Family Business Matters

The Other Woman

2007-05-07T15:01:00.000-07:00

(NOTE: Every story is a highly disguised composite of several actual cases. All identifying details are changed, including names, family size, industry, genders and ages. I've fictionalized them so carefully that any resemblance to a real person or family would be coincidental.)

Many families have said their Dad’s business was like a mistress: consuming his time, money, and passion. Ralph Blivin’s son and daughter suspected a flesh and blood mistress as well. I had to admit that was a plausible hypothesis.

Ralph, 74, hadn’t lived at home for several years, as his wife’s diabetes-related health problems deteriorated. “To make room for the nurses” was his ostensible reason, which Sam and Karla didn’t challenge. But they did complain as his visits to Mom became less and less frequent. Karla, of course, visited her mother daily and coordinated all the medical, home care, and household logistics. As well as her own three young children and husband, she did her share of helping Ralph when he entertained customers and suppliers.

Mom was too heavy to be moved in and out of her chair by one person alone. She also suffered from morbid depression. Karla chided her father, “She still has her mind, you know. She’s always asking me if you’re all right.”

Her brother Sam did stop by the house briefly most weekdays, on his way home. But he worked ten- to twelve-hour days, and saved the weekends for his wife and children. “We don’t think it’s good for them to see their grandmother like she is.”

Sad as it was for Mom, the Blivins had settled into an angry equilibrium. Over the years, Sam gradually took on more and more responsibility, as his father argued with him (and with me) every step of the way. I could have challenged these clients on their relations outside of the business side, but I was on shaky ground with Ralph as it was, constantly ignoring his insistence that the only succession problem was Sam’s bullheadedness.

Ever since Ralph bought his high-rise condo retreat, he’d stopped coming in every day. He still called Sam every morning as well as the CFO and plant managers about details more appropriate to a small plant owner than the CEO of a $200M company. Sam and Karla touted Ralph as a genius who started wo a nickel and built Alltech Plastics into a nationwide leader in their niche. But Sam said Ralph was now “overcompensating for his age or something,” as he pushed them to be first to adopt the newest computer-guided machinery. Sam saw competitors shrewdly waiting for the second or third generation of those innovations, saving tens of millions in costs as the prices would drop, and avoiding “Betamax commitments,” as he called them. I’d heard father and son argue over that for years, Sam citing examples of Ralph’s premature changeovers in the past. “I guess we really screwed up all those times,” Ralph said sarcastically. “It’s a wonder we got where we are.”

When they came to a Board decision, Karla’s was the third of three votes. She increasingly supported her brother’s conservatism against her father’s mania to be “first with the best.” Disrespected, Ralph accused her of turning against him “because of her mother—she blames me.”

Ralph had often said, “If you don’t want me as Chairman and CEO, it’s two against one. You can have the whole company.” At the same time, he warned Karla that Sam, who had bought an original partner’s small stake, would have 53% of the stock if the company acquired Ralph’s. Karla had no motive to participate in a buyout. Furthermore, she feared it would kill her father: “It’s his whole life.”

Yet Ralph, to her surprise and Sam’s irritation, kept offering to leave. Sam wavered. Why should he pay for Sam’s stock, then maybe have to buy his sister’s eventually too, leaving himself with the risk and her witl the nice liquid assets?

It was the “other woman”--though never acknowledged by Ralph—whose presumed existence led to a breakthrough. Karla discovered, managing Mom’s household accounts, that her father only deposited $10,000 a month—a fourth of his Alltech income. Estimating that over a million dollars were unaccounted for, she and Sam confronted Ralph. “You think we’re going to finance a $70M buyout only to have that money go out of the family?” That was the closest they ever came to suggesting they thought—knew—Dad had someone else in the picture.

But he surprised them. “My stock is marital property,” he said. “Put it in your mother’s name, I don’t care. But give me a severance, five years’ consulting at my current salary. It’s none of your business how I choose to spend that.”

Deal? Or no deal?

Suicide is Painless?

2007-03-14T20:04:00.000-07:00

Tony Packo's Cafe in Toledo, Ohio, became famous in the US and Canada when Klinger, the cross-dressing Corporal in M*A*S*H, played by Toledo native Jamie Farr, mentioned Packo’s hot dogs in several episodes. Now the Packo family have made their own headlines crossing lawsuits over power, money, insults and hurt feelings.

I started to add this story to the “Family Feuds in the News” column (below) but then realized I’ve had enough similar cases so that I could use it this month in lieu of a fictionalized anecdote based on my own clients. In this case, the names are real and I know no more about it than what I read in the Cincinnati Enquirer.

The article (from the Associated Press) reports that founder Anthony Packo left his café, three other restaurants and packaged food businesses equally to Tony Jr. and his sister, Nancy Packo Horvath. Last June, Tony sent a memo to employees and suppliers saying that Nancy is not an executive or an employee of the company.

Nancy filed suit last month in Lucas County Court accusing her brother and fellow shareholder of libel, breach of duty and trying to force her out of the business. Arguing that she’s a director and corporate secretary of Tony Packo's Inc., Nancy seeks $500,000 in punitive damages and demands that Mr. Packo retract his June memo.

Now her brother and his son, Anthony Packo III, filed a countersuit seeking to dissolve the company. They claim it’s impossible to carry on the business “because the owners are in a deadlock.”

Imagine where all this leaves Nancy’s son, Robin Horvath, a company vice president.

Anthonys II and III ask the court to appoint a receiver to take charge of the company’s assets while its affairs are wound up and the corporation is dissolved.

Our question, ladies and gentlemen of the jury: At what point in the escalation of a feud does the Lose/Lose option (the business equivalent of suicide bombing) become inevitable?

"Crazy" Sister vs. "Power-hungry" Brother

2007-02-06T17:33:00.000-08:00

Chronic mental illness impairs one in every eight or ten adults. Which of us doesn’t have a relative—an aunt, uncle, cousin or in-law if not a parent, child, sibling, or spouse—suffering from long term inability to behave rationally and reliably in the adult world?

Wealth doesn’t cause mental or emotional problems, nor does it prevent or cure them. On the contrary: Disturbed family members’ “failure” to follow norms, behave sensibly, care for themselves, and view their good fortune as other members do can lead to dysfunction in the whole business ownership group.

Marilyn is such a member of the Huffman family.

She’s the oldest of four siblings. Thirty-five years ago, when Huffman Aerospace was about to make its initial public offering on the New York Stock Exchange, Mark and Jane Huffman placed $500,000 worth of shares in a personal trust for each child and another $500,000 worth in a Stewardship Trust in each child’s name. The personal trusts’ explicit purpose was to give the children (when they reached age 21) independent incomes, freeing them for creative work and contributions to society. The trustees were instructed to distribute as much of the dividend income as a beneficiary requested, and could make additional distributions (selling HA stock as needed) to support his or her education, health, maintenance, and career opportunities.

The Stewardship Trusts were to distribute only dividends to each beneficiary. The shares in those four trusts were to be voted in a bloc by the common trustee together with the parents’ shares, and could only be sold in two circumstances: if the family agreed unanimously to divest from the company, or for an individual beneficiary “in cases of severe, unforeseen difficulties.” Today, the stewardship trusts are each worth $50M and give each of the siblings an annual income over $400,000. They represent a total of about 10% of HA’s shares, and with the mother’s shares the total bloc of about 25% is sufficient to control the Board of Directors, on which all four siblings sit.

Jane, the founder’s 82-year-old widow, lives well within her dividend income of about $2.5M. Upon her death, her trust will pass to the benefit of thirteen grandchildren equally, skipping their parents. The Stewardship Trusts will also eventually pass to each sibling’s children, irrespective of the siblings’ personal estates.

Marilyn and her brother give conflicting accounts of the litigation she threatens against him and against the co-trustee of her Stewardship Trust. They more or less agree about the current financial situation of the four siblings:

	Marilyn, 54	Janet, 52	Rick, 49	Sally, 45
HA stock in 1970 Trust	$0	$40M+	$32M	$50M
Other assets in 1970 Trust	$0	$10M+	?	$0
Assets in own name	One house, equity=$300K	?	?	?
Stewardship Trust income	$400K	$400K	$400K	$400K
Personal debt	$1M+ (tax liability)	?	?	$0

How did Marilyn burn through assets that would amount, if she’d held onto them, to more than $50M today? For 25 years, according to Rick, she has managed to “squeeze” the trustees (one of whom was her mother) to distribute millions for houses and household staffs, a horse breeding business, an antique auction business (both businesses paid substantial compensation to partners even as they were failing), divorce settlements, dubious “charitable” contributions to what the family termed “cults”, and three long psychiatric hospitalizations for anorexia nervosa.

Marilyn acknowledged all of that, except the word “cults”. Her two daughters and her son also respectfully refrained from using that word, though they said their mother had been irresponsibly generous to her “spiritual advisor.” Marilyn is deeply disturbed in reference to her own body, of course (she denies being 20 to 30 pounds underweight for her height), and my rough diagnostic guess would include both depression and paranoia. But she also has a number of realistic complaints on her side.

Rick, the brother and only sibling who has ever been involved in the business, has been Chairman and CEO for more than ten years, since their father’s death. He also holds his mother’s proxy for her voting shares, and is one of the trustees of his sisters’ Stewardship Trusts. In other words, he controls everything and will continue to do so as long as the shares aren’t sold. But here comes Marilyn claiming “severe and unforeseen difficulties.” She is, in fact, destitute. Her three children will have to support her when their grandmother dies, unless Marilyn is allowed to invade her Stewardship Trust. But that would establish a terrible precedent, in Rick’s view, especially as the family’s shares will soon be dispersed among 13 more trusts.

Rick is angry and frustrated at his “crazy” sister’s lifelong demands on their legacy. He calls the current demand “a crack in the dam,” likely to break through as a flood. It isn’t only a matter of retaining his own control over Huffman Aerospace and his two sons’ paths to succession. He also worries about the effect on the public market for HA’s stock (and thus the company’s capital investment opportunities), because if Marilyn does file suit, it will immediately become public information.

Their mother is cognizant of all this, but refuses to take sides or be drawn into the dispute. She has already bought Marilyn out of difficulties more than once with her own money, but to do so again would be “robbing my grandchildren,” she says. She understands Marilyn’s position that there’s still $50M of her own assets in the Stewardship Trust, but Jane won’t take a position contrary to her son as long as the other trustee agrees with his insistence on “stewardship not dissipation.” The sisters emphatically side with Rick. Although they feel bad about Marilyn’s decades of unhappiness, they ceased communicating with her about business years ago because of her “constant provocations” on the Board.

This case won’t be resolved through family meetings, but through mediation. Can you predict whether it will be settled Win/Win, Lose/Lose, or if Win/Lose, in whose favor?

A Matter of Faith

2006-12-13T04:44:00.000-08:00

Maybe I got the session off on the wrong foot by using the word evolves. “You don’t have to think of everything in advance,” I said. Your Family Council will evolve over time, the way species adapt to environmental constraints. What you’re creating now is just a starting place.” I could have used the American Constitution as another example, a living document subject to each generation’s interpretation and review. But that would have been almost as unpopular an idea as the evolution of species was in this family.

They silently dismissed my tactless use of the e-word, and we moved on to discuss the elements of an Edens Family Mission and Values Statement.

Dad was a spiritual presence in the room. The family members were still in the process of mourning, as well as struggling with their mixed feelings: gratitude and resentment. Those feelings were complicated by Jennette’s self-appointment as guardian of his values.

Jennette was the founder’s daughter-in-law. Her husband, Eddie, second of the four children, was currently President and designated successor to the non-family CEO. Suffice to say that there were issues among the siblings about her husband’s exalted status, his huge salary, their personal use of the company plane and a string of lesser offenses. Their mother, Louisa, blamed daughter-in-law Jennette’s social climbing, pressuring Eddie for more and more disposable income.

Then there was the problem of Jennette’s attitude about her faith.

They were all, including the in-laws, Christians in the broadest sense. But Louisa and the four children hadn’t made religion the center of their lives. The children were already adults when Dad accepted Jesus Christ as his Savior. Then Jennette had brought Eddie into her family’s conservative Bible church, where he, too, had been born again. He told me he tried to respect his family’s right to make choices in their own lives. He didn’t share Jennette’s disdain for the fact that his brother, Jim, “lived in sin” with his fiancée, Cheryl.

The family loved Cheryl. She was bright and enthusiastic, caring and considerate—the sooner Jim married her the better, but in the meantime it was unanimous that she be included in our meetings.

It was Eddie and Jim’s sister who suggested they include the phrase “a Christian family” in the Mission and Values. One or two people nodded agreement, no one dissented—until Jennette said, “But we’re not all Christians.” For a moment I optimistically imagined she was celebrating some diversity within the family, but they caught her meaning even before she explained: “Jim and Cheryl aren’t Christians.”

While I sat there with no idea what to say, Louisa suggested they drop the word Christian in favor of listing the family's specific shared values. She clearly wanted to avert a fight, knowing that while Cheryl was too stunned to lash back at Jennette, Jim might. He already barely tolerated his sister-in-law.

I, too, sensed that if Jim said what he was thinking at that moment, the meeting—for which I’d flown half way across the country—would blow up, along with the hope of a Family Council in which to address the controversial family employment and other issues. Relieved at Louisa’s intervention, I let the insult and hurt feelings go without discussion.

Big mistake. Although we got through the day, Jim and Cheryl blamed me for allowing Jennette’s “personal attack,” while Jennette herself, chastened afterward by her husband, declared she wouldn't attend any future meetings. Louisa took me aside before I left and said, “The reason we hired you was to prevent the kind of thing that happened this morning.”

What could I have done?

copyright reserved 2006, Kaye Family Business Associates, Inc.

Fairness is as Fairness Does

2006-11-02T11:30:00.000-08:00

Most family firm conflicts don’t result from anything “dysfunctional” in the family. There isn’t necessarily any “baggage” from childhood rivalries; nor are there always personality issues, spoiled brats, or greedy in-laws. Conflict is often simply a result of not having thought through the consequences of business succession and estate planning.

This fictional case illustrates one of the commonest of such avoidable consequences. With variations, it’s a pattern that all experienced consultants will recognize. Jack was the second generation sole owner of a construction company. Three of his children had worked there for 22, 20, and 13 years, respectively. (I’m going to call Jack and Sylvia’s six children the siblings so the case isn’t complicated by the issue of brothers vs. sisters, which it usually would be.) Two of the three other siblings worked at Jaxco for a few years, but by the time Jack was ready to retire, they had gone on to other careers (including homemaking).

Jack and Sylvia sold Jaxco to the three who wanted to acquire it. Let’s say they purchased it in equal shares. Payment was in the form of a note, with interest, over a twenty year term, which made the payments low enough so the buyers could take distributions from Jaxco each year which were sufficient, after income tax, to pay Jack and Sylvia.

What’s wrong with that? Nothing, but you probably see where I’m going. In Jack’s mind, the successor owners “got” the business. They didn’t really buy it—the business bought itself for them. If the three of them never protested his way of describing the deal, they must not have known or allowed themselves to dwell upon the second half of Jack’s summary: “… so the others will get everything else.”

Now Jack is dead, and the eldest sibling, 54, whose children are well launched into careers unrelated to construction, wants to sell out and move to Hawaii. The owners’ buy/sell specifies a clear formula. One of the others may buy the offered stock, thereby owning two thirds of the company; the company must redeem it, leaving the two of them as equal owners.

Either way, the seller and his or her spouse still have to pay their share of the debt to Mom, as well as capital gains on the shares. They learn, if they weren’t aware before, that Sylvia’s substantial estate (she and Jack were well fixed even before investing those note payments for more than a decade) will all go to the non-successor sibs. So the eldest can’t afford to retire. Yet the other two had been looking forward to his or her doing so. Suddenly we have a reluctant owner/president and disappointed partners. Now every normal disagreement, which they dealt with reasonably in the past, becomes emotionally fraught with frustration, mutual blame, betrayal, resentment, charges of favoritism, guilt and fear of disharmony in the family as a whole.

Only now do they call a family business dynamics consultant. How I would have liked to sit in twelve years ago when Jack and his attorney figured everything out for the family! There’s not so subtle pressure on Sylvia from the three owners to change her will. “We paid for the business,” they say. “It’s not like you gave it to us.” Yet Sylvia remembers that Jack and she had been in agreement on this. For years, she thought the formula “Those three got the business, and the others will get everything else” was the accepted family definition of fairness. Faithfulness to Jack’s vision for his estate is only one of several factors that make it hard for her to even consider a change in her own will. Yet an equal number of emotional factors incline her toward “correcting the unfairness”: her fondness and sympathy for her eldest child; her disappointment with two of the others, who moved across the continent; and the fact that the third of the non-successors married into great wealth, while Jaxco, frankly, has been only modestly successful.

What’s fair? Does the answer depend on the relative value of the business today compared with Sylvia’s net worth today? Should she write the child who wants out of the business into her will, while still excluding the other two? Or what?

copyright reserved 2006, Kaye Family Business Associates, Inc.

Board of Governors

2006-10-06T11:09:00.000-07:00

Hewlett-Packard is the latest of many public companies embroiled in scandals resulting from boardroom misbehavior or negligence. Private companies, free of S.E.C. regulation, generally escape such damaging media exposure, but are their Boards any more responsible than those of Enron, WorldCom, Tyco et al.? If Directors can’t stand up to management in a public company, how can they be bold enough to govern a private one, where the Chair is not only the founder but the majority owner and parent of would-be successors?

Many of us recommend that our clients treat the Board of Directors as a serious governing body, bringing the experience and greater objectivity of outsiders to the benefit of the shareholders. But how often do we see Boards that add real value to the enterprise—even when they seat several smart non-family Directors? This humble blogger invites your comments on that question.

One of the few public companies I’ve consulted to had an impressive group of outside Directors—who seemed to be little more than window dressing, good enough to fool the thousands of shareholders who traded this Fortune 500 company’s stock on the New York Stock Exchange.

Dan, 78, had built his father’s string of Ohio stores into a retail empire, marketing the brand brilliantly and taking its holding company public thirty years ago. When I met him, Dan was Chairman and CEO, his wife Marie, 80, was President of the operating company that accounted for most of their sales (though not their profits), one son was nominal President of the other major business, and his younger brother, 40, reported to Marie, in charge of U.S. sales.

I thought I was being brought in to help with succession planning—help the parents let go—but the problem turned out to be more complex than a brilliant entrepreneur’s resistance to retiring.

The sons had a plan: Dan should yield the CEO title to elder brother, and Marie, while keeping her title of President for public image purposes, should give up operational control of that business to the younger brother. Both brothers would report to the Board. A key motivation for this plan was the sons’ recognition, agreeing with all four top managers I interviewed, that Marie’s impulsive, autocratic directives in a billion-dollar business she only superficially understood was threatening to tank it.

What the sons didn’t know, or refused to acknowledge, was that the long-time senior managers didn’t consider either of them any more adequate to lead the company than their mother was. It was those managers, under Dan’s leadership, who had built the company’s reputation. A couple of their colleagues had recently retired, but the four, all in their fifties, struggled to remain loyal to the founder they admired, working around Marie’s imperiousness when she was there and her absence on vacations about half the time. Each of them more or less told me he or she would take an early retirement the moment Dan stepped down, if the “boys” were given anything more than titular status.

Clearly, this would be an important matter for the Board. It consisted of the four family members (an older sister neither worked nor was a Director), plus five distinguished outsiders. Two of them were former Governors, one a Republican and one a Democrat, of different states. At least one of those, I knew, had been President of his own family’s business before entering politics. Two other Directors were businessmen, one with a Wall Street background and the other a man Dan had known for many years. The fifth was President of a well-known sectarian university of which Dan was a Trustee, and to which he and Marie were major benefactors.

Two of the senior managers shared another concern that also might have troubled a fiduciary Board: Dan and Marie were milking the company. His salary of over two million a year may have been within the range for a business of this size (this was nearly 20 years ago), but Marie’s only slightly lower salary was out of line with her contributions to the business. Worse, they used the company jet more for personal travel than business; the company paid for home remodeling, their personal art collections, and a “retreat center” in St. Thomas that saw minimal use for business meetings; and both sons’ salaries were far out of line with their positions (unlike the salaries of non-family managers).

I didn’t last long as consultant in this case. The pointed questions I raised with Dan and Marie were unwelcome. Before our last meeting, however, I did have the opportunity to talk by phone with one of the outside directors, the retired CEO of a private company in the same industry. He made it clear that he was well aware of everything the executives had told me. Wasn’t the Board concerned about those matters? I asked. “A few of us are,” he said. “Bob ______ [the other independent Director] actually brought up the matter of all the personal expenses and asked if the auditors had been aware of them, or if our tax lawyers rendered an opinion.”

“And …?”

“Bob said that without some such outside opinion, ‘I don’t know if I’m comfortable serving on this Board if the budget is approved that way.’ Dan just stared him down, quietly, and said ‘Do let us know what you decide.’ ”

The man recounting this didn’t indicate that he shared the other Director’s doubts about remaining on the Board. I didn’t lecture him, but he must have got the drift of my thoughts.

I’d like to be able to report that the company’s performance and share price went to the dogs or that the family failed to maintain its control into the next generation, as a result of the Board’s weakness. All I know is what’s in the public record. The older son is listed as Chairman and CEO. Dan and Marie have both passed away. The company is thriving, still publicly owned and family controlled.

Was that an unusually ineffective Board? Does it matter?

copyright reserved 2006, Kaye Family Business Associates, Inc.

At Least the Son-in-law's a Winner

2006-09-01T11:43:00.000-07:00

Granger Machinery holds regional exclusive parts franchises for two farm machinery manufacturers. They stock after-market truck engine and tractor parts for other manufacturers on a non-exclusive basis. With the purchase of a related wholesale business in southern Indiana, the company has sixty employees.

Until four years ago, Frank Granger couldn’t foresee the company’s future, or his own and his son’s financial security.

Eddie, 39, has worked at Granger Machinery for nine years, primarily taking telephone orders. He spent his twenties as an itinerant sailboat crewman and competitive windsurfer. He’s a likeable young man with learning disabilities that make him shun any kind of training that involves books and numbers. Even simple order taking suffers from his errors. As Frank grew increasingly critical, Eddie became increasingly defensive.

Eddie views his father’s unwillingness to hand over the company to him as a “letting go” problem. On the contrary, Frank is more than ready to turn the company over—to his competent son-in-law—only hesitating out of concern for Eddie’s feelings and livelihood.

Eddie’s older sister and her husband, Mark, moved from Chicago down to Danville four years ago, so that Mark could come on board as General Manager. Well qualified, Mark has done a great job.

Eddie talks as if he and Mark will run the company more or less as equals once his father retires. “If he wants to be President, I’ll be General Manager, I don’t care. Or we could take turns, him five years and then me for the next five or whatever. I heard about a family business where they do like that.” It seems an astonishingly naïve outlook—no reference to skills, work history, or leadership. Eddie’s unrealistic vision of the future is about to be dashed by Mark’s and Frank’s plans.

Mark and Diane approached Frank diplomatically about purchasing a majority of the stock. Frank promised to get advice about how to transfer control to Mark within an estate plan that includes Eddie and another, oldest daughter not involved in the business.

Diane says her brother “really wants to stay in the family business, answering the phone ‘Granger Machinery, Ed Granger here.’ ” She and Mark both feel it will be possible to keep Ed as an employee, compensated appropriately for his sales performance, after Dad leaves.

The senior Grangers pick me up at my motel and we drive over the Indiana border to the Beef House restaurant for dinner. They’ve mentioned that it’s just off I-74, so I’m surprised when instead of driving south toward that east-west highway, Frank heads his white Lincoln north to the edge of town and then off onto a little farm road. We drive between eight-foot-high corn and low soybean plants, the latter dark green, sharply illuminated by the setting sun behind us. Ahead, incandescent pink clouds spread across the horizon. We pass a tractor towing some sort of menacing implement. Frank and the farmer wave at one another.

Peg Granger is a retired English teacher. Well informed about business and legal matters, she participates in all financial and estate planning meetings. She and Frank own 100% of the business. They reckon it’s worth about $2.5M today, which constitutes 80% of their net worth. At 67, he wants to retire within two years, if possible.

How can the Grangers treat their three children equally in their estate plan, while ensuring that Mark and Diane get at least a controlling share of the business and that Eddie can stay in the company without hampering Mark?

copyright reserved 2006, Kaye Family Business Associates, Inc.

Whose Wealth Is It?

2006-07-30T06:38:00.000-07:00

Phil and Marty Edwards have co-owned Edwards Brothers, multiple franchise holders in the moving industry, since their parents died twelve years ago. Despite a seven year age difference, the brothers and their families are close. Marty, VP for Operations, has a more expansive vision for the businesses, but has yielded to Phil’s conservatism. “My day will come,” he told me.

Unfortunately, his day is coming too soon to suit anyone in this family, including himself. His older brother Phil, 50, just suffered his second heart attack. The business is stressful, and to appease his wife and avoid fraternal conflict, Phil has decided to retire.

None of Phil’s children have shown interest in the business, so selling to Marty makes sense. But there is an obstacle in the terms of the trusts created when their parents died, and the shareholders’ buy/sell agreement: Phil’s leaving the business would result in each of his children getting legal control of almost three million dollars when they reach twenty-five. Their ages today are 24, 22, and 17.

Without going into the legal mechanics here, the problem is that Phil can’t get any of his capital out of Edwards Holding Corp. and Edwards Leasing LLC without liquidating his children’s stock as well. In fact, each of their trusts already has about two hundred thousand in assets from dividends paid to them over the years. I was troubled when I learned, two years ago, that none of Phil’s and Marty’s children had been told about those assets already in the trusts, nor about the termination age. But I understood the parents’ desire that it not be a topic of discussion.

Phil and Sarah believe their daughters will be cautious with their inherited wealth and accept parental management until they reach a level of maturity and sophistication. Not so their oldest son, who dropped out of college after one semester and lives with a girlfriend he’s refused to let his parents meet. A cousin described her as “scary.” He will be twenty-five in six months.

Marty proposes they seek ways to postpone the buyout as long as possible, which he’d prefer for financial as well as family reasons. But that would tie up most of Phil and Sarah’s capital. Furthermore, Phil confides in me that he doesn’t believe Marty has the needed finance background and communication skills to maintain the companies’ growth and profitability.

With the clock and Phil’s heart ticking, he and Sarah wonder what, if anything, they ought to tell their children.

copyright reserved 2006, Kaye Family Business Associates, Inc.

“Your business or your wife”

2006-06-28T06:18:00.000-07:00

Gerhard’s key employee is 46-year-old Stacey, his Controller. “I can’t get along without her,” he tells me, “and she’s threatening to quit if I don’t keep Angela out of the business.”

Gerhard came to St. Louis from Austria in the 1970s as a chef. He founded a stylish bistro with two partners in 1986, then—when that venture failed—opened his own Gerhard’s in 1990. By 2005 he had opened eight distinctive restaurants, with different names and distinct cuisines, all known for their style and dash. Six of those are still open and doing well, and venture partners are about to clone the most successful of them in Chicago, Kansas City, and Memphis.

In 1989, at the age of 40, Gerhard married 22-year-old Angela, an interior designer and socialite. She was instrumental in the business’s early years, providing some of the capital, managing the back office as well as designing decors. A staff took over most of Angela’s functions as their two daughters came along, and the business grew, but she retains the title and salary of Executive Vice President. “She doesn’t really interfere in decisions,” Gerhard tells me, “but she oversees our corporate bank account, which makes Stacey crazy, and insists on final approval of all interior designs. I don’t mind that, I always want her input, but I’ve had four designers quit because they can’t work with her. Just like Stacey, they’ve pretty much told me it’s her or them.”

Forty per cent of the stock in their holding company is in Angela’s name, forty per cent in Gerhard’s, the rest in the children’s trusts.

At 39, Angela is tall, tanned, tailored, and tasteful. I couldn’t restrain myself from admiring her full-length, russet fur: “How’d you find a coat to match your hair so perfectly?” She looked at me quizzically until I realized, of course, she’d matched the hair to the coat.

Angela’s refined eye and sharp tongue disguise an insecure, volatile woman. “He says I’m bossy, but he put me in charge of our life by default. He’s an artist—can’t express himself in words. He needed me, but now he’s rich and famous—which he deserves, because he’s brilliant—he makes changes at the office without telling me. He approves décor changes in the restaurants, too, and I don’t even know about it. He pulled the rug out from under me.”

Her principal complaint is Stacey, Gerhard’s most trusted and vital manager for seven years, who left her own husband’s firm (she pointedly tells me) “because it wasn’t good for our marriage.” Gerhard has assured Stacey that Angela doesn’t have authority to write company checks or even to look at the bank account. But he can’t tell Angela that he gave those instructions. Angela calls Stacey “high-handedly disrespectful,” and says Gerhard doesn’t have the guts to stick up for his wife. “I have to check the financial records because he hasn’t instituted adequate controls over Stacey.”

After interviewing the three of them as well as the firm’s principal project managers, it becomes clear that Angela has alienated all the managers. “My problem with her started the first month I was here,” one of them says, “when she explained that we came from different classes.”

The plain truth is that Gerhard did pull the rug out from under Angela, but is afraid to own up to it. The managers get the message: they should “put up with” Angela while ignoring her as much as possible.

Gerhard complains that Angela’s crying and shouting give him stomach cramps. The growth and fame of his brand name have put him under tremendous pressure—a big payroll, bank debt, a dozen projects to stay in touch with—while Angela spends every penny they draw. (Along with travel and three club memberships, she’s decorating two expensive homes: a showpiece town house and one on a lake.) But money isn’t what Angela wants. She misses being important to the business. Gerhard keeps telling her how important she is at home, but he isn’t there much, and when he is home he devotes his attention to the children. “The only place I can be his real partner is at the office.” She hasn’t uttered the ‘D’ word—yet—but Gerhard tells me the specter of losing Angela would kill him emotionally as well as financially. He is already devastated by her unhappiness.

How would you advise each of these owners?