Family Business Resolution with Thomas Davidow, Ed.D.

M&A TODAY
Vol. 15 January 2006 No. 1
Newsletter for the Professional Intermediary
Reprint by permission of M&A Today

Editor’s Comments: The principals of M&A Today have known Tom Davidow for over 15 years and have admired his consultation and resolution of family business problems. An enormous amount of companies are family-owned or controlled, and yet for all their inherent advantages, the progress of these businesses is impeded because of the family‚s differences.

Whether it is management decisions, generational transfer or ownership transition, many of these family businesses become dysfunctional due to the often recalcitrant nature of family members when involved in business matters. In these situations the companies become bogged-down, because problems are not resolved, nor decisions made, and essentially the companies become stuck. What to do, where to go and how to proceed becomes the over-riding concern. Enter Tom Davidow, the founder and principal of Thomas D. Davidow & Associates who draws on his extensive background in psychology, family counseling and the interdisciplinary method in family business consulting.

AN INTRODUCTION TO FAMILY BUSINESSES

To set the stage for our subscribers who may not have been involved with the problems of family businesses, the following story is an actual situation that transpired when your editor was the M&A intermediary retained to sell a multi-million dollar bakery which sold bread to supermarkets, retail stores and restaurants.

The founder transferred his ownership of the company to his five children such that each one owned 20% of the stock. None of the second generation currently worked at the bakery, turning the management over to two members of the third generation. The company had been operating at breakeven for some years and annual sales were stagnant.

The five owners decided they wanted to sell the company, because they were either retired or nearing retirement. I was retained to sell the business. Most of the small wholesale bakeries had gone out of business or were acquired through the industry consolidation.

Every sizeable bakery in New England was contacted with only modest interest. Finally, a former successful business owner offered a price equal to 50% of sales. Under the circumstances, this was a good offer and a formal letter of intent was presented to the five shareholders in person at a small conference room at the bakery. Never had I walked into a hornet’s nest quite like this one before. Within minutes of discussing the proposal, an old family argument ensued – to such an extent that I was asked to leave the room. Fast forward, the offer was flatly rejected without any attempt to renegotiate the price, terms or conditions.

After spending six months on this project, I asked myself: “How is this possible?” As the story unraveled, it was apparent that the major concern was the fear that the two third generation young family members managing the business would lose their jobs. Despite assurances by the potential buyer otherwise, the decision had been finalized.

Twenty years later, I checked back with the chairman of the company. The company is still in business with practically no growth and still operating a breakeven. Most of the stockholders are now in their seventies, there has been no liquidity event for them, and no resolution as to how to resolve such issues in the future.

The above case is a true story; one that shows how family businesses can be dysfunctional; second, it shows how some family businesses can still survive (barely) in spite of themselves; and thirdly, it shows that the proposed deal could have probably satisfied all the stockholders‚ goals – if Tom Davidow had been given the opportunity to consult and advise the family members.

DAVIDOW’S SECRET TO SUCCESS

As Dr. Davidow states: “Family interactions and business operations are intertwined. Family problems result in business problems; and business problems result in family problems.” He is credited with pioneering The Davidow Interdisciplinary Method® which is a method of family business consulting that addresses the family issues which interfere with sound business decisions. The word interdisciplinary means the combining of two or more academic, scientific or artistic disciplines into one field of study. In Davidow’s case it is combining family counseling and business advising together. As the situation requires to provide resources from the business community, Davidow calls upon other carefully chosen experts to compliment his own skills.

When Davidow is introduced to a potential client, it is most likely through a current account or the client’s attorney. He is aware that family businesses, despite their problems, usually have numerous attributes: founder’s vision, passion, pride, continuity, seemly understanding of family members, etc. Conversely, family businesses can be distrustful of family members, disagree with them and have different motives.

Walking into a family business for the first time that is burdened with internal conflict takes poise, experience and confidence. Davidow is able to engender confidence and trust with the family members with his depth of rapport and understanding. Much of Davidow’s ability to build positive relationships on his initial visit is through his 20 years of experience working with hundreds of family controlled enterprises.

Upon Davidow’s engagement with the family owners, the various issues are revealed, the anxiety subsides and a sense of reality prevails. The anger by various members, which has often been internalized, is brought forward in an open discussion monitored by Davidow.

THE ASSIGNMENT

The turning point for family businesses in which there is conflict amongst the owners is their realization that they have been in denial. They concede they need help – professional help. Upon engaging Davidow, all the family members including spouses, family employees, family business shareholders and frequently the company CFO and senior management attend a full day meeting once a month for nine months. The reason for the non-family members attendance is their personal concern that the business is in jeopardy unless these issues are resolved. The first nine month consultation is followed by a second ninth month period to be sure all the progress and resolutions are kept in tack.

The success of Davidow’s consulting is to have all the family members buy into the process and then pledge to total commitment. If all the family members concede they are part of the problem, then they in-turn become part of the solution. The consequence of this commitment by the family yields a significant and positive impact of the financial performance of the business.

UNDERLYING ISSUES

Many of the issues are financially related. Family companies by nature are casual when it comes to internal systems, regulations, agreements, etc. Let‚s suppose that there are three brothers that own and run Bates Manufacturing Company, one as president, one as plant manager and the other as sales manager. They all own one-third of the company.

Bates has no outside Board of Directors. Years pass and the CEO feels that he is entitled in a higher salary and a leased Mercedes. Later on, more members of the family join the company, i.e., wives, children - even second wives. Issues of bonus, vacation time, perks - all become an irritation to some family members.

Then, the CEO wants to make an acquisition which requires borrowing money from the bank. The bank notes need to be signed by all the shareholders. One of the brother refuses to sign the note along with his siblings. It doesn’t take much imagination to realize where this scenario is headed.

ACTION STEPS

Tom Davidow focuses on counseling the families by:

• Increasing and clarifying their communication
• Reducing sibling rivalry
• Identifying core values
• Discussing ownership transition

Tom Davidow also focuses on advising the families on their business issues by:

• Drawing up shareholder agreements with puts and calls so there is a mechanism for any member to exit on a pre-arranged understanding
• Engaging a third party consultant to establish salary rates based on position, and bonus amounts  based on performance
• Establishing an estate plan based on a formal valuations so that tax free gifting can be granted to  working and non-working family members
• Implementing the hire of a CFO to install financial systems and reporting mechanisms
• Undertaking life insurance policies for key-man positions so a buyout can be funded through the company
• Considering a recapitalization or third party sale in order to satisfy shareholders financial needs.

CONCLUSION

Many family business owners have problems making decisions, because they are buried in  family issues. Either there is conflict amongst the owners or there is absence of proper authority  to conduct the business without constant disagreement. Both of these situations causes stress  in the business which results in business inertia. Invariably when Tom Davidow is retained by a family business, there is a sense of relief by the family members because he represents change. In essence, he saves troubled family businesses so they can reach their true capability.  As Tom Davidow states: “Progress Made. Potential Reached. Promises Fulfilled.”