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Remember the statistic that I quoted in my February column. Seven out of every 10 family-owned businesses don't make it through the second generation. That means either entrepreneurs make poor teachers, or their kids aren't paying much attention.
The problem with this factoid is that it doesn't carry much weight with risk-takers like you. Small-business people have already beaten the odds in the first place, and they don't care about adversity, or at least are ready to take it on.
What you're about to read, however, isn't about a statistic. It's a story about successful pool construction business owners — subscribers to this magazine — whose company is frighteningly close to swirling down the drain along with decades' worth of blood, sweat and tears. It's all because the couple made some huge assumptions about their son's ability to lead and manage their business. Unfortunately, some of them were wrong.
Barbara and George Harvey (all names and places have been changed) have a 25-year-old pool construction business, In-Ground Solutions, in Hartford, Conn. Both are 61, and together they operate the two-store construction and supply outfit for upscale homes in Simsbury, Avon and the surrounding communities. There are 50 employees that help them generate over $4 million a year.
Among the ranks are the Harveys's son, Ed, and a daughter, Dorothy — 40 and 32, respectively. Both have been employees since their teens. Three years ago, Ed was named general manager of the operation, allowing Barbara and George more time to crunch numbers and act as InGround Solutions' goodwill ambassadors in the community. Dorothy is a store manager but has little interest in assuming any more responsibility. There is one non-family member running the other retail store.
Barbara and George have been taking modest salaries since they opened the stores, putting most of their profits back into the business. Their frugality has paid off in terms of store assets and customers, but their real payout is going to come in 2005 when they sell to Ed.
Two years ago, however, the Harveys's early retirement plan began to crumble. Ed asked to take the business in a new, more modern direction. Profits were good and George agreed to the new direction, clearly stating that he would act as a safety net if the company's profits (operating in the black 10 years straight) suffered. After losing money in his first year at the helm, Ed was given another year to correct the problem and get the company back on track. After a second year of similar losses, George and Barbara reassumed control of the business and instantly returned it to profitability.
The problems with Ed don't end there. He has been caught writing personal checks against company coffers, yet he goes relatively unpunished for that. His credit doesn't give him enough leverage to borrow against the company to buy out his parents, even if they wanted to sell to him. George and Barbara would have to put up property as security to give Ed the capital he needs. But based on Ed's track record, they are unwilling to do so.
The Harveys are trapped. They want the business to continue, but they would like to keep it in the family. They wanted to retire at 62, but may now have to work six more years to amass a nest egg big enough for their planned retirement. They haven't even considered selling to an outsider. Until now.
As it stands now, the son still works at In-Ground but resents the stricter supervision his parents have placed on him. He feels that the company will eventually fall into his hands. Barring a miracle, the parents have no intention of selling him the company.
FAIL TO PLAN, PLAN TO FAIL
After I talked with the Harveys about their situation, it's clear they understand their mistakes.
But for you to gain insight into the value of spotting crises in your succession planning before they occur, they've agreed to let me use their situation as an example.
There are five major themes that power the execution of a succession plan: communication, con.ict resolution, avoidance, accountability and consequences.
How you address each theme will be re.ected in your succession plan, for better or for worse. Each theme comes into play with the Harveys's situation, some more than others.
• Communication. Both Barbara and George knew that Ed, and not Dorothy, has been interested in taking over the business for some time.
However, it also appears that George and Ed weren't on the same page when it came to Ed's new business plan or how long Ed would need for it to truly succeed. Failing to mete out a smooth business-philosophy transition cost the company money and potentially a future leader.
• Conflict resolution. In this case, they have unresolved con.icts. Ed lost money for the company but George quickly rectified that. Now, what are George and Barbara going to do with their company since they know they can't trust their son, but they don't want to sell it to just anyone. In terms of passing on the business, the decision firmly rests in the hands of Barbara and George.
• Avoidance. Until Ed took control of the company, neither party really avoided the other, but I'm pretty sure there wasn't a lot of proactive communication leading up to that moment. Confronting potentially difficult issues before con.ict occurs is as unpleasant as it is necessary. They clearly haven't done that.
• Accountability, consequences. These two issues point to assigning clear job goals and measuring performance against those goals. The consequences of failing to live up to those expectations follow the review and are agreed upon by both parties. I'm lumping these together because this is the weakest link in the succession chain. Although the Harveys trained both of their children on how to run the business, which included some family business workshops at the local college for Ed and Dorothy, Barbara and George acted more as parents and less as company owners during the crucial transition stage. While they took a calculated risk in allowing Ed to run the company, and while George did stop the bleeding before In-Ground Solutions could sustain any permanent damage, they've basically been giving Ed a free pass for his mistakes.
Was two years enough time for Ed's plan to work. Should Ed have even been given the reins at that time. The Harveys could have considered sending him to work outside the pool industry before trying his hand at running In-Ground Solutions. It would have exposed him to other ways of running a business. Ed shouldn't be considered at fault for wanting to mix things up; his parents gave him the keys to the kingdom and he wanted to put his own mark on it. Regardless of the reason, Barbara and George didn't prepare Ed properly for his big moment, and, by all appearances, Ed didn't have enough experience outside the walls of In-Ground Solutions to usher in a new business model.
BETTER COMMUNICATION If George had worked alongside Ed during those transition years, he would have had the opportunity to understand his son's motivation and the losses Ed incurred might have been more acceptable to his parents. At the very worst, they could have been minimized. During critical periods of transition, it's critical to review financial records on a quarterly basis and better to review them monthly.
Additionally, Ed could have learned some intangible leadership lessons from a man who has a quarter-century of business success behind him.
The Harveys admit that if they were simply Ed's bosses, he may have been fired by now. But that's the trap many parents fall into: They try to wear both the hat of the boss and that of the parent. As a result, they've failed to execute either role effectively.
Now, they face long-term and short-term issues. What becomes of Ed. Do they keep him on as an employee or give him another shot at the top, this time under heavy surveillance. Do the Harveys continue working another six years and take more profits to build their retirement to where they thought it would be in one year, and then pray for success for the company with Ed. Or do they sell to an outside party, leaving Ed's fate in someone else's hands but securing their own comfortable retirement.
The first thing the Harveys should do is nothing. Literally. They've made too many radical decisions concerning their business that it's best that George continues to run the company for the time being. Secondly, they need an intermediary. Regardless of whether Ed has a future at the top of In-Ground Solutions, a professional business planner needs to hear both sides and either validate the owners' concerns or possibly reveal a misunderstood side of their son. Finally, the family needs to fully investigate possible buyers of their company. There isn't much advantage to selling the company to a non-family employee because this buyer typically does not have the financial resources to buy the company. Of course, neither does Ed, so the only edge the nonfamily member may have is competency. Secondly, is this business readily marketable and in what time frame? In order to sell, you need a buyer. Relying solely on this scenario could be an expensive gamble.
In the meantime, Barbara and George need to start socking away profits and prepare for a few more years in the business. Hopefully, they enjoy their work.
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