Month: October 2012

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Scary “Tricks” Played on Companies

Scary “Tricks” Played on Companies

In honor of Halloween, I’d like to share some of the scariest situations I’ve encountered at companies. Unlike Halloween, no one asked whether these companies would like a “Trick or Treat.” They just got tricked.

Here are just a few of the situations I’ve encountered:

• A son who was stealing from his father’s business because he thought his salary was too low. After dad died and mom was made CEO, instead of him, he was so angry he confronted his mom with a knife. Talk about “A Nightmare on Elm Street.” Wonder if he ever got invited to Thanksgiving dinner again. I bet he doesn’t get to carve the turkey.

• A CFO who was been stealing a business blind but the CEO wouldn’t believe it. (He did once we presented him with the folder from the CFO’s computer desktop with a list of all the money he stole and how he spent it. How I love an organized thief.) His father-in-law paid it off so he wouldn’t go to jail!

• A business owner who lost his boat building company because he proudly appeared on the cover of a magazine with his bikini-clad girlfriend in the background. His wife was not amused. She filed for divorce and got control of the company, which was started with her daddy’s money.

• A Texas-based company that overstated its inventory and received a larger loan that it should have qualified for and defaulted on the interest payments. . When I took over as CEO, I discovered that we were $75 million short in inventory. That’s a number that will keep you up at night. The bankers were stunned and prosecuted the CEO and CFO!

• A company president who owed the mob several hundred thousand dollars for gambling debts was stealing and giving the merchandise to the mob right from the plant loading dock at night. The mob then applied the value of the items to his debt. These guys didn’t even have to wait for merchandise to “fall off a truck.”

• A refrigerator warehouse company forced into bankruptcy because the CEO was paying more attention to his hobby of breeding the perfect bull and less on keeping frozen things frozen. Which is kind of crucial to a refrigeration company. I had to liquidate both the company’s and his hobby’s assets, so I held an auction to sell the bull sperm. It went for the discount rate of $75,000 a gallon. So somebody got a treat that day — a deal on bull sperm. And that’s no bull!

• A production manager at a designer haute couture manufacturer was selling the overrun of $5,000 dresses to discount retailers. That worked so well, he eventually escalated his scheme and bought excess material that he wrote off as scrap and then had it made into dresses to also sell out the back door.

• A bookstore where the controller diverted the Discover merchant account for his own use. The stores kept routinely depositing into it and ended up paying off the guy’s entire mortgage. A federal judge sentenced him to five years!

The lessons learned from these types of occurrences are that you have to keep your eye on every aspect of your company and trust your gut when things don’t seem to add up.

The scariest part? These things could happen to your company. And there’s definitely no treat involved.

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Filling Your Own Shoes: How to Pick a Successor for Your Family Business

One of the things I’m often called upon to do is pick a successor for a family business. In an ideal world this is a process that the owners of a business would have already done in an organized and orderly way. (For tips on how to do that, see my previous post.)

However, that is often not the case. Generally by the time I get involved, a company is already in a financial crisis or the owner has suddenly died without a successor. Not the best scenario.

No matter what the situation, and whether it’s a family business or not, I follow the same process to determine who should take over the company. It involves a lot of talking. To a lot of people.

After inheriting 13,000 clown items from his father-in-law, Richard Levine decided to go into the family “business.” (Photo from now.msn.com)

I talk first to all the members of the family. If there are two uncles, five siblings and seven cousins working for the business, I’ll talk to all of them. And if both mom and dad are involved, I want to hear from each of them separately.

Obviously, in a family situation there are emotions and years of history involved. I take that into account. If one guy says that his brother Joe can barely find the restroom on his own and breaks into a sweat if he is ever called upon to speak in a meeting, I consider the influence that sibling rivalry may have on his perspective.

But if five people tell me the same thing, well then, Joe doesn’t need to update his business cards with a new title any time soon.

Here’s a partial list of what I want to know about people who are under consideration to take over:

• What is their knowledge of the products or services provided by the company?

• Do they have drive and initiative?

• Do they display passion about the company?

• Do they get along with people?

• What are their strengths and weaknesses?

• Do they have an entrepreneurial spirit?

• How do they handle success?

• Are they respected by their colleagues?

• Do they have any managerial skills?

• How do they deal with a crisis?

• Do they function well on a team?

• Do they listen to and consider other’s opinions?

• What is their educational background?

• What other positions have they held in the company?

I also talk to senior managers and other non-family members in the company, as well as the company’s business advisors, such as accountants and lawyers, for a fuller picture of the people involved.

Sometimes I suggest psychological and aptitude testing to help discover untapped qualities and abilities.

But let’s say Dad has already selected a successor. Junior will definitely be taking over when he retires and I’ve been called in to help educate the company about the succession plan or some other aspect of running the company.

I still want to speak with Junior, asking him the same questions, and speak to other key employees about Junior. The goal is to determine Junior’s strengths and weaknesses and where he may need to beef up his skills for his future role.

Junior may be a killer sales person but has no managerial experience. Or let’s say Junior has the necessary drive and passion for the business, but doesn’t know the product line or how the company operates. Dad needs to determine the best way for Junior to grow from a business knowledge standpoint. He needs to start grooming him to take over as soon as he is selected as successor.

I may suggest that Junior attend night school to get an MBA, or go on sales calls with experienced sales people to learn the products and the marketplace.

You don’t want Junior to be surprised or unprepared to assume the responsibilities of his new position.

After I’ve gathered all the information I can, I sit down with the owner of the business and go over it with my suggestion for who is best qualified to take over. I tell him or her that it doesn’t matter who has been chosen the anointed one when I get there. What matters is who the anointed one is when we leave.

I’d like to close with one amusing example of an unexpected “business” inheritance. Richard Levine took over and runs the Waterboy Sprinklers business that his father-in-law started in the 1970s. But he got a different type of inheritance when his father-in-law died recently — 13,000 clown items. In his retirement, “Clown Jackey” Kline often dressed as a clown to visit children’s museums and opened the Clown Rushmore museum in Winter Haven, Florida with his massive clown collection.

Although he was shocked by the inheritance, Richard carted several truckloads of clown memorabilia to Central Florida, where he will sell some items to raise money to resurrect Clown Rushmore and will give away Clown Jackey dolls to challenged children.

But he knows he isn’t truly qualified to handle all aspects of this particular family business. So he has enrolled in Clown College, on his way to becoming “Clown Richey.”

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Does Your Daughter Want to Be CEO? Six Mistakes CEOs Make When Choosing a Successor for a Family Business

Dr. Robert Doback: He quit college his junior year and said he wanted to join the family business.

Nancy Huff: But you’re a medical doctor…

Dr. Robert Doback: I told him that. He just said, ‘It’s all about who you know.”

— From the film “Step Brothers”

 

My dad thought I would take over the family business. But I told him several times I didn’t want it and his persistent misconception cost the family a lot of money and my dad a lot of grief, as I wrote in my last post.

If you’re the owner of a family business, chances are you have relatives working for you. You may have brought in your kids and placed them in positions of increasing responsibility, assuming that one day you’ll retire and fill your days perfecting your golf game or cruising around the world while the next generation takes over.

If you own a family business and plan on a son or daughtertaking over, ask him or her if they want to run the business. Don’t assume they do.

But have you ever asked your son or daughter if he or she wants to be the boss? You may be surprised by the response. Children crave their parents’ approval and don’t like to disappoint them. It’s possible they are in their current positions just to please you.

Your daughter may secretly be harboring aspirations to be an entertainment attorney or your son may be dreaming of a career in the medical field. Rather than focusing all their energies on the future of your business, they may be working towards their exit as soon as dear old mom or dad is out of the picture.

Not asking that crucial question is just one of the mistakes I see when family business owners deal with the question of succession.

Here are five others to watch out for:

1. Using guilt to get a family member to take over the company

Doesn’t the company you worked so hard to build and grow deserve someone at the top who is 100% devoted and whose skills match those necessary to be a successful CEO? Think about the last time you were guilted into something. Did you feel positive about it? If you ask your family member if he or she wants to take over and the answer is no or a halfhearted yes, consider other options.

2. Leaving the succession of a company up to a lawyer

I’ve heard this many times when I ask CEOs about their succession plan. “I don’t worry about that. My lawyer will handle it all.”

Lawyers are necessary for many aspects of your business. But they are often called in when the company is already in transition and will be focused on the legal issues. The key to an orderly succession is to have it planned out before you need it, and you need to consult all your business advisors when developing the plan.

3. Leaving the company in the hands of several family members

You can’t run a business by committee. “We’ll just get together over Sunday supper and decide on that then,” I’ve heard before. It’s fine to have family members talk over key decisions. But you have to have one person empowered to make all the final decisions.

4. Not picking a number 2

So you’ve gone through the process of picking a successor. Guess what? You also need a number 2. Let’s say your son takes over and he leaves the company in a few years to start his own business. Or your successor is your brother-in-law, who takes a liking to the diner waitress and sends you a “Having a great life” postcard from St. Croix. You need to have a back up.

5. Not educating everyone about the succession plan

Once you have a succession plan for the next CEO and the number 2 person, make sure all the family members know about it. There may be hard feelings over the selections, but it’s best to deal with them now and have everything settled before the transition.

It’s also important once the succession plan is made to communicate the plan to customers, vendors and bankers. Then, bring the successor into important meetings so there will be continuity when you retire or get hit by a bus.

So how do you pick the best people to run your company? Stay tuned for the next post on The Turnaround Authority.

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Don’t Miss the Exit: Make a Succession Plan

I was at a breakfast with an older gentleman yesterday who started a family business almost 20 years ago and works with his wife and his son.

“Will your son take over the business when you retire?” I asked.

“I hope so,” he said. “But I’m not sure I’ll be retiring.”

That’s a pretty typical response and situation for owners of family businesses. They don’t really have a plan in place and aren’t really sure when and if they will retire. In fact, almost a third of family business owners have no plans to retire.

Furthermore, he wasn’t even sure if his son would be taking over if he did retire, or in the unfortunate event of his death.

Maybe I should have told him my story.

When my dad was 87 years old, I had to carry him out of the family business. I took over and liquidated the business, paying creditors 50 cents on the dollar and rewarding long-term employees with anything left over.

While that may sound harsh, he was in the early stages of dementia and had recently gotten swindled out of $300,000. There was very little left of the company. The worst part? I had been telling him for years to sell the company and even had an offer for $5 million ten years before. He turned it down. The family ended up with nothing.

All because he had no succession plan in place. Although I had no desire to take over the company, having worked there and turned it around once in the 1980s, he persisted in believing I would one day take it over.

If he had planned for and been working with someone else to take over the business, the business could have been saved and provided him with continuing income for his retirement.

Maybe if I had told this gentleman my story he might have taken a closer look at a succession plan.

I bet if I had asked him if he has life insurance or homeowners insurance or car insurance he would have looked surprised and answered that of course he did. What if something unexpected happened?

Then why hasn’t he taken steps to ensure the future of his company by instituting an emergency plan?

I use the analogy of driving on the highway. In Atlanta, where I live, we have I-285, an eight-lane perimeter that encircles the city. If I’m driving on 285 in the far left lane and need to get off at the next exit, I need to start planning my moves to the right so I can exit.

If I don’t? I miss the exit. I could end up circling the city as one of our Atlanta Braves players did in 1983. Pascual Perez, a pitcher from the Dominican Republic, got lost and drove the 64-mile perimeter three times before running out of gas. He missed the game.

While 88% of current family business owners believe their family will still control the business in five years, statistics show that only one in three makes it to the next generation.

Sometimes it’s because an owner died. In almost half of all family businesses that failed, the business collapsed because the founder died. In almost 30% of those cases the death was unexpected.

The key to making sure your business survives is to have a succession plan. Think of it as adding value to your company as well. Wall Street analysts are now tying market value to a company’s succession plan. IBM and GE have strong succession plans and Wall Street took notice.

I know it’s not a lot of fun to talk about what happens when you die. But it’s not fun to talk about what happens when your house burns down or if you wreck your car. But we protect ourselves in the event those unfortunate events occur, while hoping they never do.

However, we know for a fact no one gets out of this life alive. So even if a family business owner doesn’t ever retire, he will die one day. And the only way to make sure his business doesn’t go with him is to make a viable succession plan.

Next week: How to pick the right successor for your business

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All in the Family: Succession at The New York Times

The publishers of The New York Times, from left to right: Adolph S. Ochs (who ran the newspaper from 1896 to 1935); Arthur Hays Sulzberger (1935–61); Orvil E. Dryfoos (1961–63); Arthur Ochs Sulzberger (1963–92); and Arthur Ochs Sulzberger Jr. (1992–present). The photo appeared in an article in Vanity Fair. *

When a family member died unexpectedly, he was given the reins to the family business, the third generation to run it. He was just 37, and although he had been an exec at the company, he described his position as “vice president in charge of nothing.”

Arthur Ochs Sulzberger, former publisher of the New York Times, died this week at the age of 86.

The “newspaper of record” won 31 Pulitzer Prizes during his tenure. Punch, as he was known, is remembered for being a staunch defender of freedom of the press, no more so than when he made the controversial move to publish the infamous Pentagon Papers on the front page in 1971 about the U.S. involvement in the Vietnam War.

That got the New York Times involved in a skirmish of its own — the lawsuit for libel landmark New York Times vs. Sullivan, which became a landmark First Amendment decision by the Supreme Court.

Punch’s death brings to mind a topic that I deal with often in my work as a turnaround specialist: succession in family businesses. As I mentioned in my last post in this series on family businesses, the greatest threat to a family business is the failure to plan and manage succession well.

There were no emergency family meetings called when Punch died, no anxious creditors waiting at the door, wondering who would be running the company. No sibling infighting, lock changing or festering family feuds.

Arthur Sulzberger had turned the reins over 20 years prior. In 1992, his then 40-year-old son Arthur Ochs Sulzberger Jr., became publisher.

Punch’s transition to the top post wasn’t as easy. Although he was working at the Times, he thought he had several more years before he’d take over from his brother-in-law, Orvil Dryfoos, who had become publisher in 1961.

Then Orvil died suddenly just two years later from heart failure at the age of 50. And Arthur’s time had come. From vice president in charge of nothing to publisher of the New York Times. Not exactly an optimal situation for the continued smooth running of a company.

It worked out in his case. During his tenure revenues of the Times’ corporate parent rose from $100 million to $1.7 billion, and circulation for the Old Gray Lady soared from 714,000 to 1.1 million.

But it doesn’t always go so well. That’s when I get hired.

The Times in now being run by a member of the fifth generation, with a sixth on his way up. Punch’s grandson, Arthur Gregg Sulzberger, joined the Times in 2009 as a reporter and was promoted earlier this year to editor on the Times metro desk, and is reported to be in line to take over one day.

Joseph Astrachan, a professor of management and entrepreneurship at Kennesaw State University in Georgia who studies family businesses, said in an article in USA Today that the odds of a family business surviving to the sixth generation are 500 to 1.

The New York Times may beat those odds. Wouldn’t you like your family business to as well? Do you have a family succession plan in place?

* Photo Illustration by Chris Mueller; Digital Colorization by Lorna Clark. Photographs, From Left: From The Museum of the City Of New York/Getty Images; From Bettmann/Corbis (3); By Andrea Renault/Globe Photos; From Granger Collection (Background Headlines). All Other Newspapers: From Bettmann/Corbis.

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Don’t Wait for Miracles: Act on the Gift Tax Exclusion Now

In this world nothing can be said to be certain, except death and taxes.

— Benjamin Franklin

The only difference between death and taxes is that death doesn’t get worse every time Congress meets.

—  Will Rogers

It actually will take an act of Congress – well, to keep the lifetime gift-tax exclusion at its current rate, that is. For the past two years the lifetime gift-tax exclusion has been at a historically elevated rate: $5 million in 2011 and $5.12 million in 2012.

It was a complete surprise when Congress voted to raise the limit at the end of 2010, which had been at just $1 million, prompting some folks to refer to the new provision as a “Christmas miracle.”

ImageBut that miracle is due to expire December 31, when the exclusion is scheduled to revert back to $1 million. And if you own or work for a family business, you need to pay attention to that deadline.

We have just entered the fourth quarter of 2012 and unlike the decision of where to hold your annual spring retreat, or whether Uncle Bob can get his office redecorated, this one can’t wait.

If an older generation has ownership in the family business, this is the time to consider gifting all or a portion of that ownership in the company to the younger generation to benefit from the $5.12 million exclusion

If a married couple have ownership, the exclusion doubles. So if dear old grandma and grandpa or mom and dad own the business, they can potentially save the company millions by exercising all or part of a lifetime gift tax exclusion of $10.24 million before December 31.

John Glass has owned a refrigeration and air conditioning distributor in Aurora, Illinois for 40 years. Last year, he gifted $2 million of company stock to his three daughters, and he and his wife are considering gifting more this year, according to an article on www.bloomberg.com. His company stands to save millions in taxes from that gift.

Taking advantage of the current lifetime gift can substantially reduce a family’s tax burden and will also reduce potential estate taxes in the future.

Another factor is that the percentage of tax due on amounts exceeding the limits of the gift tax rate will increase from the current 35% to a whopping 55% at the end of the year.

If your family hasn’t discussed who will take over the business in the future and how the transfer will occur, now is the time for that discussion. It could save the business millions of dollars as well as the headaches and hassles involved if there is no current succession plan in place. The greatest threat to a family business is the failure to plan and manage succession well (more on that topic later).

The issue of giving up control can be a big one, and is often the reason families haven’t had the discussion about succession. There are ways that a donor can maintain control even after gifting part or all of the interest in a company.

There are several ways to make use of the lifetime gift tax exemption in the last three months of 2012. However, these are complicated issues, and you need to contact your estate and trust attorneys immediately. You want to ensure that the right decisions are made for future of the business and for the family.

No one knows what Congress will do, whether it may extend the lifetime gift-tax exclusion or not. Make sure you are prepared for whatever happens for 2013.

Time is running out. Do you really want to count on Congress for another miracle? Didn’t think so.