Help Family Business Leaders Avoid Disaster by Sheon Karol

Read the original article in the October issue of TMA's Journal of Corporate Renewal (subscription required).

The same qualities that help the leaders of family businesses survive and thrive can also lead to their downfall. Stubbornness and determination can be strengths while building a business or leading it through change, but these qualities can also damage a company if they blind a leader to festering problems.

Unlike other companies, family businesses are typically controlled by a single dominant leader who holds sway over its decision-making. These individuals are often perceived as heroic figures within the family — after all, they’re responsible for their family’s key asset and, essentially, their fortunes. Unfortunately, when these leaders steer the company in the wrong direction, they not only endanger the business, but also the financial security of their families.

A Napoleonic view by the leader is particularly dangerous. A foolhardy CEO once told me that he had always disregarded advice and was successful and so he planned on continuing to ignore all advice.

So what can be done? Concerned family members, whether they’re actively involved in the business or not, can help the family business stave off ruin by learning to recognize dangers ahead of time and proceed to implement solutions that will help the company get back on track.

The old cliche of “knowledge is power” holds true when approaching a family business leader who may be on the wrong track. Concerned family members need to uncover signs of business decline before the business suffers a significant loss of value. While business distress is more easily discernable, typically hints of downturn are only noticeable to executives, who may turn a blind eye or not realize the implications.

Concerned family members must snap the family business leader back to reality.  They must end the delusion that everything will turn out well.  There will be no deus ex machina, no outside agents or external circumstances to rescue the business. This awakening starts with identifying the warning signs of decline that I discussed in greater detail with Scott Stuart in “TMA Talks: Early Signs of Change Precede Signs of Distress.” For company insiders, these include a lack of innovation in how the company is run or the products and services it sells, a shift in buying or sale trends, the deferral of capital expenditures, or a new focus on the timing of payments. Other warning signs include the emergence of competitors or a heavy reliance on a single sales channel, customer, supplier, trend, or executive.

For family members without access to the inner workings of the business, the warning signs to look for include: an unwillingness to grow the business, seek out new deals, or formulate new strategies; stagnation among management; and health or personal issues distracting the family business leader from focusing on the company.

But uncovering signs of business decline is only the beginning. Convincing the family business leader to change course is the real challenge. After all, this person may have built the company from the ground up or steered it through tough times; so why would he or she listen to advice now? A concerned family member’s goal should be to provide hope, to show the company’s leader multiple options grounded in reality that will improve the fortunes of everyone involved. The next step is to determine whether a one-on-one discussion or a more formal mechanism would be best to make the case. Litigation should be avoided, as family business battles tend to be expensive and drawn out.

Regardless of the forum, the uncovered warning signs should be discussed and solutions presented. Examples include introducing new technology, entering new markets, adopting a new pricing model, adding or substituting executives, modifying the company’s debt structure, or instituting vertical integration. More drastic measures include shutting down a poorly performing division, acquiring a competitor, or selling the company.

Selling the company may satisfy family members who want to cash out on their assets while keeping the family business alive through a buyer with the resources and wherewithal to take it to the next level. Presenting this option early is best, as selling the business before distress is discerned by the market is far better than allowing the business to decline and lose value.

Another reason to act soon is to avoid compounding family losses.  I recall with pain explaining to aged parents that their son’s management of the family business would result in the lender calling on their guaranty.  Although the parents had to contribute a considerable sum, we limited their loss by selling the business as part of a settlement with the lender.

It is not enough to raise the alarm.  One must always provide a solution.  Support the proposed solution with thorough and intelligible analysis. Preferably, the analysis should provide alternatives; and the advantages and disadvantages of each alternative. Persuade!

But how does one persuade? The sixteenth century compendium of ethical advice, Midrash Shmuel, advises those dealing with governmental authorities to achieve success by only advocating what is in the interests of the authorities. By analogy, if the family leader holds the power, advocate what is in his self-interest and protect his self-image by not appearing to threaten his position.

If the company leader is not amenable to a one-on-one discussion, it may be necessary to call a family council or a meeting of the family or board of directors. Success is more likely if the groundwork has been laid.  Establishing a family council and ensuring regular board meetings before an issue arises could obviate later problems.

Suasion and consensus are achievable when the concerned family members rally support with their relatives. Remember that business is about people. Consider what motivates each person.  What are his goals?  What are her fears?  How can you address these psychological factors? Can you do it yourself or do you need an outside party who is influential or is viewed as impartial? There is no one solution – as Leo Tolstoy, the great Russian author, wrote, “All happy families are alike: each unhappy family is unhappy in its own way.” When counseling a family business, I spend a great deal of effort determining how I can “package” my advice convincingly. The “package” is ultimately a customized combination of financial analysis and psychology.

It may prove to be a challenge but look for a resolution that keeps the other members of the family’s finances in mind. For example, some family members may want to sell the business to have immediate access to funds, others may want to keep their positions within the company, while another group may want a steady future income stream. In these types of cases, the assistance of business consultants may be needed.

Tapping their expertise may lead to solutions such as a methodology I used successfully in a contentious family dispute: a staged sale of the company’s holdings that ensured short-term payments, maintained employment for family members, and facilitated the establishment of a trust for future distributions. The mechanism succeeded because it satisfied the goals and concerns of all parties involved. The likelihood of agreement is always increased dramatically by identifying and addressing the needs of each party.

Concerned family members need not have a controlling position within the company to help bring about positive change for the family business. Looking for signs of business decline, warning the company’s leader, and providing solutions are necessary steps to effect change. Mechanisms for family decision-making assist consensual resolution, especially if they are implemented before issues arise.  Proposed solutions should provide cogent alternatives and address the concerns of involved parties. There is no simple panacea but family members have the tools to avert potential business disaster and protect the family’s biggest asset as a source of financial stability.

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