I could tell the question made him uncomfortable. Andy (not his real name) leaned forward, put his elbows on the desk and said, “I don’t know why Dad didn’t plan better. He was a go-getter, started a lot of businesses, and this one really took off. But planning didn’t seem to be his strong suit.”
At the age of 75, Andy is ready to sell the company and retire. Problem is that his board of directors won’t authorize him to start the process. You see, Andy’s board has four members, each of whom own 25% of the company. Another important detail, the other three board members are family, his brother, sister, and the brother-in-law of another sister who is deceased. “They say they don’t want to give up Dad’s legacy, but truth is, they like the annual dividend,” he said with a not-so-hidden tone of exasperation.
Andy’s father started the business in 1957 and ran it until Andy became CEO in 1997. His father gave 25% interest in the company to each of his children. “Truth is, we never had time to think about, much less talk about the future of the company. Dad’s passing came on so quickly, he was gone before we could do any planning,” Andy quietly said. “Actually, everything has gone well. Until this, we hadn’t had any problems we couldn’t work out.”
It’s easy to criticize a decision in hindsight but giving 25% interest in one thing to four people is not smart in almost any situation. But boy howdy, doing it in an operating business is a recipe for disaster. And I know what you’re thinking, since he has been the one running the company, Andy should be able to decide about the future of the business. But there are two intractable problems. First, forcing a sale would create problems that filter down to grandchildren and great grandchildren. Andy said it this way, “Harmony is still the best way to honor my father.” Second problem, Andy can’t just throw up his hands and walk away, the 25% financial interest is important to his family, too.
While it seems his siblings aren’t being reasonable, dependence on a regular dividend check can lead anyone to make short-sighted and selfish decisions. “If it makes you feel any better,” I said to Andy, “I have seen this problem before.” Of course, that didn’t make him feel any better, especially when I added, “yet I don’t have a simple solution.”
If there is a moral to this story it is, don’t do what Andy’s dad did! When passing an interest in a business to several family members, give one person the final decision to make key decisions, especially an existential decision like when and how to sell the company. Having a business that passes from Dad’s ownership down the generations seems like a good idea, but reality can (and usually does) set in to change things. At some point sooner than later, group indecision becomes a potentially lethal organizational disease.
Tennessee Valley Group
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