In the quest to come up with solutions to their companies’ financial woes, managers must establish a serious and objective analysis of the situation at hand. It is also essential to assess the organization’s potential to solve its problems through an analysis of each structure as well as the evaluation of key personnel. This review, which is already complicated under most circumstances, becomes exceedingly difficult in the context of a family-run business, where the members of the family are involved to various degrees: shareholders, managers, shareholder officers, employee shareholders, directors, employees, etc...
A critical period is not the right time to ignore family matters; however, it is crucial to distinguish between “business” and “family”. The ensuing events depend on it. Although fictional, the following scenario will convince you!
Welcome to the fold!
On January 3, 2006, Raymond, aged 67, was going to the head office of the family business that he founded with his sister, Jeanne, in 1957. The electronics repair shop and adjacent boutique have now become a large Quebec-wide chain of stores that sell electronic and computer products. The company’s total sales are in the neighbhourhood of $50 million and it employs 400 people. Although Raymond is still Chairman of the Board, he turned over general management of the company to his nephew Pierre in 1994.
At the start of the new millennium, Raymond is delighted by the financial situation of the company, which had posted a robust performance and remarkable growth over the past few years. While attempting to figure out the reasons for the company’s success, Raymond remembers the long years of work that he put in with his sister Jeanne and the enviable reputation the company acquired over many decades. Nevertheless, the significant downturn that began at the start of the 1990s still comes to mind.
In February 1991, following two consecutive years of sharp financial losses, the company had run out of liquidities to the point that its lending institution hesitated to renew its operating credits and demanded a detailed business plan that included, in particular, a description of the organization and the presentation of its short-, medium- and long-term outlooks. Raymond, then aged 58, quickly realized that the organization’s portrait that he would present was not very reassuring:
The company’s mission had not been reviewed for over 10 years and no precise, measurable objective was defined;
The matter of succession had never been openly discussed;
Although Jeanne had not been active in the company since 1988, she still held
50% of its shares. However, several members of the family were working in
the organization:
- Julie (Raymond’s daughter), Marketing Director;
- François (Raymond’s son), Corporate Controller;
- Alain (Jeanne’s son), Purchasing Director;
- Jacques (Jeanne’s son), Manager of a branch in Laval.
- None of the four children had ever worked in another organization. Moreover, their salaries were determined based on their needs rather than on their qualifications and responsibilities;
Raymond was not aware of Jeanne’s will and vice versa;
Evidently, any legal matters had always been laid out as simply as possible, so that there were none of the following elements:
- Shareholders’ agreement;
- Employment contracts for the personnel, including the members of the family;
- Estate freeze and crystallization of the $500,000 capital gains exemption;
- etc.
The branch supervisor, who was not a member of the family, left the company in 1990. When he left, he hated the idea of never being able to openly discuss his possibilities for advancement despite a productivity level that he felt was clearly superior to that of the other managers of the company, particularly, certain family members. Jacques, Jeanne’s son, had been clamouring for the position of supervisor for months. The company’s financial information and internal control were clearly lacking: lack of costing, monthly financial statements issued late, etc. Moreover, François seemed incapable of producing complete and detailed financial forecasts such as requested by the short- and long-term lenders. Julie, Raymond’s daughter, was faithfully carrying out her duties as Marketing Director, but would have preferred managing her own advertising agency. However, she stayed with the company seeing as how she needed money to finance her personal dreams. Added to this were a number of management weaknesses in most of the company’s departments. Meanwhile, Raymond and Jeanne had received countless offers to purchase the company, however, they declined out of concern for the future of their respective children following an eventual sale. Further, the economic backdrop in 1991 significantly dampened the fervour of any prospective buyers.
Moreover, it was clear that the company had considerable resources and that, despite the difficulties, the know-how and commitment of the family members represented the company’s key strength.
Raymond recalls that he had decided to resolve the weaknesses rather than attempt to convince the short-term lender to inject additional liquidities. The following key actions were taken:
External advice was obtained from consultants, friends and business relations. A family committee, independent of the board, was set up in order to clearly distinguish family matters from company business. The family committee appointed an external arbitrator who would be called on to manage any family conflicts in the future. External members were added to the board. The organization’s mission and objectives were reviewed and approved by the Board and the family committee. Pierre (Jeanne’s son) was hired as Vice-president of Operations and Branch Supervisor. At the time, he occupied a senior management position in the computer division of a major enterprise. The board had correctly tapped Pierre to succeed the general management, a challenge that Pierre was ready to take up. Following lengthy and tumultuous meetings, the family committee confirmed this course. With the help of experts in the matter, a complete succession plan was prepared including, in particular, an estate freeze, a shareholders’ agreement, the creation of trusts, life insurance for shareholders and the preparation of wills. The shareholders’ agreement included clauses on share redemption, right of first refusal, non-competition and provisions for resolving conflicts. The company thereby ensured that any negative spin-offs resulting from the eventual death of an owner or conflicts would be minimized while promoting the succession and each person’s sense of duty. Meanwhile, proper employment contracts were prepared for all management employees, including members of the family. Specific objectives were set for management personnel and an employee evaluation process and salary scale were developed. A decision was made to reduce François’ responsibilities and reinforce the finance function by hiring a Vice-president, Finance. A training program was prepared for Alain and Jacques in order to develop new management tools and allow them to increase their responsibilities in the mid- to long-term. A bonus plan was implemented for management employees who were not family members to offset their unlikely chances of being promoted to shareholder status. A decision was also made to help Julie start her own advertising agency as soon as the company’s situation would allow. A series of measures was initiated that would allow the company to turn its financial situation around with the help of the Board, key employees and external consultants.
Raymond is convinced that the measures taken at the time to provide a framework for the company allowed it to regain its sound financial health and to experience remarkable growth in the ensuing years. His only regret is that Jeanne, who passed away in 1993, is not alive to witness the success of the company and, in particular, that of the kids.
Note: the above-mentioned scenario is purely fictional and merely used to illustrate the measures that could help a family-run business that is having organizational woes turn its situation around.
Jean Chiasson, Partner, Raymond Chabot Grant Thornton Turnaround Management Services
