Fathers and sons who butt heads. Siblings vying for control of the company. In-laws seen as outsiders by members of the family. Exes whose disagreements are more about each other than the business or employees they oversee.
“Family disputes are characterized by lying, cheating, backstabbing, fist fights, divorces, affairs, stealing company assets, and deception,” said Rocco Luisi, author of the book “Business Divorce Prevention: The Top Ten Red Flags Lawyers, Accountants and Finance Professionals Need to Know to Prevent Your Best Clients From Going Out of Business.”
Following are five tips on what to do when it feels a business breakup is imminent — or to prevent one from happening down the line.
RUN YOUR BUSINESS LIKE GENERAL ELECTRIC
“Usually, it becomes a power struggle when more than one person wants the same job,” said Ray Isaac, president and CEO at Isaac Heating and Air Conditioning Inc. in Rochester, New York. “A lot of times, it’s not because they want to do that job, but because they want the perks of that job. I think you see that in a lot of family businesses, where there are co-CEOs, co-presidents. It’s not because they want to make a difference in the company.”
It really boils down to how the business has been established, how it’s run, and who’s really best skilled to run the business.
Isaac instructed business owners to ask themselves this question: “Are you an equity business or a lifestyle business?”
“[An equity business] is a business that’s run like General Electric: It doesn’t matter if you are an owner or not, there is a strict methodology, structure of authority … It comes down to an ego problem,” he said. “The older brother is like, ‘Why should I report to my younger brother?’ And then mom and dad enable this because they want everyone to be happy, so they are both co-CEOs, or one is head of external and one of internal.”
It’s much more difficult to transition from a lifestyle business to an equity business than vice versa because it’s hereditary, he said, and it requires asking what an owner really needs out of life, when they’re not being supported by the lifestyle business. Running an equity business can be handled through strict differentiation between management and leadership. Isaac gave an example of a good friend who owns a very large business and has two sons, of which neither is in leadership. One is in IT, one is in trucking.
“That doesn’t mean that those two individuals are not important,” he said. “They vote their authority at the board meeting. It’s the same thing as, I may be a stockholder, but I can’t get into the building.”
LEAVE EMPLOYEES OUT OF THE DRAMA
One of the biggest red flags that a business breakup is pending is when the players start forming triangles, Isaac said.
“They’re not talking to each other — they’re talking to whoever the authority figures are,” he said. “One brother doesn’t want to talk to the other brother to settle their differences, so both talk to dad.”
Teams and factions get formed — including employees.
Factions can tear a business apart.
“It’s almost like a government or a country being taken over by a coup,” Isaac said. “Then someone’s like, ‘forget this; buy me out,’ and that valuation process isn’t agreeable. The fallout of that can be tremendous. [We need to realize that] our fight can destroy 400 families.”
Affairs are another factor that most people don’t think of, and it’s quite common, Luisi said.
“While office romances between owners, directors, officers, and employees have the potential to cause significant problems for businesses, the red flag I’m talking about is more specific,” he said. “I’m referring to a married owner of the business who is having an extra-marital affair.”
It’s potentially worse when the owner has an affair with someone involved in the business, because the discord that often accompanies the discovery of a cheating spouse can spill over into the business.
“For example, the wife of a two-timing owner can end up with his stake in the business in a marital divorce proceeding,” Luisi said. “Depending on how the ownership agreement is structured, this involuntary transfer of ownership may cause the business to dissolve, or may cause the business to break up due to the other owners dealing with a new, unwanted owner that is disruptive to the business or does not have the needed expertise possessed by the ousted former owner.”
BRING IN A NEUTRAL PARTY
“What I’ve found, in over 20 years of helping family businesses prevent, mediate, and litigate family business breakups, is the following: not getting along is the symptom, not the ailment,” said Luisi.
That might mean a poorly drafted ownership agreement, one that has not evolved with the company, or the complete absence of a written agreement.
“Related to this is the head of the family business who refuses to retire, and who keeps the next generation waiting with baited breath and in a state of frustration wondering when their careers will advance and the founder will turn over the reins of the family business,” he said. “If owners are aware there are troubles brewing that could lead to a business breakup, mediate the issues and then focus your efforts on business longevity planning.”
If a business has gotten to this point, a neutral, trusted third party could be the best solution. (The worst case, Isaac said, is go to arbitration.)
“I think the best at that point — and I’m not always a fan — would be, bring in someone qualified to act as coach,” he said. “You need someone with experience, who’s not emotionally tied to one side or the other.”
Because it’s all about emotion, Isaac said.
“Especially if your last name is on the business,” he added. “The problem for a former owner is, especially with a well-known business in the community, the first question is ‘Are you with Isaac?’ They have to say ‘no, that’s the other part of the business.’”
Luisi doesn’t recommend what he calls the “self-help route,” but if going that direction, he advised to focus on the ailment, not the symptoms.
“Depending on the family dynamics, one-on-one or group meetings with an agenda of honest communications about the issues troubling them is a good start,” he said. “Bringing in a neutral third party, like a trusted professional, is often a good idea.”
LOOK LONG TERM
First and foremost, owners need to work on their businesses, Luisi advised.
“The true reason is most often they have failed to plan on making the business last,” he said. “This requires business longevity planning: strategic, expert analysis of the company and its owners/key personnel, and creation or amendment of the ownership agreement to fit the unique DNA of each family business.”
When mixed with family emotions, sometimes the normal family squabbles and disagreements between owners and executives become toxic, Luisi said. For example, using the phrase ‘for the foreseeable future,’ as he witnessed in the case of Don and Sharon (whose business breakup he cited as a cautionary tale) is purposefully ambiguous, and its meaning cannot be objectively determined by a court of law. And their agreement did not set up a specific mechanism to decide ownership.
“I would have drafted the [ownership agreement] in more concrete terms,” he said. “For example, the parties could have agreed that barring mental incapacity, Don was to serve as CEO, if he wished, until a certain date — say until he was 70. At that juncture, if Don still wanted to continue as CEO, the matter could have been decided by Don and Sharon and, if deadlocked, the accountant could break the tie.”
This would have eliminated their kids, who may have been biased, from participating in this decision, which is what the two wanted.
“Another option would have been to submit the issue to binding arbitration with one or three arbitrators,” he continued. “Either option would have prevented the issue being decided by the courts, the primary benefits being control of litigation costs and knowing ahead of time who would decide the issue.”
DIVIDE & CONQUER
David Squires, president of Online-Access Inc., and his brother started off together with their dad in a family business and now are partners in two HVAC-related businesses. Back when their father was involved with the business, he went against the advice of his accountant and gave a quarter of the business to each son when they graduated college.
“He did something most people didn’t do,” he said. “If me and my brother wanted to take advantage of him, he wanted to know now rather than later.”
By the end of the 1990s, the business had hit almost $3 million, but there wasn’t enough maintenance work to carry the company when businesses slowed.
“When we retracted, we became profitable, but there weren’t as many options,” Squires said. “We saw the market wasn’t going to be as big as we wanted it to be, and we figured the web was the future.”
No one in 2000 was doing web-based marketing and the brothers needed it, so they formed a company.
“It gave us each a little bit of elbow room; we each had our domain,” Squires said.
Squires and his brother are both joint owners of both businesses: Online-Access and Vincent’s Heating & Plumbing, the original business.
They’ve been partners since the mid-1980s.
“We’re 50-50; we respect each other’s boundaries,” he said. “If you get into a partnership with someone, it’s because you respect their judgement. The thing that’s saved us is, our father taught us it needs to be a 100 percent vote. What they teach you in business school is ruthless business. But if people don’t want to do something — if they’re being dragged into something they don’t want to do — there’s strife.”
Squires elaborated on that point in his August 2006 newsletter.
“Even though most business coaches would tell you that this type of decision management would stifle a business’s growth, it did just the opposite for us,” he wrote. “In the last 30 years, we have grown the business, patented and sold a refrigerant recovery device to a major manufacturer, started a successful internet marketing company doing the web marketing for hundreds of contractors nationwide, negotiated the purchase (and later the sale) of a major industry best practice group, and just recently launched a new type of advertising agency specifically for contractors. All of this we could never have done without a partnership based on mutual respect, knowing that our partners had our back at all times … I can say, after 30 years of experience, having this mutual respect for each other that allowed one vote to negate two has saved us from a lot of bad ideas that really seemed good at the time.
“If you don’t get 100 percent, there’s probably something you should reconsider,” he added. “It’s your problem: You didn’t explain it. If it’s so brilliant, why don’t others see it?”
Squires said the relationships are what matter — more so, possibly, than the business.
“I’ve seen a lot of families who won’t even speak to each other now,” he said. “My advice is, relationships are the most important thing in life. When you’re on your deathbed, it’s relationships that matter. It’s not worth it to destroy one because of a business.”
The relationship aspect extends to husbands and wives, too.
“I’ve seen more family businesses break up because of spouses,” Squires said. “The problem is, when we go home, we focus on the bad things. Our wives see what we put into it, see us complaining. When your busines partner is taking one for the team, you’d better tell her that. If you only keep score on one side, your team always wins — or loses.”
Publication date: 6/10/2019