Editor's note: This is the fourth in a new series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.
Problem: Blood in the Water
A Minnesota cement subcontractor has been doing business just outside the Twin Cities area for more than 40 years. The company, which we'll call "In-the-Mix, Inc.," benefited from a building boom, particularly among shopping mall developers throughout the North Star state. But the sector has been contracting for several years and the company's annual revenue has shrunk from $20 million to $10 million.
Some recent scandals in the local media have created a great deal of scrutiny and second guessing. It doesn't help that the father and founder of this family business, who started the company out of his bedroom, has accumulated a conspicuous amount of wealth in the form of several homes, flashy sports cars, and a yacht. The books are a mess and In-the-Mix is about to be audited. The family's homes have been mortgaged and 401ks have been cashed in. There is a chance the business will survive. But it's time to clean up and consolidate.
The two sons who run the business with their father know they need to make changes. There isn't enough future growth in the business for all of them to make a living from it, and the family dynamic has put company management in a state of paralysis. The father is a charming procrastinator. One of the sons analyzes everything to death but ultimately refuses to face reality and take action. The other son keeps talking about his wish to pursue another career and barely focuses on the business. It's as if both men have inherited their father's procrastination gene and are stuck in time warps. They face foreclosure if they don't act soon.
The sad part is that if this business had a motivated management team instead of a dysfunctional family at the helm, it would have checked the free-spending, financially negligent ways. Even though the industry has contracted, there was room for all three managers and their company. There could have been enough profit to weather this economic cycle and eventually start expanding again.
Solution: Cut the Ties That Bind
The best family businesses have one member. Even though more than 80% of small businesses are family owned and operated, working with relatives is almost always a lousy idea. Owners who are parents forget to be bosses and fail to hold their children accountable. Children who are equity partners fail to stand up to their elders and put profits first. Deadbeat relatives aren't fired soon enough out of fear that their feelings will be hurt. Nonfamily employees fail to perform because they despair of ever getting ahead in a company that gives junior the promotions and keeps the in-laws' hands in the till. Business meetings become more like a family dinner run amok. Important decisions don't get made—at least not for the right reasons. It's bad business all around.
At my turnaround firm we're often asked to act like family therapists. Instead, what struggling business owners need is a dose of tough love. In-the-Mix needed to separate the business facts from its family dynamics and deal with the realities of a shrinking industry. Somebody had to go. The son who has a business degree had some great ideas about running his own operation. I strongly recommended that he sell his share of the company to his father and brother and go it alone. We advised him to schedule a few hours a week with his dad to pass on certain responsibilities and ease the transition.
We told the father to retake control of the business, strip down expenses, sell off the luxuries, and cut the remaining son's salary. Junior is a big thinker but he doesn't follow through. Dad has to start holding him accountable and teach his kid—who is already pushing 40—how to pick up the phone and stay on top of sales to get more business from contractors. He needs to groom his family successor and break him of the bad habits he encouraged by providing his own poor example. If the son remains useless, fire him. If the father doesn't take this action now, there won't be a business for the next generation to inherit. In-the-Mix's sole family legacy will be a big pile of bad debt.
—With Samantha Marshall