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When Business Separates Father From Son

This sticky situation could have a happy ending if it's treated as a business problem and not a family dispute.

Here's an e-mail that will really tug at your heart--it did mine.

"I am a 75-year-old former engineer. Thirty years ago, I founded a small consumer goods company that today has over $2 million in sales. I sit on the board of directors with my only son, who has been with me in the business for over 10 years, and the company accountant. I own 70 percent of the company's stock, and my son owns 20 percent.

"The company last made a profit three years ago. At that time, my son started a sideline business--a commercial real estate firm--that purchased the building my company currently occupies. My son then arranged the transfer of the company to this building, at a bargain rent, and began investing in additional facilities and personnel as part of his plan to grow the company.

"We soon ran out of money, and my son asked me to give him my president and CEO titles to help his search for additional funding. Over $3 million of new funding has come from my son's real estate company in the form of loans collateralized by the company's assets.

"My son has become increasingly committed to his real estate business, and I can't blame him, because he has really prospered there. Unfortunately, he's spending very little time managing my company's business. He only comes into the office one day a week and has appointed a golfing buddy of his as general manager. I see no change in the company's position since this person took over a year and half ago.

"I started the company using my own resources and later brought in my son to manage the business, help it grow and eventually become my successor. My goal was to build a successful business that would provide a comfortable retirement for my wife and me and to provide a comfortable life for my three children. That hasn't happened, and I'm afraid we are running out of time.

"I intend to fire my son and take over as CEO while I search for a new one to replace my son and turn this business around. What's the best way to do this?"

Okay, to start with, Father has only one seat out of three on the board of directors, and so will not be able to oust Son directly without getting the third director--the company accountant--on board. The company accountant (if he or she has any sense) will probably resign from the board rather than be put in the position of "arbitrating" between Father and Son--a position that might create a "conflict of interest" for the accountant, who presumably has been taking his marching orders from the son or the general manager.

But . . . with 70 percent of the stock, Father should be able to call a special meeting of the company's stockholders (both Son and the owners of the 10 percent of company stock not owned by Father and Son will have to receive written notice and an opportunity to attend the meeting) and elect a new board of directors consisting of just himself. Once that's accomplished, as the sole director of the company, Father can hire and fire anyone he pleases, including Son and his friend, the general manager.

Before Father pulls that trigger, though, it's important to know which way the gun is pointed. Son, through his real estate firm, has made $3 million in loans to the company, presumably to meet payroll and other operating expenses (since the "disinterested" members of a company's board of directors must vote on shareholder loans, Father and the company accountant probably approved them). These loans are collateralized by the company's assets. I'm willing to bet that these are "demand" loans that Son, or his real estate firm, can call at any time if Son is unhappy with the way things are going at the company.

By ousting Son from his CEO job, Father almost certainly will get Son really mad--after all, Son may honestly feel that he's been doing his dad a favor by keeping the company on "life support" out of his own pocket (let's not forget the bargain rent for the office space) with little prospect of a return--so mad that he may call in the loans. With only $2 million a year in sales and zero profits, the company will not be able to repay these loans on demand, and Son will end up foreclosing on the company's assets, leaving Father (and indeed all stockholders) with empty hands and worthless stock.

If I were the father in this situation, I would call a meeting of the board of directors for the stated purpose of "discussing the company's future and any ownership or management changes that may be necessary to ensure the company's future profitability." That should send a signal to Son (if he doesn't already suspect) that Father is unhappy, and it also creates an opportunity for Father and Son to discuss the situation calmly and intelligently, without finger pointing. By treating the company's situation as a business problem and not a family dispute, there's a chance the company accountant, who as a director has some legal and ethical responsibility to act in the company's best interests without taking sides, may be more willing to offer constructive suggestions and compromises that will resolve the impasse between Father and Son. This is not a perfect solution, to be sure, but it's the best I can offer given how badly the situation at this company has already deteriorated.

One more thing: At the age of 75, Father probably views this business as his "life's work" or "legacy," and so has an emotional investment in the company that goes far beyond the labor and money he put into it over the years. It's very possible that this company may fail despite everyone's best efforts. The fact that the company needs the son's personal loans to meet operating expenses hints at problems that go far beyond his "absentee management", and Father and Son both need to confront these directly and honestly. It may be that Father and Son should both accept the inevitable and shut down the company (or sell it) to limit their future losses and preserve their relationship. Perhaps there's a cushy job opening for Father at that very successful real estate firm Son is running.


Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at www.sbtv.com. E-mail him at cennico@legalcareer.com.

Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.

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