The Family Business: How to Keep It Going

When it comes to running a family business, sheer enthusiasm and "I think I can" attitude can keep the engine on track — for awhile. Too often, though, there's a loose bolt in the undercarriage forged from the homegrown resentments and personal agendas that family members bring with them to the workplace. When parents and kids deal with personal problems instead of business affairs, the non-family staff blames every profit derailment on shameless nepotism. When things come to a head and the train hits an emotional sharp curve, the whole business can be left blowing steam on a sidetrack.

Fortunately, a little preventive maintenance can keep your family flooring business chugging along. Here are seven common family-related business problems and how to overcome them.

Problem 1

Your son went to college, moved away and got a good management position. Now you want him to move back and manage your flooring crews. But you are afraid to alienate your veteran non-family employees who may want the job. They invested years building their skills at your business, and now they have to report to somebody who gets the job because he's family? That could create an attitude problem, not to mention costly defections of quality people.

You can solve this problem with a good communications strategy, says Paul I. Karofsky, director of the Northeastern University Center for Family Business in Dedham, Mass. Karofsky suggests a three-step approach.

Step one: Have open discussions. Interview all the players and ascertain their feelings about the expected appointment. "Have open discussions that clarify the company's policy and your entry criteria for family members," says Karofsky. Emphasize that family members must jump higher hurdles. "It is extremely important that family candidates be more qualified than others for a position," he adds. Such higher qualifications are necessary because family members are held to a higher standard than others. There is a greater level of expectation of them.

Give special attention to anyone you believe maybe gunning for the position, suggests Karofsky. You must be particularly careful to explain to that individual how your son's knowledge, skill and experience are so much higher than that of other candidates. In any case, openness plays a key role.

Charlie Clough, who operates Allsports Flooring in San Diego, Calif., with his son, Kevin, emphasizes the importance of fairness and communication in maintaining good relations between family management and a non-family workforce. "If something comes up you've got to talk about it right away," he says. "Everything is up front. We don't try to harbor anything; we expect our employees to tell us if they're unhappy."

"We treat everybody fairly," says Rick Trisler of Trisler Hardwood Floors in Whiteland, Ind. Trisler and his brother, David, are taking over the business from their father, Raymond. "It's okay as long as nobody is getting any favoritism over anybody else just because they're family or not family."

Step two: Demonstrate the need for the position that your son will fill. "If it's not a demonstrated need, you are asking for resentment," says Karofsky. Giving someone a figurehead job and a salary insults everyone.

Step three: Interaction. Break the ice by getting your son to work with others right away. "Create projects that require the interaction of your son and key non-family employees to help build relationships," Karofsky suggests. Maintain a continuing dialogue among top managers regarding family business dynamics, emphasizing that family members are respected not for who they are, but for how well they perform.

Problem 2

You feel a long-time, trusted employee and talented installer would make a great mentor for your child, but you are afraid the employee might feel intimidated. No one wants to train his or her replacement. That goes double for a career employee who may feel trapped by your request for stewardship.

"Unless they are incredibly mature, any employee would feel threatened about training a next-generation family member," says Nancy Drozdow, principal at the Center for Applied Research, Philadelphia, Pa. "It's natural for them to ask, 'What does it mean for me?' The solution is to put your employee's fears to rest by talking about the subject." Communicate your admiration for the employee's skills. Emphasize that your son will be working in another capacity at the business.

While people need to understand their jobs are not in jeopardy, Drozdow warns against glossing over the truth about your plans for leadership succession. Blanket promises that your child will not be advanced over the non-family employee may come back to haunt you. "If you plan for the second generation to take over the business, provide a time frame," suggests Drozdow. "For example,you can stress that the transition will take a certain number of years."

But wait. Is that trusted employee the right coach, anyhow? Maybe not, says Drozdow. "When selecting such mentors, business owners often value loyalty over competence," she says. "Allegiance may not be a sufficient primary characteristic."

Problem 3

Your daughter wants you to sell the flooring business at a discount price to her husband, who has been working at your business for many years.

This situation, in colorful variations, is as common as it is tricky to solve. "You need to answer three questions when approaching this issue," says Mike Cohn, president of Cohn Financial Group, Phoenix, Ariz.:

Question 1: What's the real value of the business? "Has an outside appraiser determined fair market value?" poses Cohn. If not, you don't know what a reasonable "discount price" is. Many privately held companies know their book value — the total of assets. But what would the business bring if placed on the open market?

Question 2: What do mom and dad need to retire comfortably? Will the first generation need continuing income from the business? Money from a sale may not be enough. Prior to being transferred, the business can create a pension benefit for the parents.

Question 3: Are the parents ready to let go? "Family dynamics comes into play here," says Cohn. "Are mom and dad psychologically ready to relinquish control of the business? And what will be their role after the transfer?"

Next, turn to issues of promises and expectations. Are there any grounds for selling the business at a discount, other than from the goodness of your heart? "Did you make any promises concerning the business transition?" Cohn asks. Often, says Cohn, the owner will say something like, "Some day I will let you have 10 percent of the business in exchange for sweat equity." In this case, the second generation would be entitled to purchase the business for 90 percent of its value.

Consider, too, whether the son-in-law was paid a fair market salary during his years at the business. Often family businesses underpay the second generation, with the assumption that "some day this will all be yours." The difference between actual pay and fair market pay could determine a discount. "Suppose the son-in-law had been underpaid $20,000 for five years," says Cohn. "Then he has earned $100,000 in sweat equity."

Also, remember to make sure your transition plan accounts for the disposition of the business in the event of a divorce between your daughter and son-in-law.

Problem 4

Family shareholders not employed by the business are questioning too many of your decisions in an effort to protect their dividends.

People who are not involved in the business day-to-day can get nervous about risky but necessary initiatives. The solution is to clue them in. "Even if management is making wise decisions, outside family members need to feel they are part of the business," says Peter Baudoin, a Lafayette, La., family business advisor.

Educate outside family members about what is going on. Informed individuals feel more in control of their destiny. "The smaller the business, the more outsiders want details," Baudoin says. "At larger businesses, they are more interested in strategy."

Establish policies concerning which family members can participate in the business. Note that any family member who wants to apply for an open position must meet certain experience and education hurdles. Anticipate job battles. "What if three family members want the job — whom do you pick?" asks Baudoin. "One solution is to establish a hiring committee that has family members and non-family members employed in the business."

Provide a vehicle for selling out shares in the business. "A dissatisfied family member with two percent of shares should have a way to sell out," says Baudoin.

You need to establish a formula for determining the value of shares at any given time. "One solution is to have an outside firm assess the market value of the business and establish share values," says Baudoin. This can be unwieldy if you have many family members, since the formula needs to be recalculated every time someone wants to cash out.

Problem 5

You feel it's time to pass the management torch to the second generation. Problem is, several sons and daughters, now in their 40's, want the president's chair.

It's time to bite the bullet and name a successor, even if you anger some of your sons and daughters, says Robert O. Middleton, a partner in the Chicago law firm of Nisen & Elliott. Remind yourself that part of the job of management is to make the tough decisions.

"The patriarch or matriarch should decide on a succession plan, communicate it to everyone, and supervise its transition," says Middleton. "It's a lot easier for the founder to communicate the decision to children than to get involved in complicated alternatives like trusts and voting block control." This approach is attractive because the second generation will readily fall in line with what the founder decides. "There is a heritage established. People understand 'this was the founder's wishes,' and forward they go," says Middleton.

Mark Frasier of Third Generation Floors of Pleasanton, Calif., says that dividing authority can be a thorny issue in any kind of business relationship, be it with a family member or close friend. "I don't think you ever want to have a 50-50 split because somebody has to make the final decision," he says.

Trisler says his company found a good balance in its transition. The change in ownership from his father hasn't caused any family crises, nor has working with his brother on an equal footing. "It hasn't been any problem at all," he says. "Actually, my brother takes care of the installations, and I take care of all the refinishing and sanding. We're both knowledgeable in all aspects, but that's how we chose to split it."

Whatever the decision on a successor, put it in writing. Should the founder's decision be explained to the second generation? Maybe not. "Sometimes you can't put your finger on the reasoning behind an appointment," cautions Middleton. "Entrepreneurs often base their decisions on intuition. It's better to just explain the plan and how it will be executed."

Nonetheless, rough waters may lie ahead. "Some sort of sibling competition inevitably gets uncorked once the parent steps away," says Middleton. "The new leader will not get the unquestioned respect, obedience, and loyalty that was granted the founder." Avoid retaining business ownership after transition. Your successor needs the power that comes with ownership of voting stock — balanced by a controlling authority such as a board of directors.

Problem 6

Your son, starting to work at your business at age 16, wants to be treated like everyone else. But employees treat him with kid gloves, and that makes him uncomfortable.

Your son should approach this problem on two fronts, according to Susan Lazar, president of Susan Lazar Consulting in Minneapolis. First, go beyond the call of duty in work habits. "Your son should work hard to do what is asked of him and avoid anything that would lead people to the conclusion that he is demanding special treatment in how he completes responsibilities," says Lazar. He should also come to an understanding with his parents that he wants to learn all aspects of the business. Don't assume that your son or daughter knows what you expect. State explicitly that you expect them to work harder than other employees and to keep longer hours.

Second, he needs to interact properly with fellow employees. Says Lazar: "Hangout with other employees at lunch time. Be careful to never discuss personal things at work." It's also wise to refer to his parents not as "Mom and Dad" but with the same names used by other employees. Avoid discussions with other employees that question management decisions.

Experience in the outside world can also help. "I recommend that children get experience elsewhere before they come into the business," says Lazar. "Then they have a sense of their own work history and something of their own to offer the business beyond their name. They have less to prove to employees because they have a track record."

Kevin Clough's 21-year-old nephew is part of the fourth generation to join the business, but being family doesn't mean he's not treated like everyone else. "He's expected to work just as hard," Clough says. "When we bid jobs, everyone has to install a certain amount of square footage." In fact, "He's actually expected to do better than anybody else," Charlie Clough adds.

Kevin Clough recalls one time when nepotism became an issue for him personally. "A couple guys were upset that I was making the same money they were without knowing as much," he says. "But I think over time they realized how hard I worked, that I wasn't the type of person who would slough off. So there was a respect that came with that."

"I think a lot of it is communication,"says Mike Boberg, the second-generation operator of fourth-generation Boberg Hardwood Floors in Sacramento, Calif. "When my son, or my daughter, or my nephews go out there, we don't expect the other employees to baby them or anything. We want to show them the trade and teach them the correct methods."

Problem 7

Your children seem to be rebelling against what they say is your authoritarian-style rule. Whenever you turn around, they seem to be circumventing your orders.

This scenario is typical of communication breakdowns in family businesses, according to Aron Pervin, present of Pervin & Company, a family advisory firm in Toronto. "Families rely on ambiguity in home life," he says. "A family cannot start fresh when they move to the workplace. Family members bring along their old wounds and resentments. Side-stepping issues rather than dealing with them head-on in a respectful, caring and fair manner is tantamount to a death knell for the family business," Pervin cautions. He says the solution is to work out all the expectations that each family member has of others.

Meetings to accomplish this can involve all of the family members. Other meetings might be one-on-one with the family member and an advisor. The ultimate goal is to increase communication between all family members. "When you foster a healthy relationship through communication, you eliminate much of the back-biting that goes on," says Pervin. Often it's not easy to get everybody opening up, because they are afraid others will react negatively to their thoughts. "They are reluctant because they are afraid they won't have a family in the end."

"You have to have trust — trust and confidence that the other people are doing their jobs, because you have the same goals and interests," Frasier says. "Without it, a business will never work."

Phillip M. Perry is a New York-based business writer and frequent contributor to Hardwood Floors.