Tough economic times put family businesses to the test

By Mark Green and Amy Schuman

D ECENTLY, a good friend confidl\ed in me that she's been waking up in the middle of the night wonied about the economy and its effect on her family and business. She's not alone.

Business-owning families across the country are concerned about the economic slowdown. For many, the demands and tensions of tough economic times highlight even more clearly the need for trust and oPen communication between family members. These demands and tensions also emphasize the need for economic discipline, clear policies, and well-established systems of family and business sovernance.

Over the last 15 years of economic prosperity, the financial success of many family businesses has spawned a number of bad habits. A recent meeting I had with a client led to a discussion of the economic outlook in his industry-rising fuel costs together with a more competitive landscaPe have led to a shrinking bottom line. The natural tendency in tough economic times is to cut costs and consider letting some employees go. Upon further discussion with my client, it became clear that the family members management positions were reacting to the pressures without a clear understanding of the true cause of their financial troubles or the likely financial impact of their decisions.

I asked the founder of the business how he ran the business seven years ago, when it was growing rapidly. As expected, I heard that there were regular weekly meetings that included a review of the financials, in-depth analysis of budgets, revenue, and cost trends. My client admitted that as the business grew and profitability exploded, the budget process became less disciplined. Weekly meetings became monthly meetings, and then disappeared altogether. Further discussion also revealed that family tensions were ignored as the business grew and bank accounts expanded.

Suppression of family conflict did not resolve it, but only made it more deep-seated. This lack of financial discipline, combined with increasing tension in the family and a shrinking bottom line, were leading to a real challenge. Beyond economic discipline, families must have the discipline to stick to their policies and succession plans. Families can avoid creating additional tension at an already challenging time by enforcing discipline in all areas of family business planning.

Managing the intersection of the three systems present in a family business-family, business, and owner- ship-is a key to family business success. Tough economic times create stress across the system. Business performance may suffer and tough decisions need to be made. Family conflicts, which are easy to ignore when the return from the business is good, rise to the surface during an economic downturn. Family members not in the business may blame those who are for not addressing financial problems sooner. Owners must deal with the possibility of cutting back on distributions or possibly even selling the busiNESS.

The tendency is to ignore policies and processes when times get tough. However, a sound family business infrastructure is even more crucial in tough economic times. But there does need to be some flexibility in policies and processes to address unforeseen challenges. Families must consider the long-term implications of breaking rules they originally made in the best interest of the business and family. Here are some tips for addressing a downtown:

Buitd or return to sound business management practices.

Tracking and enforcing responsibility for financial results is important in good economic times, but it is essential in a downturn. Creating a realistic budget to ensure that revenues will cover costs is also imperative. This exercise should consider what areas can be cut back if revenues shrink substantially. Once the budget is complete, create a process for tracking Per- formance against the budget so that any changes in the environment faced by the business are identified quickly. Developing solutions in areas that are not tracking against the budget and then holding management accountable for delivering results (or alternative solutions if budget expectations are no longer realistic) are a natural outgrowth of the process. Last, but not least, it is critical in uncertain times to hold regular management meetings where the team can discuss changes in the business environment and also develop plans to address them.

Be prepared for lower distributions.

A business that has prospered over the years and always paid generous distributions or dividends to its shareholders may find it difficult to meet these payouts during challenging economic times. A family shareholder group that has taken the time and effort to learn about the business and the factors that make their dividends possible-rather than a shareholder group that has just accepted their dividend checks without any effort to understand what lies behind themwill be in a much better position to anticipate and adapt to changes in their dividends.

Stick to your employment policy. Many families require members of the next generation to work outside of the business for several years before they can work in the family business. However, when the economy slows and a well-paying, desirable job is tough to find, the family may be tempted to ignore its employment policy and hire young family members right out of college. The family may ask, "What good is having a business if we can't help the kids during tough times?" A valid question-but perhaps the members of the family would be wise to remember why they created the policy requirement in the first place. Most family members are able to make more significant and enduring contributions to their business after having a chance to learn in other work settings. Just because it's very difficult to find work. is that requirement no longer relevant?

Rather than simply ignoring the established policy, a family must seek ways to help young, inexperienced family members without abandoning its stated policy. There are many ways to accomplish this, and each family will find its own way. For example, the family business can help family members with resume development, interview preparation, or even introductions to possible employers.

Honor the succession plan.

A father or grandfather who has turned management of the business over to members of the next generation is often tempted to jump back into action during tough times. The family may welcome and encourage their involvement because of Dad's or Grandpa's history of success under pressure. Will the family allow the current leadership to lead or will there be too much fear for the family to place its trust in the next generation's leaders?

An "either/or" solution is not the answer. Finding a way to access the wisdom of the senior generation without cutting off the junior generation will be imperative. Combining the wisdom of the past with the talents of the present will be the key to success in these tough times.

A family's response to these economic times could be seen as a test of will and commitment. A family shareholder group may question policies and governance systems that were created during times of peace, calm, and even prosperity. Will the family stick with its policies, even if individual or collective suffering results in the short term? What will take precedence: the needs of the business, or the needs of the brother who requires his dividends for a mortgage payment or the sister whose daughter needs a job?

Al1 systems will begin to fray or fracture at their weakest point when the going gets rough and pressure starts to build. A family system is no different. Many family businesses are seeing and feeling more than a few cracks in response to increased economic pressure. By returning to the tried and true-strong governance, agreed-upon policies, family education-families can use the challenges of these tough times to become even stronger and more unified.

- Mark Green is an associate of the Family Business Consulting Group, Marietta, Ga. He can be reached at (800) 55 I -0633 or green@ efamilybusiness.com. Amy Schuman is a principal of the firm and can be reached at (800) 551-0633 or s c human @ efamily b u s ne s s .c o m.

LUMBER ASSOCIATION of California & Nevada's 2nd Growth group held its summer conference July 17-19 in La Quinta, Ca. (1) Tom & Karin Angel. (2) Mike Carey, Beth Bollen. (3) David Abbott, Jean Henning. (4) Laurel & Chuck Casey. (5) Tammy & Tim Kennedy. (6) Grant Pearsal., John Pasqualetto. (7) Jay & Holly McArthur. (8) Michael Caputo, Steve Prado. (9) Joe Allotta, John Neel. (10) Steve & Jenny Robertson, PhilGallicchio. (11) Dannv Sosa. Greo Scott. (12) Maooie & Eddie Garrett. (13) Pete Danny Sosa, Grej Sbott. (12) Maggie (13) Pelg Ganahl, Joe Lstiburek. (14) Chris Henderson, Larry Christensen. (15)

Coatings, Preservatives On The Rise

Demand for wood protection coatings and preservatives is forecast to increase 2.27o per year to $3 billion in 2013, according to a new Freedonia Group study.

A rebound in the housing market will promote growth. Demand will also benefit from a shift in product mix to higher value items, a slight upswing in pressure treated lumber production, and solid residential repair and improvement spending.

Higher value formulations in both coatings and preservatives continue to gain market share, primarily due to environmental and performance issues.

Interior applications such as flooring and cabinetry, however, will outpace growth in exterior uses. In order to maintain wood's marketshare in interior applications, wood coatings suppliers will strive to develop product lines that feature a wider range of colors, improved efficiency and enhanced durability. In addition, suppliers are addressing demands for "green" materials with environmentally friendlier formulations.

Ironically, the longevity of interior wood limits gains in coatings demand, as maintenance requirements are infrequent.

In exterior applications such as siding, wood will continue to suffer losses to competitive materials that require less maintenance, resulting in a difficult market environment for wood protection coatings and preservatives suppliers. However, maintenance coatings demand will continue to be supported by the large installed base of woodbased home exteriors and decks.

Decking remains the largest consumer of wood protection products. In 2008, decking accounted for 21Vo of the $2.7-billion wood protection market, followed by siding with 2l%o, furniture at l3%o, and cabinets at 107o.

Mill Cited For Stormwater Runoff

Manke Lumber, Tacoma, Wa., was given 30 days to appeal or pay a $69,900 fine for ongoing stormwater management problems at its mill along Tacoma's Hylebos Waterway.

A Manke official said the company is trying to get any alleged problems under control and has not yet decided whether to appeal the fine.

The mill's permit requires that it monitor and test stormwater runoff that drains to the Hylebos and into Commencement Bay.

Manke was fined two years ago after inspectors first identified storm-water problems at the facility.

Six months ago, officials with the Washington

Department of Ecology discovered that water used to clean the mill's air scrubber unit was overflowing and discharging to a storm-water pond and the Hylebos Waterway.

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CRC Closing Orick Sawmill

California Redwood Co. will close its Orick, Ca., sawmill in mid-October due to depressed lumber demand.

The mill's large log processing equipment, including head rig and edger, will then be moved to its Korbel, Ca., facility by January.

In the near term, the 125-acre Orick site will continue to be used as a sorting yard. Forty-seven positions will be eliminated.

The mill was built 55 years ago by Arcata Redwood Co. and sold to Simpson Timber, now CRC, in 1988.

Hardware Store Sues Worker

Big Jo True Value Hardware, Santa Fe., N.M., has filed suit against a former employee who last year pleaded guilty to misappropriating thousands of dollars from the store.

Krista Quintana confessed to one count of fraud and had l0 counts of forgery dismissed.

According to a 2008 plea agreement, she agreed to at least five years probation, to repay Big Jo up to $67 ,4O4 in restitution, and to sign a promissory note for any unpaid balance of the restitution.

Big Jo, however, is seeking compensatory, punitive and exemplary damages, plus interest and other relief.

Asgociotion llews

(Continued from page 24)

Tournament at Costa Mesa Golf & Country Club, Costa Mesa, Ca., to benefit the Hardwood Forest Foundation. An awards dinner will follow. he moved to Blackman Lumber, Oakland, Ca.

Western Hardwood Association will sponsor its annual lumber-grading school Oct. 15-16 at the CFS Morgan warehouse in Portland, Or.

Students will learn about western hardwood grades and how to apply them, the application of proprietary grades, and the importance of "on grade" to profitability.

Accommodations and meals are not included.

Western Wood Products Association's Lumber Pioneers group will hold its annual meeting Sept. 18 at the Monarch Hotel, Clackamas, Or.

National Hardwood Lumber Association has booked former New York City mayor Rudy Giuliani to keynote its annual convention Sept. 30-Oct. I in Boston, Ma.

Other highlights will include programs by the Hardwood Forest Foundation, Hardwood Federation lunch, cocktail reception, exhibitor appreciation lunch, and educational seminars.

In 1971 , he and his partner, Jim Kronenberg, bought Hulbert. Six years ago, Mr. Kinney sold his share to his partner and retired.

He was a past president and active member of the Oakland Hoo-Hoo Club.

Phytlis Maureen Holmes-Hautala, 64, co-owner and co-operator of Fred C. Holmes Lumber, Fort Bragg, Ca., and Dusty Creek Lumber, El Dorado Hills, Ca., died of cancer June 29 in El Dorado Hills.

The Holmes family has owned the businesses for five generations, since Joseph H. Holmes started Holmes Eureka Lumber in 1903. Dusky Creek Lumber, a retail yard, opened in 1984.

Robert B. Pamplin Sr., 97, former c.e.o., president and chairman of Georgia-Pacific Corp., Atlanta, Ga., died June 24 in Portland, Or.

Frank Kinney, Tl, retired owner of Hulbert Lumber, Newark, Ca., died July 12 in Newark.

He started working for his uncle, Bud Kinney, in the 1950s at Western Dry Kiln, Alameda, Ca. In the 1960s,

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In 1934, he joined newly formed Georgia Hardwood Lumber Co., Augusta, Ga., as an accountant. Over the years, he helped expand the company into the Pacific Northwest and transform it into G-P, while pioneering plywood production in the South. He became president in 1957 and was named chairman and c.e.o. 10 years later. He retired in 1976.

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