How Advisors Can Tell If a Family Business is in Trouble
By Charles Paikert
Financial advisors with clients working in a family business have to deal with a lot of moving parts.
One of the biggest value adds they can provide, according to Rob Lachenauer, chief executive and co-founder of Banyan Family Business Advisors, is being able to pick up on warning signs that the family business may be in trouble.
Here are six to watch out for.
The first-generation patriarch has built an incredibly successful business, but canít let go.
He or she has put the companyís assets in a restrictive trust, and the children have no input into how the business is run.
The patriarch is trying to protect the business for the children, but is over-protective, and enabling the children to become passive,says Lachenauer.
Advisors need to tell their client to let the next generation become adults, even if it means making mistakes.
We suggest they ask their client this question: ĎIf your father or mother had done this to you, could you have been as successful as you are?í
In family businesses, family members have a variety of different roles. They can be parents, brothers, cousins, shareholder and executive Ė all at the same time.
The problem is when the roles arenít carefully delineated, Lachenauer says.
We see this a lot Ė in one conversation, a family member is speaking as a parent, a boss and a leading shareholder. Which is it? If advisors notice this, they should suggest their clients adopt different dialogues for different roles. As we like to say: structure is your friend.
There a lot of family business where sons report to their fathers who are the boss, but thatís all they ever do, Lachenauer reports.
They are close Ė but too close. Advisors may want to diplomatically suggest fathers let their sons loose on a broader playing field so they can learn and grow in different situations, he says.
Otherwise, itís a classic Ďcoddle model,í and while the intentions are good, the outcome is almost always bad.
Sure, family businesses are run to make money. But what makes them different from other companies is that theyíre not just about money, according to Lachenauer.
Thereís a lot of personal value in the company, and assets that arenít exchangeable, he says.
We work with two similar companies that are family businesses. One pays out hundreds of millions of dollars in dividends; the other has no dividends Ė if family members need liquidity they have to sell shares. The first company is bogged down by terrible infighting; the second doesnít have those problems. When itís all about the money, thatís all itís about, and that leads to conflict.
Too many lawyers hanging around is a huge warning sign, Lachenauer cautions.
Weíve walked into board rooms where there were twelve family members and each had their own lawyer, he recounts.
Itís an obvious sign the family members arenít communicating directly. If advisors notice this going on, they should suggest that family members get together in a room without lawyers, draw up a term sheet and discuss issues among themselves so no one feels threatened. That should be the starting point. Lawyers can come later.
Thereís nothing wrong with talking to reporters, but they shouldnít be the first to know about whatís going on in the family business.
If an advisor sees that a client is frequently being quoted in the press about the family business, especially about problems in the business, he or she may want to make sure the client is also talking to other family members, Lachenauer suggests.
Issues about the business should be aired out in private first, he says.
An advisor may want to help clients find a safe place for family members to talk openly, and possibly recommend a mediator or a therapists if problems persist.
One of the biggest value adds advisors can provide is being able to pick up on warning signs that a client's family business may be in trouble. Here are six to look out for.