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Bloodlines and bottom lines

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A family business can be a successful, profitable venture, but it takes a lot of planning and a willingness to work as a team

Most family businesses don’t start out as such. Instead, they begin as the vision of a single entrepreneur who serves as the sole driving force behind the company’s formation and growth.

The founder lays out the business plan, often invests the majority of the initial seed money, builds the customer base, makes the hires and decides how to grow the company once it passes the start-up stage.

It’s the template for the great American success story, that is, until the founder is no longer involved in the business, and leadership falls to the next of kin. That’s when things can get dicey if protocols aren’t in place and enforced.

Kim Huffman is well aware of the challenges a business faces when it transitions from a strong central leader to family leadership. She’s part of a triumvirate of Huffman family members who have run Neil Huffman Automotive Group in Louisville, Kentucky, for the past eight years.

“Neil was my father, and he passed away about eight years ago,” Huffman says. “My father had been the main person in charge of everything, so a lot changed when he was no longer here for us. We knew we needed to adapt and form a new leadership structure if the company was to keep going like it had been.”

On top of the transition from first to second generation, a third generation of the Huffman family was waiting in the wings and had to be brought on board in a way that maintained continuity and paved the way for eventual third-generation control of the company.

“Our concern through all of this was that we didn’t want to be in a situation where the first generation created it, the second generation built it and the third generation lost it,” Huffman says. “So that was also a factor in how we formulated and executed our plan.”

Building a successful family business isn’t an easy task, but the Huffman family — like many others — discovered that people and processes are key to ensuring that the founder’s original vision evolves and thrives for years to come.

Defining the structure

The Huffman family took the initial step of hiring a firm that specializes in the creation and implementation of succession plans. The firm performed a detailed analysis of the Huffman’s business, assessing what the company would need to reach its goals. From that assessment, Huffman decided that the company, which previously operated as nine separate franchises, should be reorganized under a single, centrally focused, family-run management team composed of Huffman, her brother, Dow Huffman, and her nephew, Shane Huffman.

“The firm we hired did personality profiles of each of us and our managers, and it really helped us to figure out how we could work together,” Huffman says. “It helped us decide how to divide the responsibilities and authority within the organization. For instance, I’m in charge of marketing and PR because I have the most experience there. My brother has a good deal of experience in legal, so that’s his area. My nephew is in charge of operations — he’s the one who works with all of our location managers on a daily basis.”

Stephanie Resnick, a partner at commercial law firm Fox Rothschild LLP, says that defining job descriptions within the family is a critical first step. Doing so helps ensure that boundaries of authority are established and that decision-making power is funneled to the person who should be making the decision in a given area.

“It’s very important to have clear roles and responsibilities established and in writing,” says Resnick, Fox Rothschild’s chair of the directors’ and officers’ Liability and Corporate Governance Practice Group.

“Roles, compensation, duration of employment — all of it should be specified. It’s good to have employment agreements written out, so they can be referred to in the event of a dispute, because any time you have family members working together, there’s that chance that family tension could bleed over into the business.”

It’s a risk that virtually all family businesses face, no matter how professional the culture. Personal affairs and biases can get in the way of good business practices. Without an organizational flow chart and job descriptions in writing, family members — particularly peers, such as siblings, in-laws and cousins — can find themselves involved in personal arguments that can undermine the goals of the company.

“There is no doubt family businesses are more informal,” says Michael Newton, managing partner of Fuller Landau, a business advisory services firm in Montreal. “Many businesses exist to be passed from one generation to another, and they are not always set up for involvement from the outside world. That means the dynamics within the family can complicate matters as the business grows.”

In some cases, family members make attempts to consolidate power. The attempt could be motivated by a number of factors — a belief that a sibling or extended family member is less capable of leading the portion of the company in question, or a sense of entitlement brought about by being raised in the company. Or, quite simply, it can be difficult to view your brother, sister, uncle or cousin as your boss when you’ve never related to them in that way before.

“I’ve seen it get pretty ugly, with family members filing lawsuits against one another,” Resnick says. “Often, it’s because one family member is busting their hump, working 12-hour days, while another shows up sporadically, goes home at 3 p.m., but still gets an equal share of the profits. When you don’t have responsibilities defined, you can’t really enforce things.”

Huffman says the new organizational structure at Neil Huffman Automotive Group has been an adjustment, but because her, her brother and her nephew have believed in the plan and stuck with it, it has made it much easier for the rest of the organization to follow suit.

“I was used to being involved in the day-to-day operational end of things,” Huffman says. “But I knew I needed to step away from that and let my nephew take over. It took three or four months for everyone in the organization to become conditioned that you go to him for operational things, you go to my brother for legal and you come to me for marketing and PR matters.

“We had to remain steadfast that you adhere to the chain of command — you don’t come to me for this, you go to Shane. But it worked, and the company is healthier for it. We now have a very firmly entrenched chain of command.”

Outside perspectives

Building a well-defined organizational structure isn’t just about developing rank and file within the family. A strong leadership team must be equipped with a wide-angle lens, bringing outside perspectives to the table in high-level strategic discussions. To achieve that diversity of perspectives, most family-run businesses need to recruit nonfamily members into the company’s uppermost ranks.

While building the company’s new management structure, the Huffman’s recognized the leadership areas their collective expertise didn’t cover and decided those would serve as ideal broach points for bringing in outside help.

“We’ve found having outsiders as part of the company’s management team can be a major benefit,” Huffman says. “We have a management team that serves directly under the three of us, and they’re all people not from the family. Our CFO, used car director and HR director are already on board, and we’re planning to add a new car director and service director soon.”

Bringing nonfamily members into the business and giving them high-level authority to advise and make decisions is a critical safeguard against family groupthink. Those from outside the family are often more apt to view decisions differently and question them.

“You want to put the best people in the best places, and when you hire those people, you want them to feel like they can tell you how they feel,” Huffman says. “They might see things differently because they’re not coming from the same place we are as family members. They can offer new ideas, or a new spin on an existing idea. You want to have those additional perspectives that make you think a little differently, think about a way to do something you hadn’t thought of before.”

Resnick says it’s important that outside hires comprise at least part of the management team. If outside hires enter the organization too far down the ladder, they won’t have the authority — or won’t think they have the authority — to challenge the family leadership’s thinking.

“Typically, the people from outside the family will occupy some of the top-tier roles in the company, such as COO or CFO,” Resnick says. “But the important thing is finding talented people from outside the family and getting them on board in a management capacity, no matter the role. They could even serve on the board, or on an advisory committee. But any way you do it, having outsiders on board is going to help insulate everyone from internal matters between family members.”

Sometimes even family members are capable of bringing an outsider’s perspective to the table if they’ve been exposed to outside influences during the formative years of their careers. Newton says it can be beneficial to the business if younger family members spend some post-college time employed outside the business, then bring that experience back to the family.

“I recommend, whenever possible, they send the children away for a few years once they leave college,” he says. “They get a more global understanding of business, so if and when they come back to the family business, they’re more able to step back and view things through an objective lens, not just the lens of how the family operates.”

Money matters

If a business is privately held within the family, it’s not just a day job for the family members involved. It can also be, in effect, part of the inheritance.

When the founder retires or dies, next of kin may harbor a belief that the company’s money is “family” money and can be spent at the discretion of anyone within the family.

If a company is privately held, there isn’t anything legally wrong with that, as there would be at a public company. But improper use of company funds can lead to further tension among family members, in addition to the balance-sheet problems arising from using company funds for personal expenses.

As with roles and responsibilities, proper management of family business funds must arise from well-defined checks and balances. Family members must understand what constitutes a business expense versus a personal expense, and the difference should be outlined in writing as part of the company’s governance. Also, outline firm consequences for improper usage of company funds, regardless of who the individual is.

“That’s where having a CFO from outside the family can become such an important factor in the success of the business” Resnick says. “You don’t want a family member to think, ‘This is mine anyway’ and just take money out of company accounts to pay for dinner. Having a nonfamily CFO and a well-defined reimbursement policy can help prevent that type of spending.”

The policy should identify examples of appropriate expenses and inappropriate expenses, particularly regarding travel, where the line between professional and personal expenses is often blurred.

“If you go out of town on business, the hotel, the rental car, the plane ticket, dinners or events where you’re entertaining clients — all of that is legitimate,” Resnick says. “If you have a birthday party for your brother at a ritzy golf club and write that off as an expense because you technically work together, that’s not advancing the business in any way, so that’s an inappropriate expense.”

It comes down to making sure everyone in the family understands the purpose of the business, why it exists and how it benefits the family.

“Outline the purpose of the business, and make sure everyone understands that the business exists to employ, protect and finance the family over the long term,” Newton says. “The money within a business should be respected and treated as the family’s life savings.”

Wages and salaries should be addressed in much the same way. Family members should draw the pay negotiated for their position — no more, no less — in exactly the same way nonfamily members are paid.

“You need a policy of fair, equal employment, regardless of who it is,” Resnick says. “Hours and compensation should be enforced fairly across the board, and that should be a part of your company’s governance, in writing.”
If a family business is built on a structure of fairness, transparency and acting in the best interest of the company, it can be a rewarding experience for both family members and employees outside the family. But it takes hard work and a continual focus on maintaining sound ethical principles and operational standards.

“It took us about two and a half years to complete the transition, but it has been a fantastic success for us,” Huffman says. “By being organized the way we are, we’ve taken out a lot of the drama. We’re happier as a family, and I think our employees are happier working for our company.”