Lessons I Learned Today 5/18/09 – Family business week

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.


*Doing Your Detective Work by Paul and Sarah Edwards

Depending on your industry, there may be a trade association or a Web site that collects and publishes pricing data.

Sometimes businesses post their prices on their Web sites. If not, talk with people in your community who are using the products or services and ask what they’re accustomed to paying.

Industry reports are national or state averages and may not be applicable to your clientele. But at least they will give you a ballpark idea.

Regardless of how you gather pricing information or the response you get, the best route to finding out what people will actually pay you is to experiment by setting up a pricing schedule and monitoring reactions from prospective customers.


*Fifteen Tips To Keep Your Company Growing by Maureen Farrell and Mary Crane

Each stage of growth comes with its own challenges.

For tiny companies with a bead on that $5 million-in-sales mark, the first thing to do is chart a financial course. But before you fall in love with the projections in those pretty Microsoft Excel spreadsheets, mind your cash. Unless you socked away a pile from a previous life, one wrong move and you won’t be able to cover next month’s inventory or interest payments.

Next step: Focus your energies.

Back-office systems are critical, too

If you haven’t thought about hiring professional management, now’s the time. This includes a chief executive, a chief financial officer and perhaps even a human relations manager and full-time legal counsel.


*Family Business Challenges Need Novel Solutions by Jane Applegate

It is impossible to find a one-size-fits-all solution when every family is different.

“I have voting control and I can overrule them, but I don’t,” said Gerald, the only sibling to have worked outside the family business before joining it. He spent three years as an attorney before taking over the business founded by his father and an uncle.

One of the biggest problems arises when the family members, in their roles as shareholders, reprimand or criticize employees who don’t report to them. Tension created when family members interacted with employees who didn’t work for them led the elder Cigliano to institute a strict policy that calls for verbal and written warnings and a week’s suspension without pay for violations.

“It’s a challenge because we’re both employees and owners,” said Marisa Neal, the youngest of seven siblings, who handles marketing and training for the company’s three retail seafood stores. “The problem is, employees look at you as an owner—not necessarily as an employee.”

It’s tough working for a family business because “things take so long to change and it’s very hard for my siblings to take direction from outsiders.”

We’re afraid to take risks because it will affect so many people’s lives,” making any changes is tough for him because he feels responsible for his family and his employees.

Some of his younger brothers work as salespeople, others handle operations, and one brother is responsible for the company’s computer systems. He said the three youngest siblings tend to stick together and have a different view of the world since they were born after the family business began to flourish and the family had more money.

“There was a different experience for the three oldest children,” said Gerald. “There was more money when the younger kids came along.”


*Business Mentoring for Your Kids by Patricia Schiff Estess

If a family business decides to use nonfamily managers as mentors, they have to develop a well-defined, well-structured mentoring plan.

Selecting an interim leader to act as the mentor is another option. Parents ready to retire might opt to hire an interim president when they take leave of daily responsibilities, if their successors are not quite ready to take the helm. Part of the new president’s job is to mentor the heir apparent so he or she is ready to take over in a given number of years.

Before a nonfamily manager assumes a mentoring role, he or she should be clear about the latitude of his or her decision-making responsibilities, advises Harvey Meier, a family-business consultant in Spokane, Washington. Among the issues to be addressed: Can the manager discipline the successor or decide the successor’s compensation and job duties?

Once the parameters of the mentor’s authority are established, Meier says the family has to assure that they will support the manager and that the job will be worthwhile, either through written guaranties of job security or additional financial compensation.

The core of a mentoring plan is an assessment of the successor’s capabilities: intellectual, educational, communication, and leadership strengths and weaknesses, as well as his or her skills and interests.

The mentor or mentors can develop a plan to improve weaknesses and capitalize on strengths.

There has to be sufficient teaching, training and monitoring of its assignments and goals. “Specific goals–what successors must do, what must be accomplished before they move to the next step–are necessary if the younger generation is to move through the plan.”

The plan should be of limited duration, anywhere from five to 10 years, Hoover contends. At the end of the successor’s mentoring, barring any unforeseen problems, leadership is transferred from the existing leader to the new one.


*Are Your Kids Wrecking Your Business? by Patricia Schiff Estess

So what can you do to rectify a rocky start when a young adult enters the family business? First, bring the issue into perspective, Herz Brown suggests. Either the parent or the child can ask themselves, “If this weren’t my child (or parent), how would I define this problem?” Is it a question of personality? Of being in the wrong position? Of not having enough experience? Of not communicating adequately? Of not having a method for resolving conflicts?

Once the problem has been identified, you can look for solutions. Maybe the child should work for another company in an allied field to gain experience, or maybe he or she should report to someone other than the parent. Maybe the parent and child can plan to meet once a week for an hour off the premises to discuss issues surrounding the business.

He also suggested creating a board of directors that meets quarterly. We did, and it has allowed the boys to air their ideas and goals with a group of people we all respect, and to get feedback from someone other than me. In fact, it’s proved so successful, it’s allowed us to go back to having dinners together and being a family again.

Often, the upheaval has to do with unmet expectations on the part of both generations, says Sam Lane, founder of LBF & Associates, a family business consulting firm in Fort Worth, Texas. These expectations can include everything from how much vacation the young adult can expect to have in a year to far more complicated issues, such as what kind of mastery the person will need to exhibit before moving up the ladder to a higher position.

“Both generations may think they’ve talked about what’s expected because they’ve touched on the subject in snippets of conversation,” Lane says. “But that’s not the same thing as sitting down, having lengthy and thoughtful discussions, coming to an agreement on expectations, and getting those expectations on paper.”


*Stock of Ages by Patricia Schiff Estess

Every relative seems to want a piece of the family business pie. Don’t let your business be a casualty of these shareholding squabbles.

It’s obvious if you do the math: The longer a family business has been in existence, the greater the number of people who may own its stock. Too many family businesses collapse on top of themselves because the stock was fragmented and owned by shareholders who had no interest in the business.

The ideal situation is for a family business to work all this out before the stock certificates leave the founder’s hands.

Shareholder wars are often more a matter of stock owners simply having different agendas than anything else. Those shareholders not directly involved in the business, the outsiders, often received their stock as an inheritance. And yet it doesn’t turn out to be a great windfall: They can’t sell it easily, and the money they earn from it usually pales beside the high fliers in today’s markets. Outsiders often look for ways to shed this so-so investment and reinvest the money in a venture that’s more lucrative and more liquid.

The insiders-those family members active in the business-have another vision. Perhaps they want to keep dividends low, so more money can be plowed into the business for growth and compensation. Or maybe they want a way out of being forced to confer with outside relatives when making decisions concerning the company’s future.

It’s imperative that family businesses put their own buy-back programs in place so shares to companies’ stock can be redeemed by those who decide they want out.

Any plan considered should restrict people from selling to anyone outside the family and define when, who, what and how the company will redeem the shares.

Any of the four Ds-death, divorce, disability or disillusionment-can trigger the desire for a stock redemption

It is important to form a plan that delineates how and when the payment of redemptions will be made.

  • Will there be a window of opportunity for redemptions, sometimes from 30 to 90 days annually?
  • Will the payment be immediate and in cash, or will it be spread out over a longer period of time?
  • Will there be a minimum and maximum amount that can be redeemed annually?
  • If shareholders want to redeem more than the company has in its own sinking fund, will all the requests be handled on a pro rata basis, or first-come, first-served?

Stock agreements are also subject to complicated tax laws, and the family should seek the counsel of appropriate accountants and lawyers when designing a stock-redemption plan to see whether the redemption will be treated as ordinary income (and taxed at the individual’s normal rate) or as capital gains (and therefore taxed at a lower rate).

Stock-redemption agreements can be tricky. Because each family is different, the final agreements must be customized. The plan should aid long-term family ownership, respect the important contributions and the varying needs of both insiders and outsiders, and be as savvy as possible about the tax considerations of redemption.


*Stock It to ‘Em by Patricia Schiff Estess

The younger generation is eager to get stock in the family business, but the older generation is reluctant to give it up. How does this impasse get resolved?

Estate-planning experts suggest gifting stock from one generation to another in family businesses be done often and early. Give stock away to your successors when its value is low-assuming you have a growing company and expect the stock to increase in value.  “That’s because gift tax consequences are based on the fair market value of the stock at the time it’s given.”

In family businesses where multiple considerations come into play, estate tax is just one factor.

There’s the issue of timing – the head of the company, it often feels like he or she is giving control to children who, however loved, may not be qualified to handle it.

  • Do you want to retain financial control of the business?
  • Are you uncomfortable with the level of your children’s commitment, maturity and leadership abilities?
  • Do you give stock equally to all your children regardless of whether the kids are in the business?
  • Do you have ongoing financial resources to support yourself in retirement?

If the answer to any of these concerns gives you cause for worry, you might very well be reluctant to gift stock.

Every generation will manage differently and put its own stamp on the company. Not only is that its right, but also its responsibility.

Other issues:

  • equalization of wealth/stock between kids working in the business and those not;
  • retirement equity for founders/parents, etc.


**8 Tips for Working With Web Designers by Johnathon Williams

Unfortunately, commissioning a website isn’t as simple as ordering office supplies. Web professionals and businesspeople don’t always speak the same language, and the learning curve for an already beleaguered entrepreneur can be steep. Here, several web designers explain how to select and collaborate with a designer to create an attractive and effective site–on time and on budget.

The first step in finding a designer you like is finding designs you like.

Consider the scope of your project as well.

Know the basics. It does help to understand a few fundamentals.

Realize how much direction you will need to provide in order to give your designer a successful starting point. The process is a collaboration from start to finish. In the beginning, designers typically ask for detailed descriptions of what prospective clients needs from their websites, as well as for links to other sites that the clients admire. If a designer provides an online questionnaire, potential clients should answer it as thoroughly as possible

Understand how important a good match is to a project’s success. Contact a designer’s previous clients to ask about their experiences.

Know what you’re paying for

Once the match is made, a contract is the next step. And here clients can’t be too careful, Reeder says. Everything that’s meant to be included in the project, from the payment schedule to the number of revisions that a client is allowed to request, should be spelled out. While some designers are flexible about small changes, clients shouldn’t count on it.

“Read it thoroughly, because anything that is not in that document is going to cost you extra.”

Clients should also be prepared to put down a deposit before any work begins.

Clients should be honest if they want to see a different design, but they were equally adamant that wholesale revisions are usually better than a lot of small changes.

“If you feel like the design is way off the mark and it doesn’t feel right for your business, speak up.”

The client is usually responsible for providing the site’s content–most commonly the text.

The most common cause of delays or extra costs after the contract is signed are sudden changes or additions.


*Not Just Any Partner by Laura Tiffany

You like marketing; he likes accounting. You enjoy designing new products; she’s a sales guru. Finding a business partner with complementary skills can be the best thing you do for your business–and yourself.


*Laying Down the Law by Nichole L. Torres

You just started your business – Now is the time to decide those issues–not after a problem develops,”

Don’t ever go it alone. Instead, Kopit suggests entrepreneurs enlist the services and counsel of a good lawyer, an accountant and an insurance agent at the very beginning of their start-up ventures. “Younger [entrepreneurs] particularly need people to bounce their ideas off of,” he says.

Hiring issues are a major legal consideration for start-ups. Consider whether you need a written noncompete contract with employees, whether you’ll use independent contractors and so on.

Should you classify your business as a sole proprietorship, an LLC, an LLP or a corporation? “There are tax implications that go along with [each choice],” cautions Kopit. Be sure to weigh each option with the help of your advisors to determine which form will best serve your business plan.


*Managing Your Brand’s Reputation Online by Karen E. Klein

Small businesses without national brands are perhaps most vulnerable to rumors, complaints, and bad blood spread about them through blogs, online review sites, and Webzines. But some entrepreneurs are unaware of what their customers—and critics—are saying about them on the Internet. They should get better at monitoring their online reputations

Technology, and particularly social media, has evolved so quickly that many small business owners are struggling to keep up with the task of managing their company’s presence in the conversational marketplace.

If you don’t control the message, somebody else does.

For a small company with $1 million in sales, when a rumor flies about their product or service, it could sink their entire business.

There are so many free tools and assets that you can use to monitor what people are saying about you, using Google Alerts, Google News, Yahoo Alerts, Technorati.com, BlogPulse.com. You just plug in your name. BoardTracker.com measures what’s going on in the world of online forums. Keotag.com monitors what’s going on in the social arena. And then there are paid services like BuzzLogic.

If you go to the source and explain truthfully where you’re coming from, you buy good will from people who were flaming you. There’s nothing better than to turn an adversary into an advocate, but of course you’re not going to have a 100% success rate.

If you go to the source and explain truthfully where you’re coming from, you buy good will from people who were flaming you. There’s nothing better than to turn an adversary into an advocate, but of course you’re not going to have a 100% success rate.

“We have to deal with this stuff in real time, so everyone gets the feeds and when stuff happens, we’re all alerted.”

“It’s almost like a badge of honor in the company to find out something and deal with it first.”


What I Think

This was obviously part of Family Business Week for the Applied Entrepreneurship group. Several articles today, last week, and continuing this week, deal with family business issues.

When you really think about it. If most family businesses could apply entrepreneurship principles we have been reading about in the 600+ articles posted since this group began in late February of this year, many “family” problems would either not manifest themselves in adversarial fashion, or would disappear altogether. I’m certainly not saying that this would solve all the problems the family layer of complexity imposes on the issues non-family businesses must deal with, but I am saying they would provide substantial help.

Many of these problems would go away with better communication. This is true for family and non-family businesses. Let’s take a few examples.

First, at the start-up stage, any business with more than two “stakeholders” or owners (not necessarily the same thing) should have a written agreement setting out basics:

  • Who is an owner?
  • What “consideration” is being paid for equity and how much equity does each owner actually own.
  • Are there any restrictions on transfer of equity (i.e. a buy-sell agreement)
  • Are there binding agreements for initial owners to put up more capital or consideration later, and if so, under what conditions? What happens if they don’t put up as required?
  • Who is an employee or non-owner and what is their role in the company, including options to acquire equity?
  • Who owns intellectual property rights or other assets used by the company?
  • Is there a non-compete or non-disclosure agreement?
  • What is the chain of command within the company?
  • How are profits divided or allocated between owners and non-owners?
  • What is the legal form the business will take?

At the other end of the life cycle, we have succession planning. Way too many good family businesses go away simply because the founders have not created a realistic succession plan, including the communications portion and the talent development module. Family businesses often fall apart in the third generation. If the founder’s passion and skill are sufficient to build a business, the second generation is often brought up in apprentice fashion, likewise living in the business.

When the third generation comes along, that generation often has enjoyed the privileges of the wealth resulting from the hard work of the first two generations, but may not have worked in the business at all. Consequently, the innate understanding and appreciation for the hard work and strategies involved in keeping the business successful, may simply have faded away or never been instilled in this third generation. Once the passion and skill are gone, there may be little love or understanding involved in management of the business, and the death spiral begins.

If the feeling is that new leadership must be brought in, it is often simply a decision on which child will run the family business. Consideration of “outside” personnel is often lacking as an option and family issues, such as first born = first to lead, becomes the deciding factor. In a best practices model, the kids should be trained at an early age to appreciate the role the business plays in the future welfare of the entire family, should become skilled in some lower end aspects of the operations, and should then be given an education in the outside world to gain perspective. Only then should they be allowed to come back in on a management track.

Once the kids come back from their “worldly” educational experience, they can bring in fresh skill sets and perspective of the larger market. When they come back, if they are in the management track, the process of advancement in the company, as well as “graduation” requirements at each level should be explained in detail and enforced, as they attempt to climb the family business ladder. All of this should be communicated carefully throughout the enterprise, so there are no surprises about the role and anticipated future role of anyone involved, including the point at which the founder will step out.

The article by Karen E. Klein, Managing Your Brand’s Reputation Online, is an excellent one. I’m almost always dealing with several clients now who are very concerned with this issue.

This article has some very good tips on how to monitor your company reputation and what to do when the alarm bell goes off, indicating that you are being trashed or your mark/brand is being infringed upon.

A recent article I posted here also deals with other new media branding issues, such as Twitter sites using the same trade name as that for which a registered trademark or service mark has been obtained by someone else.

The proliferation of new media streams in which you or your brand are being trashed or diluted makes it increasingly important to stay on top of this issue.

I’ll be hunting for other dashboard type articles to post here. Thanks, Jason, for posting that one. It seems to have struck a chord with many of our members.

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If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

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Posted in Applied Entrepreneurship, business, Business interruption, crisis, etc., Business life cycle, Buying a business, Family business issues, Financial security, Financing a business, Growing a business, Innovation, Intellectual property, Perseverance, Personal happiness, Planning for a business, Running a business, Selling a business, Starting a business, Succession Planning, technology, Thinking about a new business, Women Business Enterprise

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