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Overwhelmed and unsure

In the late 1950s Harold Reynolds, as sole owner, founded a gravel and crushed stone business, County Gravel, Inc ("County") that thrived during a highway construction boom. Harold and his wife Gladys equally, as the Reynolds Limited Partnership ("the Partnership"), own the real estate where County conducts its active business. Gladys and Harold have three children: Bill (48), Cathy (44) and Ricky (42).

As a teenager Bill loved working in the business. In college Bill studied civil engineering, and after graduating, he worked for several years with a construction company. At the urging of his parents he returned home to work at County. He was married in 1982 and has two children. Cathy finished college, worked in retailing, married an attorney and has three children. Ricky never completed college, is married to his third wife, has no children and buys and sells sports memorabilia.

Bill understood the limitations of the gravel business and also wanted to put his engineering skills to better use. Recognising the demand for precast concrete, Bill acquired a precast concrete business with his father‑(as equal partners), forming Reynolds Precast Products, Inc. ("Precast"). They relocated the business to surplus land owned by the Partnership. Bill took on major responsibility for Precast while Harold continued managing County. In the late 1980s County's gravel pit began to be depleted and became subject to costly environmental regulation. By 1990 it closed its gravel operation. Its stone crushing business also fell off significantly and ceased operations in 1994. Precast, however, thrived, increasing revenues from US$400,000 in 1987 to over $2 million in 2002 while sustaining a 15% net profit margin. Bill has exploited the family's industry contacts, invested in modern equipment, delivered a high quality product and operated efficiently. After 1994 Harold worked at Precast, primarily in sales.

Harold and Gladys are now both over 70. Their health has deteriorated and they plan to retire to Florida this year. Bill looks forward to greater independence from his father, but is concerned that after his parents' deaths he will have difficulties with his siblings over ownership and management of Precast and the Partnership. He feels it would be unfair for his siblings to share in the business he initiated and developed. Bill has asked Harold for his 50% Precast share and a 50 year lease with the Partnership.

Both Harold and Gladys understand Bill's perspective and believe that Precast will prosper if Bill is at the helm. They worry about Ricky's ability to support himself. They are both very close to Cathy and believe all their children should be treated equally.

Although they have other assets and investments (their home, parcels of raw land they have acquired over the years now worth over $400,000 and a $600,000 investment portfolio), Harold and Gladys need income from Precast and the Partnership to maintain their comfortable lifestyle during retirement. Harold's primary goal is to assure that Gladys will have no financial worries after his death.

Before retiring, Harold and Gladys want to reply to Bill's request, but are overwhelmed and not sure where to begin.

Commentary 1
Many of the problems presented in this case arise from lack of planning. Harold and Gladys' goals in priority order are to: (1) have income security for their retirement; (2) enjoy the holidays with their family; and (3) be fair to their children after they die.

It is clear that the company must survive in order for Harold and Gladys to enjoy retirement. To increase the probability of long-term success, they should form a Board of Directors or a Board of Advisors, comprised primarily of outsiders. That will provide mentoring and succession continuity while Harold lets go of the business. A Board will also ensure that family issues do not impact the company and the management team. To enjoy the holidays and ensure eventual fairness, Harold and Gladys must allow the Board to govern the business. And, with the right set of members, a Board will help Bill with his business issues, as well as preserve sibling relationships.

For the benefit of the family, a "Family Council" should be formed to govern the family and their investments. More family involvement in the business is very risky, as other family members may have neither the interest nor the competency to help Bill. Harold and Gladys must allow professionals to step in and make unpopular decisions so that relationships are preserved and Cathy and Ricky can be separated from business issues.

To provide his parents with a retirement income stream, Bill could buy them out over time, at a fair value. As a result, Bill would acquire 100% of the business, and the full value remaining in Gladys' and Harold's estates could be shared equally with the non-working siblings.

Family therapists are usually helpful when siblings are ­dysfunctional, as in the story of Ricky. The deep psychological problems that Ricky appears to exhibit will only create more ­conflict as frustration builds among his siblings. A family therapist help form the Family Council as well as help Ricky.

Finally, Harold and Gladys' family values appear to be strong enough that, with open communication and some forceful parenting on tough decisions, family members will successfully work through their issues. As for the business, Bill must be free of the shackles he is presently under to address the severe competitive pressures that only flexibility can help solve.

Jack Veale, MBA, CMC  is a management consultant in West Hartford, Connecticut, USA serving privately held and family owned businesses.

Commentary 2
Harold and Gladys need to do a lot of homework before making any decisions, since they currently have insufficient information to make the informed decisions that need to be made.

Their first assignment is to read "Rough Family Justice: Equity in Family Business Succession Planning" by Glenn R Ayres. Rough family justice is defined as "equity, not equality, among members of the family system in a context designed to serve the best interests of the family business". This article clearly articulates how equality is not always feasible when a family business is involved and gives good guidelines on how to plan and make decisions in a family business.

Their second assign­ment is to find the ans­wer to lots of questions about the business and their own personal fin­ancial needs.

There are actually two businesses involved here: Precast and the Partnership. What is Precast worth? What "shape" is it in? What is the Partnership worth? What, if any, environ­mental liabilities re­main? What would a lease be worth for the property in question? Is there a buy-sell agree­ment between Bill and Harold? Can Precast (and Bill) afford to buy out Harold?  What happens to Precast if Bill dies? Can it continue to operate without his leadership? Are there other employees ready to succeed Bill?

Harold and Gladys then need to consider their financial needs and the source of future income. What kind of income do their investments generate?

Once some of these questions are answered, Harold, Gladys and Bill need to discuss the future of Precast and how the needs and desires of everyone can best be achieved.  The issue of how to treat the children equitably (or equally) can be discussed. Again, I would strongly recommend that Harold and Gladys carefully consider what might happen if they strive for equality instead of equity among the children.  Depending on the value of Precast and the Partnership, any distinction might even be moot  For example, if Bill can buy Harold's shares in Precast and pay rent under a lease, both at fair market value, it might be possible to treat the children equally while ensuring that Precast continues as a viable business under Bill's ownership and leadership. 

The issue of taxes also needs to be addressed. Will there be enough money in the estate to pay for taxes when the time comes? This is especially crucial when the assets are illiquid property and cannot immediately be con­verted to cash without a "distress sale". 

Harold and Gladys should ask their advis­ors to help them ask the right questions of themselves and Bill and to develop answers to those questions that they can accept.

Bill needs to recognise that his partner (his dad) will need to receive money from the business in order to retire and it is unrealistic for his dad to gift him half the business. Plus, there could be tax consequences to such an action. My advice to Bill would be to start a similar process for himself and Precast NOW! Bill needs to think about what will happen to Precast if he dies.  Also, how is Bill funding his own retirement? He certainly doesn't want to find himself in 20 years facing the same predicament his parents are facing today.

Karen Vinton, PhD  is a Professor at Montana State University and a family business consultant in Bozeman, Montana USA. 

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