The hardest of hard times

[rvEN IN rHESE challenging ecoIllnomic times. the cvcles of human existence push inexoiably forward. The death of a family or closely held business leader may present the hardest of all possible hard times.

We received a call from a distressed second generation member of a family business: "My father died a few months ago. He had spent time with our accountants and attorneys preparing wills and trusts, and he assured us he had it all taken care of. We took him at his word, but now we're in a mess. None of the planning work he did had to do with the successful continuation of the operations of the business. He did good tax planning, and the trusts he set up were probably a good idea, but we're stuck now. We have no direction. Maybe worst of all, we have had no time to grieve for Dad because we are so immersed in trying to understand and take over the business. Can you help us?"

We, of course, offered assistance, and what we found was alarming. There were plenty of areas of concern. It occurred to us that it might not be the current circumstances that killed the business. but the next unforeseen event could easily start them on a death spiral.

There was a senior generation owner in his 70s still in the business, and there were three junior generation family members active. As might be expected, there was quite a bit of deference to the senior generation when it came to the future of the business. and that wasn't necessarily a good thing. The company basically had no decision-making methodology at all.

The two partners had always worked by consensus. Now that one of them was gone, they were unclear about what to do next and confusion was rampant. Things weren't getting done, other things fell through the cracks, and there was low efficiency and synergy. Because the company was mature, everyone knew their jobs, but in terms of the future needs of the business, they were at a standstill. The "new" leadership group conversed at length on every subject and had dozens of ideas, but they had no traction for implementation-there was a lack of leadership present.

Roles and responsibilities were unclear because junior generation family members were unsure about who should assume the duties of the deceased partner. There was one division of the company that was hemorrhaging money. The company's controller was extremely ineffective. A computerization initiative begun several months prior was moving at a snail's pace, with lots of pushback from employees. The company had no budgets and no cash planning. There were problems over pay: the senior generation made twice as much as the junior generation with no real consideration of why or how compensation might be tied to performance or improved with incentives.

To start, we conducted a thorough, objective analysis in order to ascertain the nature and potential impact of the problems and to develop an action plan for correcting them. Once the action plan was assembled, it was necessary to get buy-in from both generations in order to set the right tone for the improvements and set the order of priority.

The action plan contained about 75 unique items. While working through the extensive plan, the company still had to fulfill day-to-day obligations, while attempting to assimilate change.

Many of the items on the action plan were sequential in nature. That is, item #46 couldn't get completed until item #41 was put to bea.

It took about three years to fully implement the plan, and 957o of the items on the list were gradually put into place. Of the 75 action items, two stood out as being critically important. The first was that it was readily apparent that the division that was losing money rapidly ought to be shut down, in spite of the fact that that division supported one of the family members.

The other critical item was to prepare for the next transition. Since the first partner had passed and the second partner was in declining health, it was obvious that someone needed to be groomed and trained to assume the duties of the remaining senior partner in order avoid a double whammy.

The results of the action-planning project have been most encouraging. Seven years after that initial call, the company has been quite successful. Not one, but two, of the family members initially involved in the action planning project have passed away. Because of heightened awareness and careful planning, there was an orderly succession and transition oftheir roles and responsibilities to others in the organization. The company has even relocated into a modern, efficient building with plenty of room for future growth.

Does it take the death of a business leader in order to focus the minds and hearts of family and closely held business operators in order to undertake improvement planning? Of course not. However, one must recognize that the death of a business leader can be a traumatic and even crippling business occurrence. The biggest weakness in transition planning today remains the focus on estate planning and tax minimization instead of planning for the future of business operations. Every problem has in it the kernel of opportunity and possibility. Hard times, even the hardest of times in the case of a death, might just present a chance at rejuvenation and reinvention for closely held companies.

- Wayne Rivers is president of the Family Business Institute, Raleigh, N.C. Reach him at wayne.rivers@familybusinessinstitute.com or ( 877 ) 326-2493.

Reprinted with permission of the Family Business Institute. No portion of this article may be reproduced without its permission.