By Maurie Cashman
Pretending to be something you are not has likely torn many families and family businesses apart than anything else I have experienced in over 35 years of working with family businesses. I also believe it is at the crux of the general breakdown of families in our society.
â€œWe are what we pretend to be, so we must be careful about what we pretend to be.”
For the past couple of weeks we run an article titled Startup or Buy In printed in the Iowa Small Business Report about whether it is better to start a business or buy an existing one. One of the allusions I tried to make in that article is that there is no right or wrong answer to that question, however, you had better not be fooling yourself into thinking you are someone you are not. In other words, this is no time for pretending.
This is emphasized even further in extended family-owned businesses. Across the world there are many more large family controlled businesses than we are used to in the U.S. However, among small to mid-sized businesses this is more likely the norm than the exception. The family struggles I have seen are in some cases similar to those of the Shin Family, who control Krispy Kreme and TGI Fridays.
Let me talk about one specific case that I was involved with. Louise (not her real name) was the owner of a wholesale equipment sales business that had been held by two families. These families had controlled this business since before the depression and had done quite well.
During the recent recession, Louise ran into trouble when her bank failed. She had just purchased the half of the business that was not controlled by her family and taken on a significant amount of debt. When her bank failed it was bought by another bank, who had government guaranties on the loans they took over so they had little reason to re-negotiate financing. She was forced to attempt to find other financing and found it difficult to find a lender during those difficult times. It was decided that I would try to find a buyer for the business.
After significant marketing effort and expense we found what appeared to be a perfect fit for the company. The buyer was very strong financially and was willing to allow Louise to continue with the company along with most of the employees under employee agreements. Louise was going to keep the real estate in her original company and lease it to the new owners. The building had plenty of collateral value and we had several lenders that were bidding to re-finance the debt with the real estate as collateral.
The closing documents were negotiated and we thought we were ready to close on a great deal.
Then we found out that Louise was pretending to be someone she was not. She did not hold control of the company. She owned the company with her sisters, who were represented by a related attorney. The attorney advised them that it was not in their best interest to sell. After many attempts to negotiate an acceptable compromise with the attorney for the sisters, the buyer grew angry and walked away from the deal, after having spent significant professional expenses in due diligence.
The end result was that we had a damaged business since the employees had all been given notice that they would be working for someone else and a few had been let go. It was common knowledge in the industry that the company was for sale and that something had gone wrong. And Louiseâ€™s former partner was working as a salesperson for a competitor.
And all of this because Louise was pretending to be in control when in fact she was not.
Family businesses can be wonderful things if there is open communications between the family members and their advisors. However, it is critical that no one pretends to be something they are not or that the business is operating in a way that it is not. If not, they can create tears in the family fabric that can never be mended.