Over The Hill
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Your family business has made it through its initial entrepreneurial struggle, sailed through its first succession, and now has third- or fourth-generation owners and managers. Will it be able to bypass a midlife crisis?
Probably not--especially if it lumbers along without being aware that there may be forces bringing it down, says Mike Cohn, family business consultant and president of The Cohn Financial Group Inc. in Phoenix, which specializes in business succession consulting.
Who are these potential enemies? The family owners themselves.
A business founded by a grandfather in the 1920s, for example, might have three generations of shareholders--cousins, aunts, uncles, nieces, nephews, children, even in-laws. Some might live in the same town as the business and be involved in its management; others might be thousands of miles away, disinterested in everything about the business save its dividend checks.
Too much distance or, on the flip side, too much management interference by owners can be the midlife crisis that threatens an established family business' survival.
Meeting In The Middle
When nonactive family owners live far away, their involvement in the company is similar to that of a shareholder in any company: It's simply an investment. "But since they can't look in the newspaper to see how the stock is selling," says Cohn, "they're really at sea."
These family members often don't understand that dividend checks may shrink because the business needs to reinvest profits, or why so much is set aside for research and development. They don't have a clue about whether the business is losing market share, having a cash flow problem or suffering from a high turnover rate. Their lack of knowledge and involvement can lead to mistrust and be the source of a major conflict between the active shareholders and themselves.
To improve the situation, the family can try to make corrections and refocus on what it must do to draw together instead of apart. Or, if the conflict escalates and becomes corrosive, owners may choose to sell. "Because we're in the age of acquisitions, midlife may be a time when the family decides it's better to reap substantial financial gains from a sale rather than continue owning a business that causes such grief," says John Messervey, president of the National Family Business Council, a consulting firm in Lake Forest, Illinois.
Just as family members' remoteness or lack of involvement might threaten the business's future, so will interference into daily management by nonactive owners. According to Messervey, "When nonactive shareholders get entrenched in trying to run the business, the family member at the helm of the business might begin thinking `Why am I doing this? I own 4 percent of the stock, do 90 percent of the work, and have to answer to people who don't know as much about this business as I do. It makes more sense for me to own my own business and report to no one.' And he or she would be right."
If too little or too much involvement of owners can sink a middle-aged family business, what constitutes "just-right" involvement? And how do you achieve it?
First, foster a positive feeling about the business when your kids are young. While Tom Zadek's five children are still young, he is making a conscious effort to share the positive aspects of, and keep them involved in, the family's 80-year-old Fitchburg, Massachusetts, business, Nursery Needs Inc. Their involvement so far has been all fun: They model for catalogs and promotion materials for the company, which designs and manufactures infant and preschool grooming and teaching aids. Even if they don't wind up working for the company, Zadek wants his children to understand how important it is to the family.
As family members get older, they need to learn what it means to be an owner. That includes discussing the family's business philosophy. Does the business come first? Does the family comes first? Or is the family committed to a balance, taking actions and making decisions that are good for both?
Mitchel & Scott Machine Co. Inc. in Indianapolis is working on getting just-right involvement of its family business owners. The 64-year-old precision machine-parts manufacturer recently formed a family council. "We're doing what needs to be done to leave a solid business to future generations," says Tom Mitchel, the company's president. Tom, his brothers Dave and Steve, and all three of their families are trying to determine how to be effective owners even if some members are three states away, what they should look for in the next leader (who may or may not be a family member), and how to improve communication.
Family councils provide a wonderful vehicle and a safe setting for discussing a range of issues: how future generations should enter the business, how to integrate the family's mission with a changing business environment, how nonactive members can participate in a meaningful way, how family members can redeem their stock if they're no longer interested in being shareholders, how to maximize the family's role in philanthropy or the community, and so on.
Will there be dissension amidst the discussion? You bet. The expanded number of owners makes that almost a given. Still, the friction is not always bad. "It helps resolve some of the distance," says Messervey. Because the owners are often forced to examine how their unresolved family conflicts are being played out in a business setting, it's hard for one member of the family to lead the discussion (unless he or she is a skilled facilitator with few allegiances). That's one of the reasons Mitchel & Scott has an outside family business consultant come in to facilitate their family council meetings.
The little victories associated with working together as owners are important, says Messervey, because they build a family's confidence. To move through midlife crisis into the mature years, owners need to feel that no matter what challenges they face as a business in the future, they can work them out.
The Cohn Financial Group Inc., 5080 N. 40th St., #235, Phoenix, AZ 85018, (800) 422-3883
Mitchel & Scott Machine Co. Inc., 1841 Ludlow Ave., Indianapolis, IN 46201
National Family Business Council, 1640 W. Kennedy Rd., Lake Forest, IL 60045, (847) 295-1040
Nursery Needs Inc., P.O. Box 2167, Fitchburg, MA 01420.
Patricia Schiff Estess publishes the newsletter Working Families and is the author of two new books, Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).