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Building a future for the business

Henry bought Able & Sons Construction 30 years ago after his father died unexpectedly of a heart attack. Henry grew his father's business to $80 million in annual revenues, expanding into building churches and government buildings. He is well-respected in the community and proud of building the new Methodist Church, high school and city hall and expanding the county courthouse, hospital and the three elementary schools.

Five years ago, at 56, Henry suffered a heart attack and was told to slow down. He hired David to lead the company. David grew up in construction, working for 35 years in all aspects of the business. He is comfortable with making decisions and managing jobs, and is well liked by employees and customers. Henry also established a board. He asked two acquaintances to serve with him and his wife, Jane. Jack was the founder of a bank and recently retired, and Pete founded a steel company.
 
Able & Sons always provided Henry and Jane with enough to live comfortably and put their three children through college. Their two sons became a doctor and accountant, but their youngest, Heather is 32 and works as a site manager for a large commercial construction company in New York. Jane wants Henry to convince Heather to work for the company, hoping that she would eventually run it.
 
David made many changes in the company over the last five years. David believed that the company needed to move out of the fixed-bid work inherent in government and church construction because the margins are too low and there is more risks to costs overruns. He pushed for Able & Sons to expand into commercial construction where design-build provided greater price flexibility. Bradford's push for economic ­development provided a great opportunity for the company to make the switch as five manufacturing companies in the new economical park and Able & Sons built four of the five buildings. But the company did not bid on the new county maintenance shed and library, the addition to the middle school and the refurbishment of two elementary schools. This work went to three competitors. Some of his friends asked if something was wrong with his business, and he suspects others are questioning his community commitment.

While Henry knows David's vision is correct, Henry has not seen much improvement to the company's bottom line. Annual revenues and gross profit margins have increased under David's leadership, but net income remains unchanged because the employees are making a lot more, particularly David and his management team, and now they have a new office building and equipment and furnishings. David argues these improvements are essential to attract competent people and give business owners confidence in hiring the company. Henry sees the business not producing much more cash and moving into an area that is new to him. Henry thought the employees were happy before, and he remembers how he use to find used equipment and remodeled the building they were in to keep administration expenses low.

The board seems to like David's plans for the company. At least they approve what David presents even when Henry questions about how much the company has changed. Henry is wondering if David is the right person to lead the company. He questions whether Jack and Peter would support replacing David. He thinks maybe Heather could lead the company with his help even though she is young.

Commentary 1
When Henry slowed down his work in his family business for health reasons and brought in an outside manager, he attended to some aspects of this change, but not others. The most salient omission is the governance aspect that would oversee and ­integrate the family and ownership interest with the business interests. Henry did institute a board, however this entity alone is insufficient. The role of the board is to focus on the business. There is no structural entity focusing on the family and ownership issues. The immediate issues that Henry faces now have a large family and ownership component.

Henry needs to go back to basics. Clarity is required between the boundaries of ownership and management and the board. A separation of powers and responsibilities will allow Henry to bring forth his ownership interest and to have a forum to ­discuss family issues as they relate to the business. I would advise Henry to hire a seasoned family business consultant to sort through these issues with the family, the board and the ­management. Change is again upon the company as Henry's health needs shift; the question of his daughter's entering into the business is raised; and financial changes of the past several years have raised some value conflicts for Henry, for which he has not found a receptive audience.

A family council will be beneficial to both Henry and David. The council can comprise Henry, Jane and any or all of their ­children. Through this arrangement, they will learn about the separation of powers and responsibilities between ownership, board and management.
 
The values, needs and goals of the owners can be ­communicated to the board. Henry will have a forum to discuss the financial needs that he and Jane have. He, Jane and their children will be able to discuss Heather's opportunities within the company, convey this information to the board and hear from the management about the opportunities that exist. They will also be able to talk though succession issues.

Commentary 2
Henry's situation is typical of entrepreneurs in transition. He finds himself in a situation where he has transitioned out of his long time role of being in charge, but his new role is somewhat ­undefined. Henry realizes that his transition plan is not meeting his needs and he feels stuck. Henry needs to reassess his ­transition plan.
 
He should begin by focusing on his responsibilities as an owner. He needs to clarify his values, needs and goals as an owner and then communicate them to the board and ­management. Specifically, Henry values the company's ­commitment to the local community but hasn't asked to make this part of the company's culture. Henry needs money for ­retirement, but hasn't asked the board or management to consider his financial need in their planning. Henry likes the idea of the company continuing to be family owned, but liking an idea is not a goal or a succession plan. Henry wants to have an impact on the company as a manager but his need is not known. Once Henry sorts this out, he will be clearer on how he wants to ­transition. Then, he should focus on his board. The board could be an ideal place for Henry to have the impact he wants. He can set up the board to be the balance point between ownership and management. In other words, the board main role would integrate the owners' and management's plan. That way Henry will get what is important to him and management will be able to grow the company.

Henry is an underperforming owner. His values, needs and goals as an owner remain in his head. His succession plan is unclear and his transition plan is not working. His role in ­management is undefined and his board has no guidance from him as an owner. He is clearly an unhappy owner. Henry has the power to remedy this situation and the key is to start telling people what he wants.

Managers in David's situation are also commonplace. When owners do not communicate their values, needs and goals, managers do the best they can. David should encourage Henry to clarify and communicate his values, needs and goals.

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