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If you can't trust family, then who?

Harry is a hard-working man who built a successful business by sweat, ingenuity and force of will. He was good at understanding what people wanted and used that talent to build a company in the US that manufactured luxury items for successful businessmen and others who wanted to make a statement. The company, ImageMaster, grew quickly, possibly too quickly. ImageMaster needed to rapidly expand to meet the growing demand for its specialty products. The business seemed to be growing faster than Harry's ability to manage it effectively. Sales and production remained strong, covering up whatever management deficiencies existed and Harry was living the good life. Then the legal problems started. The first blow came with several citations for environmental pollution infractions, which snowballed once several municipal agencies became involved. The final straw was when the IRS stepped in and Harry was arrested for tax evasion. The huge fines he had to pay and the legal costs incurred in dealing with his problems caused ImageMaster to close and declare bankruptcy.

Because of unresolved legal and financial issues, Harry could not start a new business under his name. Fortunately for him, his son, Mark, was just graduating with a degree in business. Harry approached Mark about starting a new business in the same industry, forming an unwritten partnership and showing Harry as a salaried employee. It was agreed that Mark would own 51% of the business and provide some of the seed money for the new business venture. Harry called on his many contacts and distributors and made informal arrangements that soon netted him the specialised equipment, supplies and the initial accounts they needed. The new company, ImageMaker, was up and running in a very short time. Though Harry was in charge of production, he taught Mark everything he knew about the business and Mark was an exceptional student. The business became successful very quickly.

Mark was single, ambitious, and living at home when he started ImageMaker. He devoted most of his waking time to developing the business and it paid off. As before, the company quickly grew and expanded. Like his father, Mark got into a financial pinch with the IRS, but Harry lent him the $300,000 needed to resolve the problem. Both father and son enjoyed the financial success of the business. Harry lavished himself in luxury items and Mark wisely invested his money, chiding his father for his frivolous spending.
 
Mark moved out of the parental home, got married, and had two sons. He continued to grow the company, diversifying its products and services, expanding the company's holdings. A professional management team was put in place to oversee all aspects of the business. It had been years since Mark went to Harry for business advice. Harry joined the sales side of the business and made a handsome commission on top of the ownership distribution, which remained unofficial. Mark's resentment of his father grew proportionate to the ever increasing size of the company. Mark felt that his father was undeserving of the money he received as a partner, Mark felt he alone shouldered the responsibilities for ImageMaker. Mark unilaterally decided to change the partnership agreement, informing his father that he was now 20% owner of the company.

Two significant events occurred. Mark was poised to make a huge expansion of ImageMaker, initiating operations in Europe. On the other hand, Harry was completing the terms outlined in the legal disposition of his earlier problems and the statute of limitations for any further legal involvements was soon approaching. Harry felt disregarded and disrespected in the company by Mark and wanted to formalise the previous ownership agreement. Mark offered to buy out his father for $10 million and provide him with a $250,000 salary for the next five years in a no-show position. Harry refused – he was aware of the company's expansion plans and the monetary potential.

Harry threatened to take legal action against his son, even though that could have huge consequences for both with the IRS. Mark thought that he was being more than generous with his offer to his father.

Commentary 1
They have five areas that need to be addressed to resolve their conflict: communication, facilitation, compensation, valuation and negotiation. Their apparent lack of mutual understanding indicates that they should create a forum to start the communication process.  Because of the interdisciplinary nature of the issues they face, they should retain the services of a professional facilitator who has the necessary understanding of the four disciplines: legal, finance, management science and behavioural science.

As in many family-owned businesses, failure to understand how family members should be compensated can cause endless conflict. Apparently, they did not differentiate between compensation for the role they play and how well they perform that role (salary, fringe benefits, and bonuses at fair market value) versus compensation for what they own (interest on notes, rent on real estate, both at fair market value and dividends based on a fair return on their investment, the performance of the company and its ability to pay). This would need to be addressed at the communication forum. They also need an independent valuation of the company in order to resolve their conflict.

It appears that they both have taken positions that are the opposite of each other, a situation that would preclude a win-win solution. The book on negotiation, Getting To Yes by Fisher & Ury, will help them to understand the needs of each other and what brought them to the present situation. Only then will they be able to make the decisions that result in a win-win solution.

Frank S Schneider is founder of The Schneider Consulting Group, a management and organisational development consulting firm in Denver, Colorado. He may be reached at frank@scgfambus.com

Commentary 2
What an interesting (though not uncommon) father-son relationship these guys have!  Harry's been such a conniver all his life that no sensible business school graduate should have entered into partnership with him – much less an informal handshake partnership with expectations of under-the-table distributions. An exit arrangement should have been agreed on as part of the contract at the start of the partnership.

Why did Mark do it? He may have thought it was the only way to gain his father's respect. Or he may have been trying to rescue him. It would be interesting to know what role his mother (whether still married to Harry or long since decamped) played in Mark's decision.

Whatever his reasons for the original decision, it's not surprising that the two men are now embroiled in a potential litigious situation.  The fact that Harry is seeking to build his personal wealth at this time in his life indicates either that his agenda with Mark is more competitive than paternal, or that he's getting questionable estate planning advice – or both.

Among the most important pieces of information missing from the case description are: does Harry have other children/heirs? What are their circumstances? To give him the benefit of the doubt, perhaps he's concerned about how much he can leave them. He probably considers himself to have made a great gift to Mark.

Sons and daughters, beware of crooks bearing gifts – no matter how much affection you have for them.

Kenneth Kaye specialises in conflict resolution and next generation development for family firms of all sizes.  His website can be found at www.kaye.com

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