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When the sum of the parts became greater than the whole

My earliest memories of 'the business' were of the Saturday mornings spent with Dad on the factory floor. He would walk around checking on orders, work-in-progress, and what had been billed the day before. I would pick up tiny pieces of cloth clippings from the cutting room floor and would spend the rest of the time thinking of innumerable crafty things to do with them. The car ride to Boston and breakfast at the Peter Pan Restaurant would give us ample time to talk about how Dad came to have his own business and how he bought out his father, Joe. He would tell me how his father, Joe, and Joe's brother, Jack, were once business partners during the depression, but had a falling out and never spoke to each other again. I learned that the early days were lean, but I was too young to remember. The humble beginnings of the business meant that on Sundays Dad drove to New York to pick up 50 dozen neckties. He would sell the ties out of the trunk of his car to 'Mom-and-Pop' retailers throughout New England during the coming week while Mom took care of the family and the household. Dad left her with an envelope with US$50 in it – that had to cover all the expenses for the entire week.

An optimist at heart, Dad dreamt of bigger things. His sales ability and tenaciousness resulted in becoming a main supplier for a national men's retail operation. Having a manufacturing operation soon became critical for the control of quality and product availability. Investments in plants, machinery, personnel and business acquisitions resulted in a business success story and the attainment of an affluent family lifestyle. Dad was fulfilling the American dream.

Twenty-years later, and with all three of us kids involved in the business, the retailing environment was shifting. Individual retailers were fading away and national retailers who wielded enormous pressure on pricing and terms could make or break the bottom line. More focus was placed on designer labels and on 'image'. That meant expenses for advertising and royalties. No longer could you pick up the phone and speak to a buyer who was able to make a decision – it all had to be done by committee. With profits declining and growth opportunities ebbing, tempers were flaring. Family illness magnified the business issues and left everyone scratching their heads, questioning the future of the business.

Should Dad continue to make cash infusions into the business and save it for his children and his loyal employees? Dad was staying in the game for others now. It was no longer for his benefit, nor did he find it fun. As his children, could we allow him to put his financial security at risk for the chance that we could wait out a downward business cycle? Business advisors suggested that we (children) should go from a reduced income level to no income. Efforts to find a 'white knight' investor or buyer for the business were fruitless at best, fatal at worst. The machinery, equipment, real estate and inventory could be sold for more money part-by-part, than the entire company as an ongoing entity. Should we liquidate? What would this mean for the individual members of this family and for the legacy that our Dad had created? Could we all live with the outcome?

Commentary 1
Business families are faced with various cycles. Each member goes through his or her own lifecycle from childhood to golden age. The family goes through its own life cycle from nuclear family to extended family, cousin consortium. The operating business like any other business goes from start-up to maturity.

In many family-owned firms when the first generation has reached retirement age the initial product that was the success of the firm needs to be revisited, recycled and redesigned. In this case, who should take on these responsibilities? Can the new generation take over and rethink the strategy? Should they own not only the shares but also the responsibilities?

In some cases selling the business is the best solution, since often the business is no longer viable and surely not profitable enough to be the main income of not only one family but also now of three and even four families.

- What is being betrayed by selling? The employees? The family? Dad's legacy?
- What if, by selling the business part-by-part, it yields enough to start another business altogether? Will Dad's legacy continue? Will the family members find a new challenge? And can some key employees continue in this new endeavour?

What makes a family a 'business' family? Does the family need to have an operating business to be a business family? Or can they continue to act as such after the liquidation of the business assets? They may create a family holding that they can manage together.

The secret here is to make a decision in consultation with all the family members. The process in which these important decisions are made is crucial to the acceptance and commitment of all family members to the final decision. We find that with our experience in the field it is not the final decision of keeping the business or selling it that is detrimental to the family harmony but the process in which these decisions are taken.

Denise Paré-Julien  is director of education and training for the Business Families Foundation and a consultant to family enterprises in Montreal, Canada.

Commentary 2
Clearly, family businesses are not merely businesses operated for profit motive alone. For this entrepreneur, the business enterprise represents so much more than just its tangible and financial assets. It represents the fulfillment of a lifetime dream to create a substantial size business that could assure large national accounts high quality products that it could deliver readily. Furthermore, it created good will in the community by providing jobs and opportunities for first generation immigrants, and an excellent career path for involved family members.

When family and business are co-mingled, decision-making becomes complex and emotionally laden. The impact to the family often takes precedence over what is good for the business and can wreak havoc on objective decision-making. What often occurs is that urgent matters get sidelined or never addressed, leading to negative results for the business overall.

This business, as in many a family business, was established initially as a means of satisfying the founding owner's personal financial objectives. Yet it evolved into a system which became the foundation for financial security for family members. Once this happens, a shift occurs that can endanger the founding owner's financial security. If the business is not profitable there is a tendency to nurse it along for the sake of the family working in the company. Sometimes this involves ongoing infusions of capital or securitisation of debt that undo the founding owners' financial security.

For this reason, family businesses should have an outside Board of Advisors to ask the hard questions: "Is this line of business viable?" "Do we need to sell or get other investors?" Having professional advisors trained in accounting, law and financial issues will professionalise the decision-making process and can improve the outcome for the founding owner and family members alike.

Carrie Seligman  is an attorney and family business advisor with Northwestern Mutual Financial Network in Boston, Massachusetts, USA.

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