goes by and the owners may be in his or her 60s and the children may have worked in the business as long as 35 years without a sense of what's going to happen. There may be a large variance of skills level and even sloth, dishonesty and incompetence. Trusted non-family employees will lose patience and quit. The pressures on the founder become extraordinary. And the options may or may not be palatable:

1. Sell the business
2. Make one child president and the others report to him or her.
3. Carve out different territories or businesses for each child.
4. Appoint two or more siblings to jointly manage the business.
5. Hire professional manages and keep the kids away from any position where they can cause serious damage.

Obviously, the key lies in the family member's ability to communicate frankly and solve problems constructively and not act like Steve and Al in refusing to talk to one another. This is not an easy task, but nor is it unique; all families and businesses are dependent on trust. The more that all involved can demonstrate personal authenticity, integrity, compassion and democratic leadership, the more chance the family has to craft a workable succession plan.

How To Approach Succession Issues

The following questions can help the family address succession issues. The best way to do this is convene a family meeting or a family business council, ideally involving a professional family business consultant or other outsider to keep up the level of communication.

Questions for succession planning for each individual family member:

-- What are each individual's current and future needs?
-- What is each individual's commitment to the business?
-- What are the financial goals and needs of each individual?
-- What are the desires and competence levels?
-- What kind of retirement is desired?

Questions for the family as a whole:

-- How deep is the family's commitment to perpetuate his business?
-- How will family, management and ownership be differentiated?
-- How important is it that business stays in the family's hand?
-- How will the succession plan impact the family members? relationships?

Impact on the business:

-- What is the purpose of the family business?
-- Is this supposed to be a fast growing business? One that requires a lot of investment and new technology? Or does it virtually run itself?
-- Who and what have been most responsible for its success?
-- What does the business need to insure its growth and continuity? What skills do the top management need to meet those goals?
-- How much influence will the owners have on the management and the culture?
-- Who will train and evaluate the successor and how?

Values and Norms

The values and norms operating in the family should determine the answers. When brothers and sisters and parents fear that the others will not address their problems with fairness and compassion, they become distant and defensive. People whose energy and ideas are vital to the business are not in the frame of mind to contribute. Like Al and Steve, they let personal problems interfere with timely business decisions. As the breakdown of a family business is often a breakdown of love, the effects are more intense on other members of the family who are trying to remain loyal to all involved.

Few business leaders would define success in their business only in terms of economics. Health, for family businesses may be best defined as the development of moral character, ability to work as a team and a financially successful enterprise. To meet this goal is the challenge of family business leadership.

Marc A. Silverman, Ph.D., principal of Strategic Initiatives International in Providence, R.I. is a family-business consultant who specializes in working with succession issues, family-business councils and conflicts management.