Reprint from:
10 Nov/Dec 2006 · Families in
Business
UPDATE AND IMPACT: FAMILY FIRM INSTITUTE CASE SERIES
IF YOU CAN'T TRUST FAMILY, THEN WHO?
Harry is a hard-working man who built a successful business
by sweat, ingenuity and force of will. He was good at understanding
what people wanted and used that talent to build a
company in the
businessmen and others who wanted to make a statement. The
company, ImageMaster, grew quickly, possibly too
quickly.
ImageMaster needed to rapidly expand to meet the
growing
demand for its specialty products. The business seemed to be growing
faster than Harry’s ability to manage it effectively. Sales and production
remained strong, covering up whatever management deficiencies
existed and Harry was living the good life. Then the legal
problems started. The first blow came with several citations for
environmental pollution infractions, which snowballed once several
municipal agencies became involved. The final straw was when
the IRS stepped in and Harry was arrested for tax evasion. The huge
fines he had to pay and the legal costs incurred in dealing with his
problems caused ImageMaster to close and declare
bankruptcy.
Because of unresolved legal and financial issues, Harry could not
start a new business under his name. Fortunately for him, his son,
Mark, was just graduating with a degree in business. Harry
approached Mark about starting a new business in the same industry,
forming an unwritten partnership and showing Harry as a
salaried employee. It was agreed that Mark would own 51% of the
business and provide some of the seed money for the new business
venture. Harry called on his many contacts and distributors and
made informal arrangements that soon netted him the specialised
equipment, supplies and the initial accounts they needed. The new
company, ImageMaker, was up and running in a very
short time.
Though Harry was in charge of production, he taught Mark everything
he knew about the business and Mark was an exceptional student.
The business became successful very quickly.
Mark was single, ambitious, and living at home when he started
ImageMaker. He devoted most of his waking time to
developing the
business and it paid off. As before, the company quickly grew and
expanded. Like his father, Mark got into a financial pinch with the
IRS, but Harry lent him the $300,000 needed to resolve the problem.
Both father and son enjoyed the financial success of the business.
Harry lavished himself in luxury items and Mark wisely invested
his money, chiding his father for his frivolous spending.
Mark moved out of the parental home, got married, and had two
sons. He continued to grow the company, diversifying its products
and services, expanding the company’s holdings. A professional
management team was put in place to oversee all aspects of the
business. It had been years since Mark went to Harry for business
advice. Harry joined the sales side of the business and made a handsome
commission on top of the ownership distribution, which
remained unofficial. Mark’s resentment of his father grew proportionate
to the ever increasing size of the company. Mark felt that his
father was undeserving of the money he received as a partner,
Mark
felt he alone shouldered the responsibilities for ImageMaker.
Mark
unilaterally decided to change the partnership agreement, informing
his father that he was now 20% owner of the company.
Two significant events occurred. Mark was poised to make a
huge expansion of ImageMaker, initiating operations
in
the other hand, Harry was completing the terms outlined in the
legal disposition of his earlier problems and the statute of limitations
for any further legal involvements was soon approaching.
Harry felt disregarded and disrespected in the company by Mark
and wanted to formalize the previous ownership agreement. Mark
offered to buy out his father for $10 million and provide him with a
$250,000 salary for the next five years in a no-show position. Harry
refused – he was aware of the company’s expansion plans and the
monetary potential.
Harry threatened to take legal action against his son, even
though that could have huge consequences for both with the IRS.
Mark thought that he was being more than generous with his offer
to his father.
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COMMENTARY 1
What an interesting (though not uncommon) father-son
relationship these guys have! Harry’s been such a conniver all
his life that no sensible business school graduate should have
entered into partnership with him – much less an informal
handshake partnership with expectations of under-the-table
distributions. An exit arrangement should have been agreed on
as part of the contract at the start of the partnership.
Why did Mark do it? He may have thought it was the only way
to gain his father’s respect. Or he may have been trying to rescue
him. It would be interesting to know what role his mother (whether
still married to Harry or long since decamped) played in Mark’s
decision.
Whatever his reasons for the original decision, it’s not
surprising that the two men are now embroiled in a potential
litigious situation. The fact that Harry is seeking to build his
personal wealth at this time in his life indicates either that his
agenda with Mark is more competitive than paternal, or that he’s
getting questionable estate planning advice – or both.
Among the most important pieces of information missing from
the case description are: does Harry have other children/heirs?
What are their circumstances? To give him the benefit of the
doubt, perhaps he’s concerned about how much he can leave
them. He probably considers himself to have made a great gift to
Mark.
Sons and daughters, beware of crooks bearing gifts – no
matter how much affection you have for them.
Kenneth Kaye specializes in conflict resolution and next
generation
preparation. He can be contacted at ken@kaye.com
COMMENTARY 2
They have five areas that need to be addressed to
resolve their
conflict: communication, facilitation, compensation, valuation and
negotiation. Their apparent lack of mutual understanding indicates
that they should create a forum to start the communication
process. Because of the interdisciplinary nature of the issues they
face, they should retain the services of a professional facilitator who
has the necessary understanding of the four disciplines: legal,
finance, management science and behavioral science.
As in many family-owned businesses, failure to understand how
family members should be compensated can cause endless conflict.
Apparently, they did not differentiate between compensation for the
role they play and how well they perform that role (salary, fringe
benefits, and bonuses at fair market value) versus compensation for
what they own (interest on notes, rent on real estate, both at fair
market value and dividends based on a fair return on their
investment, the performance of the company and its ability to pay).
This would need to be addressed at the communication forum. They
also need an independent valuation of the company in order to
resolve their conflict.
It appears that they both have taken positions that are the
opposite of each other, a situation that would preclude a win-win
solution. The book on negotiation, Getting To Yes by Fisher & Ury,
will help them to understand the needs of each other and what
brought them to the present situation. Only then will they be able to
make the decisions that result in a win-win solution.
Frank S Schneider is founder of The Schneider Consulting Group, a
management and organizational development consulting firm in
The case series was brought to you by the Family Firm
Institute, an
international professional organization providing interdisciplinary
education for family business advisors, educators, researchers and
consultants.
R Phillip Colon, wrote this case study and
coordinated the
commentaries. He is co-founder of Optimal Resolutions, a firm
specializing in conflict management and resolution in family owned
businesses. He can be reached at phillip@drphilcolon.com
The Family Firm Institute, Inc Website: http://www.ffi.org
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