One of the most common, yet critical, mistakes that small business owners make is blurring the boundaries between three closely-related but dramatically different decision-making forums. An important key to long-term business success is keeping the three legs of these different decision areas – the “tenuous triangle” – separate from each other.
The three areas are 1) business decisions, 2) family decisions, and 3) partner/investor decisions.
Unfortunately, too many small businesses experience problems when owners/founders make acute and long-term decisions without the involvement and input of the appropriate stakeholders.
Bill W., 52, built a successful commercial HVAC company outside of Boston. The business was founded over 25 years ago with just two men and a truck and grew steadily under Bill’s leadership. The company now employs 100 people and has 24 vehicles. Demand for the company’s services continues to be stable and rising, and Bill’s operations manager Steve R. has proposed adding ten new workers and investing in three new trucks. Bill and his wife Beth have no children, and he is positioning the company for a future sale so that he and his wife can retire and move to Florida sometime in the next five years.
Bill is excited by Steve’s expansion plan and mentions his intentions to Beth over dinner. He is surprised at her frosty reception. The couple has sacrificed for nearly three decades and plowed almost all profits back into the business. Beth wants to fix up their home, which shows signs of neglect due to deferred maintenance, and upgrade the kitchen and master bedroom and bath to maximize the home’s resale value. With the proceed from the sale of the business, she wants to buy a beautiful seaside condominium in Florida with an ocean view and retire in comfort. She has said this many times to her husband and sees this new business investment as unnecessary. The company is doing well. In her view, there is no need to expand into selling it at a profit. Bill is in a puzzle and now regrets having mentioned Steve’s recommendation. Beth is frustrated and upset that her husband was going to move ahead without speaking with her first. She tells him she wants no part of the expansion plan.
Business decisions should be made only with the firm’s senior leadership team, which is typically made up of critical functional managers with line responsibility and accountability for the performance of their respective departments. These managers may or may not include family members, but only if they work in the business in a managerial or operational capacity. The decisions made in this forum deal with the interests of the company as an ongoing concern, separate from other considerations. Common issues dealt with in this forum have to do with strategic plans (such as steady expansion and associated hiring plans), growing or scaling back product lines, whether or not to invest in new plant, machinery, equipment or inventory, and when to roll out new products or services, etc. These decisions are primarily STRATEGIC and OPERATIONAL.
Greg S., 62, owns a commercial landscaping business in Columbus, Ohio. He and his son Ben and daughter Julie run the company. Ben is responsible for field operations, while Julie manages the office functions. Ben is 41 and has been in the company since he was 18 years old. Ben supervises the company’s 25 employees and spends his days in his truck overseeing multiple job sites to ensure quality work. As the oldest child, he feels he is entitled to take over as President when his father retires and has been angling for this position over the past five years. Julie is 38 and joined the company ten years ago, having first earned a business degree at college and then worked as the business manager of a construction company across town. She is responsible for sales and marketing, contracts, finance, bidding, estimating, scheduling and dispatching, and HR.
Greg sees Julie as his “righthand man,” and he realizes that the detailed understanding she has gained over the past decade running the company makes her a critical asset. Greg understands that Julie is an indispensable employee that he cannot afford to lose because her knowledge and experience make her the logical successor. Naming her older brother as President only due to birth order would be wrong, but he also doesn’t want to alienate his son. He also knows that his daughter has highly marketable skills and could leave if mistreated. By the nature of his role, Ben, as the field supervisor, is replaceable. Greg is realistic about this, but he likes to avoid conflict and doesn’t want to be confronted by his children. He reaches out to a long-term golf partner, Gary, who is a retired accountant and his former CPA. Over lunch, Greg asks him what he should do about the situation. Gary says that family loyalty takes precedence over other issues and that because of his longevity with the firm Ben has earned the right to be the next President.
Family decisions should include all family members who are related to the founder/owner and who have a long-term financial interest in the fate of the business. In this forum, discussions usually involve legacy issues and ownership inclusion rights and determining future claims to the profits if the founder passes away, if he/she sells the business, or if the company is turned over to one or more of his or her children. As such, family decisions typically revolve around ESTATE PLANNING matters and SUCCESSION issues. These decisions have to be made by the family members, even though uncomfortable conversations could result. The business owner has to be guided by what is in the best interests of the firm as well as the family, even if the final decision might eventually cause resentment and hurt feelings.
Mark T., 34, is a general commercial contractor outside of Harrisburg, Pennsylvania. He employs a staff of 16 people. His business is doing well, but the brutal nature of the construction industry (“pay when paid,” and “milestone payments”) means that cash flow is always a source of significant anxiety. Weeks could go by without revenue from his clients, and yet he still has payroll to make and business expenses to pay. A lengthy period of stormy weather and heavy rains, which has pushed back construction schedules by nearly a month due to the wet conditions, has squeezed Mark’s financial means to the limit. He will ultimately run out of cash in one week. Mark has wholly tapped his line of credit, and his banker, who has already extended it twice before, is reluctant to do it a third time. The business has no physical assets or inventory to sell, and Mark has reached the maximum on his credit cards. It looks as if Mark will have to lay off his people at the beginning of next week.
Mark has a silent partner, Pat H., a wealthy friend of his father who loaned him $100,000 eight years ago to found the business. Pat received a 33% share of the ownership business, plus distribution of $2,000 per month, but has no operational or managerial role in the company. For Pat, this is strictly a financial investment. Mark is under high stress, but reluctant to ask Pat for more money, as Pat is a shrewd manager who would probably demand an increase in his ownership stake and his monthly payment. Mark is unwilling to cede more control. At his 15th high school graduation reunion over the weekend, Mark commiserates at the bar with a former classmate, Jerry P., over drinks. Jerry tells Mark that he “knows a guy” who can get him an unsecured cash loan of $20,000 by Monday morning, but that it would have to be “off the books” and repayment would also have to be in cash. Jerry also said that the “fee” would be $8,000, no matter how quickly it takes Mark to make repayment. Feeling desperate and out of option, Mark agrees to meet with the man.
Lastly, partner/investor decisions should include outside partners and investors, which in the majority of cases are usually bankers, passive investors, or outside (non-family) partners with minority interests in the business. In this forum, the decisions have to do with repayment of loans or debt, buyout of partners, and dividing up claims to a percentage of the company’s profit streams. The decisions can also deal with the future investment of capital to cover operating or budget shortfalls, etc. As a result, decisions in this forum are overwhelmingly FINANCIAL, and all monetary stakeholders in the business need to have a voice in the decision-making (although this does not necessarily mean everyone has veto rights).
Problems occur when owners/founders fail to separate each of these decisions into the appropriate forum. Operational decisions are often made when sitting at the dinner table surrounded by family members. Or, strategic decisions are made on the golf course with a business partner.
When these kinds of boundary-crossing behaviors take place, problems typically occur. The decisions are usually sub-optimal because the right stakeholders are not part of the discussion. While it is easy to say but hard to do, small business owners/founders need to remain disciplined and confine discussions only to the appropriate forum and resist the temptation to make decisions “on the fly” – or at the proverbial kitchen table.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: