Slideshow How Advisors Can Tell If a Family Business is in Trouble

  • September 20 2013, 6:05pm EDT
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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.

1. No Room to Move

The first-generation patriarch has built an incredibly successful business, but can’t let go.

He or she has put the company’s 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: ‘If your father or mother had done this to you, could you have been as successful as you are?’

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2. Role Confusion

In family businesses, family members have a variety of different roles. They can be parents, brothers, cousins, shareholder and executive – all at the same time.

The problem is when the roles aren’t carefully delineated, Lachenauer says. We see this a lot – 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.

3. Boss Dad

There a lot of family business where sons report to their fathers who are the boss, but that’s all they ever do, Lachenauer reports. They are close – 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, it’s a classic ‘coddle model,’ and while the intentions are good, the outcome is almost always bad.

4. It’s All About the Money

Sure, family businesses are run to make money. But what makes them different from other companies is that they’re not just about money, according to Lachenauer.

There’s a lot of personal value in the company, and assets that aren’t 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 – if family members need liquidity they have to sell shares. The first company is bogged down by terrible infighting; the second doesn’t have those problems. When it’s all about the money, that’s all it’s about, and that leads to conflict.

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5. He’s My Lawyer

Too many lawyers hanging around is a huge warning sign, Lachenauer cautions.

We’ve walked into board rooms where there were twelve family members and each had their own lawyer, he recounts. It’s an obvious sign the family members aren’t 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.

6. Media Moves

There’s nothing wrong with talking to reporters, but they shouldn’t be the first to know about what’s 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.