It’s fair to say that small businesses present unique opportunities and challenges. It’s not surprising that some closely-held businesses are owned and managed by family members. Small companies, especially family ones with their strong emotional ties, have unique shareholder dynamics. Ponder these:
• Parents concerned about their children being the future generation of top management
• Siblings (and any of their rivalries) starting a business together and then falling out
• Non-related partners with talents that initially seem to complement each other but later tend to clash
• The role of the company manager when the owner takes a hands-off approach
One thing is certain: You can have an absentee owner but never an absentee manager. Not recognizing and addressing these issues are a recipe for disaster. A third-party professional (if independent and not a family member or shareholder) can serve as a mediator or coach. These professionals have the opportunity to present the “financial facts” in an unbiased manner to company owners and managers.
What Could Go Wrong?
Despite high spirits at launch, many family-run businesses need to confront simmering family conflicts and underperformance, real or perceived, by one or more family members. While circumstances vary, some common threads run through contentious family-business disputes:
• Unmet needs: Whatever the cause, one or more family members are not having their needs met, often in the realms of control, decision-making, remuneration and results. For example, some family members might prefer the distribution of dividends rather than reinvestment.
• Ambiguity: Unclear roles, misunderstood responsibilities, exit strategies, succession planning and overlapping spans of control can arise if these issues are not addressed from the beginning.
• Garbled communication: Conflicts can arise when information isn’t properly communicated among family members, management and owners. These three groups frequently overlap within a family business, with some shareholders actively managing the company while others remaining passive members who might not receive regular insights about how the business works.
Harnessing the Passions
An independent expert, such as a CFO or management consultant, can, through a variety of means, bring people together in a business environment. Often the expert is there to help remedy existing problems, although many businesses would maximize benefits by bringing in a professional from the very start. Here’s how a professional can help manage shareholder dynamics:
1. Setting the rules: It’s important to negotiate and reach agreement on a set of rules to govern the management and operation of the business. These bylaws address ownership issues, including those involved in inter-generational business relationships. It is important to separate management issues from ownership ones. The rules need to cover how non-owner shareholders, both family and non-family, receive important information from owners and top managers. Those in charge should not assume that siblings, cousins and other relatives will automatically support, or even be aware of, important decisions.
2. Conflict resolution protocol: A neutral expert who is neither a shareholder nor family member can serve as a moderator to help resolve conflicts among shareholders, family and owners. Trust is of course paramount, but accurate data and reasoned recommendations are equally important. A professional provides the financial data that owners and managers rely on to make decisions in the best interest of the business, rather than the personal interests of family members. For example, the decision to take on a new project requires an impartial analysis of expected returns, cash flows, cost of capital and so forth. Evaluation of performance for a business unit or department depends on how efficiently resources are used and results achieved. An expert can recommend the optimal debt and equity financing, dividend policy, capital budget forecasts, operational best practices and dozens of other key elements that can help guide decision-makers, notwithstanding family pressures.
3. Succession planning: Family disputes can erupt when a senior manager or an owner retires. A neutral expert can help with human resource issues, including succession planning, headcount forecasting, separation policies, compensation strategies and employee benefit plans. A succession plan makes clear up front the roles of different family members and other shareholders when a key person retires or unexpectedly leaves the company.
4. Cashing out: One important issue to confront is how to cash out family members who no longer want to be involved, or hold shares, in the business. A professional expert can work with the family to define the elements of a cash-out plan, including valuation of the business and of shares, restrictions on timing, limits on withdrawals and other issues.
A neutral party, such as a non-family management or financial executive, can serve to ease the tensions that naturally arise when family members participate together in a business. Earning a profit is hard enough -- family drama makes it only harder. Use a trusted arms-length professional to help family-owned businesses make rational decisions based on facts and accurate data.