Dynamics of a Family Business

March 20, 2006
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ST. PETERSBURG, Fla. - Kevin Dougherty scheduled two seminars for the Feb. 24 Quality Service Contractors' Power Meeting in St. Petersburg, Fla., titled, "Dynamics of a Family Business" and "Strategies for Buying and Selling a Business." He felt there were so many similar elements in both discussions, however, that he combined them into one for the contractor attendees.

He noted that 70 percent to 80 percent of small businesses are family owned and operated - and the failure rate is higher than nonfamily businesses. "For a lot of us our business is our life," Dougherty said. "We have a lot tied up into it, some are far into debt because of it. So why would anybody want to buy a business like this?"

GOING BACK TO THE BEGINNING

Dougherty said that despite the growing competition from high-tech sophisticated retailers and the shrinking labor pool, there are stories of startup successes of family-owned businesses. But success can have its drawbacks.

"Some people are spoiled by the quick success of a business - and they bring in all of the family members to help run it," he said. "Then the business grows and grows until the family gets older and then they wonder how to get off the rollercoaster.

"One of the hardest things about transitioning a business is walking away from it."

Kevin Dougherty points out the pros and cons of owning a family business and the effects on buying or selling a business.
Another problem facing family members is their confidence (or lack of it) in the new owners. He pointed out the differences of a startup business from an established business, based on the following "phases":

  • Wonder - The owner is a wage earner just starting out and doing all of the work in order to build sweat equity.

  • Blunder - The owner works a lot and makes little or no money, feeling burnt out and frustrated.

  • Thunder - The business and owner thrive, following the model of an owner running a business, not a business running an owner.

  • Plunder - Maturity and complacency sets in and the owner becomes less active, possibly causing the business to slip or lose its edge.

    "Some contractors never make it beyond blunder, others prosper and move forward, and others fail to maintain that leading edge position," Dougherty said. "Business is a never-ending challenge."

    THE FAMILY MAY COMPLICATE THINGS

    If a business owner can successfully steer through these phases, Dougherty sees a successful model. Still, he knows that passing along a business to a family member and continuing its success is not easy.

    "How are we going to pass our business along to someone whose ethics are different from our own?" he asked. "The priorities may be different. Work, family, and fun may turn into fun, family, and work."

    He also mentioned the conflicts that arise between family members and employees, such as how to justify different pay scales or giving jobs to family members although other employees may be better qualified for the job.

    But those are problems that have to be dealt with, often on a daily basis. The long-term health of a business should be the owner's biggest concern, especially if he or she is turning it over to a family member. The next generation should not be put at risk.

    "The last thing I am going to do, as a business owner, is put my son or daughter into a financial equation that does not work," Dougherty said. "Don't set your children up for failure."

    Dougherty suggests sitting down now - not later - and determining who is going to be the next person to run the business. Often, the owner is the glue that makes the business stick together and the next owner should also possess that same glue.

    BUYING OR SELLING THE BUSINESS

    Dougherty believes that the selling process, whether it involves family members or not, is too important to make without input from other people, namely employees. He advises gathering the people around and communicating with them.

    "Find out if the person you pick to run the business is capable of doing it," he suggested. "If that person doesn't buy into the company philosophy, you need to get rid of him or her and move on."

    The stakes are very high when it comes to buying or selling. Dougherty said that 60 percent of all business acquisitions fail and 70 percent fail to meet expectations of new owners. "If this is true, why would somebody want to buy a business?" he asked.

    The best way to safeguard against failure is to do due diligence on a business before buying it, to know what the business is all about, and unveil any hidden surprises. Fortunately for buyers, they have an advantage over sellers.

    "The buyer is at a tremendous advantage because he or she can walk away at any time," Dougherty said. "The seller has to prepare the business for sale and the buyer can walk away, despite all of the work that both sides put into it.

    "This also affects the employees, and the time the seller has spent on the sale and not on making money in the business."

    Dougherty's key advice was to get a business in order before selling it. Give the buyer a clear and precise picture of the business. It may cut down on a future failure.

    There is the fear that the business won't survive if a family sells it to a nonfamily member. One way to ensure that the business carries on, according to Dougherty, is to have processes and procedures built in so the new owners can take over and know how the business works.

    "Have you McDonald-ized your business yet?" he asked attendees.

    Know the value of the business and understand that a business is only worth what someone is willing to pay for it, he added. Dougherty also said that the more time spent on preparing a business for sale, the more the owner can finally realize the hard rewards of putting money back into a business instead of taking it out.

    "Every year you leave the money you earned in the business and you ask, "When am I ever going to get my money?" Dougherty said. "You get your money when you sell the business."

    He said it is important to check the references and background of potential buyers and to not make "the assumption that someone can afford to buy the business."

    Dougherty said it is good to have a "heart-to-heart discussion with yourself before selling your business. Running the business is hard enough - selling it is even harder."

    Publication date: 03/20/2006

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