Employing family as vendors and suppliers

By Christopher Eckrich and Stephen McClure

A S BUSINESSES and families

Agro* over time. it is highly likely that, at some point, a family member will ask or be invited to provide services or be a supplier to the family business. A variation on this theme is a family member who seeks to own a franchise or an independent distributorship. While this practice is not inherently either good or bad, we see businesses split on whether using family members or their firm as vendors is a good idea.

Consider this: Your sister Karen has just gone into the catering business. You want to champion her business and encourage her by hiring her firm to cater all company entertainment functions that affect your reputation and image in the marketplace.

But you pause... What will you do if her firm's product or service is substandard? You have a duty as the c.e.o. to protect your business's reputation for quality. Furthermore, you begin to wonder whether your cousin. a small minority shareholder who works as a CPA, will now expect to handle the firm's tax work. You already have an experienced and trust- ed accounting firm that is delivering a good product at a good price.

Scenarios like this often lead family business owners to implement a policy that family cannot be used as vendors or suppliers of any kind. This firm rule avoids the potential conflicts identified above and is a popular policy for many family business owners. But what if you already employ a family member as a vendor or believe that a family member's firm can provide a superior product or service?

Family businesses that engage family members as vendors are encouraged to consider the following:

Clearly state expectations for quality and service, as you would for any other vendor. To reinforce the expectation of a business-to-business relationship, rather than that of a family member to family member, put your expectations into a friendly but clearly worded memo. The memo should clarify the expectation for a successful business relationship and identify quality and service expectations so that they are clearly stated by the other party. This memo can be shared with others-with affected managers and employees in the business, as well as with family members-to accomplish the next point: transparency.

Seek transparency among family owners about the nature and scope of the work provided. All interested parties should be aware of any business relationships between family owners/members and the family business.

Talk openly about the effectiveness of the business relationship in whatever forum makes sense for your family business. In some cases, the right forum is a family meeting with the principals on both sides of the business relationship. Or it might be a management meeting. These discussions work well as long as there is an effective supplier/customer relationship. If something has gone wrong, however, see below.

Put the services upto-bid to multiple vendors on a regular basis (usually every one to two years) to assure that pricing stays competitive. This does not have to be a cold approach that sends the message that you do not value an existing business relationship, rather do it in a way that simply allows you to assess your needs. If you are paying a little more for the relationship and value doing business with a trusted relative, understand that and make sure everyone else does too.

If you are paying less because the family vendor is giving you "a deal," be clear. but beware. This kind of arrangement can backfire if there is an assumption on the family vcndor's part that reduced quality and service are "okay" because of the financial consideration he or she is giving.

If you find that you are paying too much, you will have valuable information for a negotiation discussion with the family vendor. Another good practice is to initiate a contract term and let the family vendor know that the services will have to be renegotiated at the conclusion. At that time, evaluate the business relationship and consciously decide whether to continue or make changes.

To minimize conflict, present the proposal to the board (independent, objective outsiders on the board help here) for review and approval. A family vendor, knowing that this is a step in the process, will increase his or her own attention to the professional nature of the business relationship.

Annual reviews of existing family vendor relationships at the board level also are a good practice. In larger family firms, consider appointing a committee of several outside directors (two to three) and key managers (one to two) to review all family vendor and supplier relationships. Some family firms already may utilize a compen- sation committee to revierv family member hiring and eompensation decisions, and this committee's scope could be expanded to include family vendors.

Use the nclrmal rnethod of making changcs to your family employrncnt policy to add a policy statcmcnt about family supplicr and customer relationships. We hopc your process involves a meetin-e of farnily members so that expectations are communicated and broad acccptance is promoted.

Fix the relationship if it's broken. A severed business supplier relationship can be like a divorce. It is either messy or not, usually dependin_r upon the civility of both parties. not just one. However, after exhausting all genuine efforts available to fix the relationship, make a clean break if that is the only remaining option. In many cases, severing a business relationship r'vith a family vendor is like firing a farnily member.

Finally, rve hope your business-tobusiness relationships ri'ith family members are successful. We fi"equently hear of the mutual benefits received r'vhcn they are rvorking ivell. But the key to this success is a professional and formal business rclationship on both sides.

- (.'hri.rtophar EckriL lt uttl Stalthut McClLtrc ure prirtt'ipuls ytitlt the I''untily IJ tt.s rrc s.s C r t rt.s u I t rt g G rt t Lt 1t, A t I u n tu, G u. ; (800) 551-06-l-1. Dr. Et'krich cart be re u c h e tl o t et'k r i c h @ e.f u r n i I y b u.s r e.s.s. c t ntr, Dr. McClure at rncclure@ e.furttiltbu.siness.com. Reprinted rritlt lterni.s.siott.front The Family Bu.sines.s Adtisor, u toptrightetl publicatiort oJ Furnilt Enterpri.se Publislrcrs. No portion ol this ttrlicle nrr be reproduced witltout permis.siott ol Famih Enterprise Publislrcrs.

Trends in M&A

(Continuetl .ffutrn page I I 1 core d-i-y business. Another example: CertainTeed sold its r,vindoivs business, desiring to refocus on core products und make l-ulther acouisitious lvith a better fit.

Wlren Will Deals Occur?

The pace of acquisitions hasn't been robust yet because a valuc gap persists. Arvare of the markct bottom. most sellers are hoping to hold clut for a rebound to ensure a hi-ther price. Where once building products sellel's were on average offered 7x EBITDA. nor'v 6x is more realistic. If the markets don't turn around in a timely fashion. sellers i.vill come to the realization it is better to get 6x today than to hold on for something that may not materialize for some time. That rvas certainly the case with Home Depot, rvhich in August slashed the price of HD Supply fiom $10.3 to $8.5 billion after the investmcnt banks financing the deal threatencd to lvalk alvay.

In recent months, strategic sellcrs have started a conccrtcd effclrt to buy bolt-on or complemcntary businesses-Fiber Cornpositcs rvith WeatherBest. Builders FirstSource lvih Bama Truss. Alternative Construction Techncllogies with Revel Constructicln. Allied lvith Florida Waterproofing Supply, and Pro-Build rvith Crosslin

Supply. And now Pro-Build is after HD Supply's lumberyard operations.

As more small LBM companies suffer earnings and sales setbacks, expect the strategic M&A pace to quicken. Changing industry dynamics, such as a need for scale, full product lines. and gcographic fbotprint, cclupled rvith -uood dcal valuations. ',vill drivc rnuch of the activity in 2008.

Ni,lt,'l,t.t V. B<'tttt' i.t tt tttrtttttyittq dircLtutr uI Stapltatt.s Itrc., Littlc Rotk, Ar., +t'lterc lte .spet'iulilc.s itt building pro(lu(1.\ utrd constru(liot .san'ices invc.rtnrcri bunkirtg. Reuch ltim at (214) 258-2717 or rti< k.lrcrtr, Q .\t(Irlt(tt.\.t t'tn.

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