You Can Fight Fraud. And Win.

We all know Smokey the Bear’s slogan. “Remember – only you can prevent forest fires.” You can use the same slogan for fraud: only you can prevent fraud in your company.

I couldn’t let National Fraud Awareness Month slip by without mentioning a major contributor to revenue loss for a company. In its 2016 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) reported that a typical organization loses 5% of its revenue in a given year as a result of fraud.

Let that sink in a minute – 5% of your total revenue. Billing schemes and check tampering pose the greatest risk. And here’s another thing to think about, the perpetrator’s level of authority is strongly correlated with the size of the fraud. The higher up the thief, the bigger the theft.

I have written extensively about fraud as it can severely damage a company, and can even cause it to fail. While you can’t prevent fraud 100 percent, you can lessen its effect on your business. Does your company have strong enough fraud prevention measures in place? Here are a few articles to get you started.

Best friends, grandmothers, partners, even church ladies – I’ve seen them all commit fraud. When it comes to protecting your assets, trust no one. Don’t ever think that you know someone well enough to say, “He would never do that.” Maybe not. But don’t find out the hard way.

Sadly, the same goes for family members. Just read about the sad case of Gladys Knight and her son and what he did to her poor chicken and waffles restaurants.

I once worked with a company where the younger brother was running the business and took a salary beyond the limits allowed by the corporate minutes. Unfortunately, the fraud was only discovered after Daddy died and the statute of limitations had run out.

Fraud can occur when you have three elements: pressure, opportunity and rationalization. Knowledge of the fraud triangle is the basis of any successful fraud-deterrence program.

To catch fraud early, you need to know what the red flags are. One of these is when an employee exhibits behavioral changes, undergoes a sudden change in lifestyle or has financial difficulties. Read the article for four other red flags you need to be on the alert for.

According to the ACFE, the most common way internal fraud is detected is by receiving a tip from someone. One of the things your company can do is set up an anonymous hotline for anyone to report suspected theft. Their numbers show that organizations that had one were much more likely to detect fraud than those that didn’t – 45.3% to 28.2%.

My book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” is now available as an ebook.

3 Tips on Enjoying Thanksgiving When You Own a Family Business

Norman Rockwell's "Freedom From Want."

Norman Rockwell’s “Freedom From Want.”

Everyone wants a Norman Rockwell Thanksgiving, the one depicted in his famous 1941 painting “Freedom From Want.” The painting shows a happy family seated around the table waiting for the turkey to be carved.

For many Americans, this is far from reality. Thanksgiving becomes something to dread, more of an endurance test and something to survive rather than to enjoy. And when you own a family business, there are even more topics that can cause conflict and tension.

I saw an ecard recently that read, “My favorite thing about Thanksgiving is when we all pass out and stop talking to each other.” Here are a few tips for how to enjoy Thanksgiving dinner when you run a family business, before you’ve reached that point.

  1. Make your desire to keep family business off the table known prior to dinner.

You can take a lighthearted approach to this if you are the host. When issuing the invitation, say something like, bring your favorite side dish and bottle of wine, but leave business matters at the office for the day. Or you may remind family members during a meeting or through a memo that Thanksgiving is a day off from the business.

  1. Plan an if/then scenario.

This tip comes from the Wall Street Journal article, “How to Have Thanksgiving Dinner Without a Family Blowup.” Author Elizabeth Bernstein recommends you coach yourself on how you might respond should a certain topic come up despite your request to not talk about the business. Let’s say one son blames the other son for thefts from the warehouse, and makes a snide comment as he passes the gravy. How will you handle it? One suggestion may be to quickly table it by saying, “Let’s be sure to address that Monday morning at our weekly meeting.”

  1. Privately enlist the help of the person most likely to start the drama.

Your brother Fred is typically the one to bring the tension, generally by referencing some long-ago conflict. Call Fred before the dinner and tell him, “Fred, I really need your help this year to have a more peaceful gathering. If you see any conflict start to develop, can I count on you to change the subject? Maybe tell us about your last fishing trip.”

Fred will be flattered you asked for his help, and eager to share his story. Problem solved.

If all this fails, there’s always TV. As comedian Craig Ferguson said, “I like football. I find it’s an exciting strategic game. It’s a great way to avoid conversation with your family at Thanksgiving.”
 

 

Funny, But True: Firing Grandma

 

Family businesses make up around 80 to 90 percent of all businesses in North America, according to the Family Business Center. These businesses are obviously crucial to our economy. But working with family members brings its own set of challenges.

For example, how do you fire a family member? Firing anyone can be fraught with legal, economic and morale issues. But when it’s a family member? That can be an even stickier situation. For one, you will be seeing these people again and Thanksgiving dinner may never be the same if it’s not handled correctly.

Dealing with these type of issues is actually a major benefit of working with an outside consultant like me. You may not want to fire your son, daughter, wife, nephew or other relative. But I can, I will, and I have if it’s in the best interest of saving your company.

I once took over a warehousing company that was in dire straits. The company was 120 days past due in payments to the bank. I found out that Grandma was on the payroll, and after doing my research, I discovered her primary task was to knit the CEO socks for Christmas. While that’s a lovely thing to do, it does not contribute to the bottom line of the company. So I let her go.

Not only did I save the company money, I earned the gratitude of the employees. Later that day a forklift driver pulled up alongside me and congratulated me on firing grandma. They all knew she didn’t have a real job there.

If you find yourself in the unfortunate situation of having to fire a family member, check out my blog “It Takes Finesse to Fire a Family Member” for tips on ensuring your success during the process. It can help make those holiday dinners this year a lot more enjoyable.

Fraud and the Family Business

Collard spring rolls. Delicious fried chicken and crispy waffles. An internationally famous singer’s name. Sounds like you’ve got all the ingredients for a successful business.

And for a long time, Gladys Knight’s Chicken & Waffles, opened in 1997, was just that. The restaurant chain had high ratings on Yelp, long lines of hungry diners and celebrities holding court in its booths. Sadly, things behind the scenes are not always as rosy.

Gladys Knight’s involvement was limited to letting her son, Shanga Hankerson, use her name. He ran the restaurant chain, which generated $8 million in sales at three locations. But he wasn’t running it too well apparently – he made national news in June when he was arrested for theft, and state revenue agents filed civil racketeering charges against him. Shanga allegedly owed $1 million in unpaid taxes and had been siphoning money from the restaurants to pay for unsavory activities. He wasn’t paying the employees and the restaurant was failing health inspections.

Shanga is out on bail and while two of the three locations have reopened, the chain made headlines again this week as it was disclosed Gladys is suing her son to remove her name from the restaurants and to stop using her recipes and memorabilia.

In addition to the financial losses the restaurant chain suffered, the Empress of Soul took another more immeasurable hit. To her reputation. Gladys has her name on seven Grammy awards, a star on the Hollywood Walk of Fame and in the Rock and Roll Hall of Fame. One place she doesn’t want to see her name is on a business mired in scandal.

Fraud can happen in any type of business and the types of fraud are similar to those in non-family businesses. According to an article in Strategic Finance magazine, “Shattered Trust: Fraud in the Family,” common fraud schemes include stealing office supplies, providing business secrets to a competitor, diverting customers to a competing entity, paying ghost employees and as happened in this case, stealing business funds.

Fraud always involves a betrayal of trust. But in a family business, that betrayal cuts much deeper. Many business owners and CEOS are happy to employ family members because there is an assumption they can trust them beyond anyone else.

An article in Forbes listed myths of family fraud. The one that caught my eye is one I have seen over and over in my career. “Our people wouldn’t commit fraud.”

Everyone wants to hire trustworthy people and continue to trust them to do the right thing. That’s one of the reasons they like to hire family members. You should be able to trust them above anyone else, right?

The bottom line is not always. Not even your own spouse/sibling/child. Here is another story to illustrate that fact.

A physician husband set up a practice with his wife in Connecticut. The business thrived and they enjoyed a nice lifestyle. One day the wife was running some errands and the husband saw an envelope on her desk from a bank he wasn’t aware of. It contained a bank statement for an account with $200,000 in his wife’s name. He learned she was planning on divorcing him, so had been stealing the money from the practice for the new life she was planning.

Other motivations for family members stealing may be addiction problems, feeling entitled or feeling underpaid and underappreciated. Whatever the motivation, the answer is the same as it is for every company. Institute strong fraud prevention policies and enforce them for everyone, family included.

For tips for setting up fraud prevention policies, please see “My Number One Tip for Fraud Prevention” and “13 Fraud Prevention Tips.”

As for Gladys Knight, it’s too late for her. She won’t be singing “You’re the Best Thing That Ever Happened to Me” to her son any time soon.

 

 

 

The 1 Question a Family Business Owner Should Ask His Children

Succession planning is critical for any business to survive beyond the current generation, and especially so when it comes to family businesses. Yet according to a PwC US Family Business Survey, 73 percent of family business owners in the US admit they don’t have a documented succession plan in place.

That’s one reason why only around 12 percent of businesses survive into the third generation. In Canada, business founders have only a 3 percent chance their business will survive and their grandchildren will run it, according to the article “Succession Planning in Family Business – Freud and Finance.”

While family business owners may assume their business will pass along to their heirs and thrive under the new owners’ stewardship, they have not taken the necessary steps to ensure a successful transfer of ownership.

If you own a family business and don’t have a plan in place, the time to start is now. As you consider what steps to take, ask your children this one question first, as suggested in the article above: Do they love the business enough to risk their own capital to buy it, over time?

If they don’t share your passion for the business and love it enough to invest their own money, as you did, they may not be the best people to manage it for growth in the future.

For more steps on passing your business to your children, please read “Should You Give Your Kids Your Business? 2 Factors to Consider.”

Should You Give Your Kids Your Business? 2 Factors to Consider

In 1985, Guy Laliberté was a fire-eating, accordion-playing stilt walker on the streets of Quebec. Thirty years later, he is still walking tall but now with a lot of more money. Estimated to be worth around $2.6 billion, the founder of Cirque du Soleil recently announced he sold a majority interest in the company to private equity firm TPG Capital for an undisclosed but estimated price of around $1.5 billion.

One of the reasons he cited for selling a majority in the business is that he didn’t want to pass it along to his five children. They range in age from 7 to 18.

“They have their dreams and as a father I have made the commitment to support them as they chase them,” he said in an article on CBSnews.com. “I don’t really believe in the idea of the second generation of entrepreneurs. From the outset, I didn’t want to put the pressure of running the circus on their shoulders.”

I can’t say I agree with him, as I do believe in second-generation entrepreneurs. In certain circumstances. In my career as the turnaround authority, I have seen many situations where a company would have fared better if the founder had not passed along his company to the second generation.

While the founders of a company have often been fueled by passion and the thrill of growing a business from just an idea, that passion is often not shared by the second generation. And sometimes they just haven’t developed the drive and work ethic to keep a successful business growing.

There are so many factors to consider when contemplating handing down your business to your children. The same is true with any succession plan, but the situation with family businesses can be complicated by assumptions and expectations of the founders.

Most family business owners assume their company will still be in family control in five years – 88 percent, according to the Family Business Institute. But only about 30 percent of family businesses make it to the second generation. That number drops to 12 percent for the third generation. By the fourth? Only about 3 percent make it this far.

There are two questions I suggest you ask yourself as a starting point when you are considering turning over your business to the second generation, now or in the future.

  1. Do your children have any interest or desire to work in the business?

You’d be surprised how often this simple question is never asked. I’ve seen business owners just assume that their children love their business as much as they do and of course, they want to take it over. But a discussion with those children tells a different story.

It sometimes comes as a complete surprise that our children don’t share our passions. And how can they not be thrilled to have a company that you worked so hard for be handed to them?

Yet that is often the case. While it may mystify you and break your heart, if your children don’t share your passion or show much interest in your business, your company will suffer for it and it’s best to pass it along or sell it to someone who cares.

One note on when you ask this question, however. In Guy’s case, his children are too young to know their life’s passion. And often kids go to college with no concept of wanting to join mom or dad’s company. A few years in the real world can often change their mind. Or they may find a place in your company that they can care deeply about.

  1. Do your children have the necessary qualities to grow your business?

It’s tough to be objective about our own children. But taking a good look at their strengths, weaknesses and potential is essential when making this assessment.

Does you son have the leadership ability to run the company? Or does your daughter have the skill set to be in senior management?

If they don’t have the education or skills yet to take over, do they have the potential to learn what they need to know?

There are many more factors to consider in planning the succession of your business to family. For more on succession planning, please see my blog Don’t Miss the Exit: Make a Succession Plan.

5 Tips for Siblings Working Together in the Family Business

This is the second in a two-part series on siblings in family businesses. Part one covered some successful sibling partnerships, while part two give tips for success for siblings who are in business together.

Even though you may have fought over whose turn it was to use the bathroom and who sat where in the car as children, that doesn’t mean you can’t own and run a successful business with your sibling.

There are unique challenges to it, of course. You may not have chosen your sister as a business partner. You can’t easily quit and go to another business when you’re frustrated. And it can be uncomfortable to attend Sunday supper with the family if you’ve just had a disagreement over an issue at work.

Here are some tips for you and your sibling to work together successfully.

  1. Have separate roles based on skill, not family hierarchy

Just because he started with the company first doesn’t mean that sibling should become the CEO. He may not be best suited for the job and would rather use his background, education and natural skill with numbers to serve as CFO. Perhaps another sister or brother is best suited to the role, and just needs a bit more training to take over the lead position, while a different sibling might have the perfects skills and personality to run the sales department.

  1. Understand, trust and respect each other’s contributions

I imagine Walt Disney got frustrated with Roy sometimes when he didn’t immediately jump on his latest vision for their company, being concerned with how they would finance it. And Roy was equally frustrated by Walt’s tendency to continually start new facets of the company without considering available resources.

But they were smart enough to realize they each played a crucial role in the company and that it took both of them to make it successful. They needed, respected and trusted each other.

  1. Communicate frequently and put it into writing

Any business needs open channels of communication on all levels. With family businesses, making sure decisions are communicated in writing is critical, as there tends to be more verbal communication among family members.

If you’re at a family picnic and make a decision about something crucial to the business, follow it up with an email to ensure you both understood the decision you made.

Hold regular, formal meetings with your siblings to discuss the business. Make sure every partner feels heard during the discussions and that notes are taken during the meeting and distributed afterwards.

  1. Establish, tweak your mission and goals together

Maybe you and your sibling started the company with one mission, but as you took your goods or products into the marketplace, you saw that a correction to that mission is necessary and your goals may shift. Or you’ve decided you should shut down one subsidiary in favor of focusing on another.

Discuss any changes or direction with your sibling partner. Don’t assume he or she has come to the same conclusion.

  1. Establish boundaries between work and family

If you and your siblings enjoy socializing outside of the office, that’s great. But if you’re forced to more than you’d like, maybe from pressure from dear old mom and dad, seek to minimize that time together, or just request it be a no-work-talk social event.

It won’t always be easy to be a partner with your sibling. When times are tough, remind yourself that you do love each other and you will always be family. Ultimately, you share the same goals of maintaining family harmony and growing a successful business.