Family-owned companies are plentiful in number and unique in character. Like any other type of company, these businesses are not immune to being infiltrated by the 9Stucks. In fact, a family business is fertile breeding ground for a unique 9Stucks mix that is often configured with a twist and a flair for the dramatic.
One blog post can’t do justice to these ‘pesky plights’ so I’ve created a 5-part series. Each post describes one misstep of family business leadership that can exacerbate the 9Stucks.
- Family needs vs. business needs: They are strikingly out of balance. (This is Part 1: The Seesaw)
- Strategic direction is stymied: Conflict over growth vs. maintaining the status quo freezes the business in its tracks. (Part 2: The Strategy Freeze)
- Transition/succession plan is non-existent: The owners can’t or won’t let go. (Part 3: The Handoff)
- Governance and decision-making at the top is concentrated and insulated: There is a weak independent board of directors/advisors, or one doesn’t exist. (Part 4: The Bubble)
- Sacred cows graze in the company’s organizational pasture: Top leadership spots are based on birthright or longterm ‘family favorite’ status rather than skills. These sacred cows crowd out talented non-family leaders. (Part 5: The Sacred Cows)
One caveat: This series is not intended to be a detailed discussion of all the intricacies and nuances related to management of a family owned business. There is considerable published content focused on all aspects of the family business: research, writing, business groups, websites, and magazines.
I simply want to help identify and evaluate these 5 disabling conditions – and suggest ways to get rid of them.
Part 1 – The Seesaw: The family needs and the business needs are strikingly out of balance
As a child, were you ever left high and dry at the top of a seesaw because of an imbalance of weight? Or maybe you were jettisoned off the thing by a raucous playground buddy? Ouch.
A company’s equilibrium can be similarly disrupted when the family thinks what is best for them is also what is best for the family’s business.
This disequilibrium usually boils down to one word…CASH. The CASH Seesaw.
How much CASH can the owners extract from the company without hurting the business in the long term?
To illustrate, here are three examples of The CASH Seesaw:
The Balanced Company
Many family-owned companies can afford significant cash rewards to the owners. Considering that the family owns the company, there is nothing wrong with turning on and leaving open the (legal) cash spigot as long as the strategic, operational, financial and people needs of the business are met. That’s great. This post isn’t about them.
The Excess-Cash-To-Shareholders Company
I’ve seen owners take out excessive amounts of compensation and perks: salaries, bonuses, distributions, under the table payouts, cars, travel, expense accounts for who knows what, payments for expensive habits and hobbies…you name it.
This may also be the company where the owners regularly complain about things such as:
- we are always tight on our bank line of credit – our bank is not happy with us
- the production line is down a lot – our machines need constant repair
- why do we keep losing good employees?
- customers complain about our quality
- competitors are stealing our customers
As I said above, considering that the family owns the company, there is nothing wrong with turning on and leaving open the (legal) cash spigot, UNLESS…the excessive distributions leave a trail of rubble and neglect behind.
- neglected assets – old broken down equipment (office/manufacturing) that needs replacement or regular maintenance, and/or unsafe plant conditions
- mistreated employees – all $$$ for the family, no special considerations for the troops. Employees have eyes and ears; they can see the excesses and the neglect. The new expensive car sitting next to a manufacturing plant with an unsafe roof and hazardous chemicals lying around might send the wrong message to employees (and others).
- poor systems – no desire to invest in new technologies
- little innovation – R&D – What’s that?
The Inadequate-Cash-To-Shareholders Company
What’s the opposite of yanking out excessive cash? Leaving most of the owners’ assets tied up in the company can also have a negative impact on the shareholders, creating a different sort of imbalance. This tactic can put the family’s assets at risk and create greater stress on themselves and their families.
There is a big difference in being prudent (i.e. being realistic about what overall cash can be taken out of the business) and being overly conservative.
Being too tightfisted indicates that money is being left on the table that SHOULD go to the owners.
Resolutions: How to create the appropriate balance of family needs vs. business needs
- Start by being objective about the long term plans for the business. Will the business be sold sometime in the future? Will ownership be transferred to the next generation? If so, then recognize that buyers don’t want to pay top dollar for a run down, derelict business. It’s never too early to start understanding the real value of the business.
- In some cases shareholders can justify a higher value to a buyer with ‘addbacks’ (adding back excessive compensation/spending to the P&L). This tactic only works if the company does not need lots of investment capital to fix the neglected components.
- Hire a compensation specialist to get an objective view of what is fair for the type of company. I have three clients right now who are working with this type of specialized advisor.
- Look in the mirror. The family generally knows deep down what’s right for the company and for the family. This may require an independent objective facilitator if emotions run high.
- Use the ‘Run the Company Well List’ to focus priorities in the right places. This is a free management guide you can download here.
The bottom line is this: Leaving the company stranded at the top of a seesaw doesn’t do anyone any good in the long run: family members, investors, employees, or the community.