When the Boss Hires His Sister

Editor's note: This is one of a biweekly series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.

Problem: A Nutrition Company's Anemic Returns

A nutrition company called the Vita-Cost Nutrition Outlet sells vitamins, sports drinks, and a variety of athletically geared nutritional supplements at a near-wholesale rate, directly to customers online.

Five years ago it was making a killing. But in the past two years, sales dropped from $6 million to $5 million, and profits were down more than 20 percent. And for no good reason. Other comparable businesses were booming. Despite the recession, people were still buying plenty of vitamins.

Vita-Cost began as a lean operation, making the most of its market niche using the various Internet message boards frequented by bodybuilders and fitness nuts to get visibility for their products. Only three people were on the payroll, including Russ, the owner. Within two years, though, Vita-Cost did so well Russ decided bring in a dozen more employees. One of them was his younger sister, Jane. And that was his first mistake.

Jane was assigned to oversee inventory. Her job was to make sure the manufacturers of raw materials kept up-to-date and deliveries to the bottling plant (where they put all the powders into capsules, then into labeled bottles) were on time. At times, her role required actually going to the factories to eyeball each stage of production and packaging. It also necessitated traveling around the region to find more competitively priced makers.

But Jane had another priority—her kids. And she used this to gain sympathy from her brother. At first, she'd cut her business trips short, claiming she had prior commitments to her children, such as PTA meetings, baseball games, and ballet recitals. These interruptions seemed inconsequential at first—but that's how the biggest problems get started. They aren't so obvious, but the cumulative effect can be devastating. After a while, Jane refused to do any traveling, claiming it was too much of an imposition. If her brother ever insisted a factory-site visit was necessary, she'd lay on a guilt trip. How could he ask her to ignore the needs of his nieces and nephews? His flesh and blood? Did he want her to be a bad mother?

Well, they weren't our nieces and nephews. As far as we're concerned it's business before family. Sounds a little heartless? Don't be so sure. We did a little snooping and found that not all these prior commitments revolved around her little darlings. She was using company time to run personal errands, such as going to the gym and the nail salon. Frankly, even if she were taking all this time off to be the perfect mother, it was unacceptable. She'd never be able to afford to pay for her daughter's ballet lessons if it weren't for the business her brother worked so hard to build. Her short-sightedness and lousy work ethic were endangering her own livelihood—and everyone else's.

Solution: Parole Them With Pay

We convinced Russ it was time to address the situation with his sister head on. If his sense of family loyalty wouldn't permit him to fire Jane outright, he could parole her with pay. In other words, write her a big fat check not to show up. In this way, he can come off like he has her best interests at heart, but what he's really doing is a big favor to his bottom line. Sometimes it's worth the extra investment to get rid of dead weight.

Had it been up to us, we would have just cut her loose with nothing more than the minimum severance package required by law. We believe the best family business has one member, and relatives should never feel entitled to employment on your dime. She was recently replaced with a professional purchasing agent with a great résumé and a willingness (and enthusiasm) to travel.

Already, we're seeing improvement. The new hire is not only diligent about making sure orders are filled correctly and on time; she also seeks out competitively priced materials and manufacturers. She even found a plant willing to give a discount of $3 on every bottle ordered if the company ordered an extra 1,000 bottles. It was a no-brainer. Looking over Vita-Cost's books, it would take just two months of sales on two of its most popular products to cover this extra cost. Once those products sold, it would mean much higher profit margins.

Six months later, the company is on track to exceed $7 million this year. More importantly, profits are up 40 percent, thanks in large part to the energy and ingenuity of Jane's replacement.

It goes to show how much Russ's sister cost the company in wasted work hours and lost opportunities. Businesses like his cannot afford to float employees who aren't fully committed. This is especially true when family members are involved. Unless they have their own money invested, they almost never take the business seriously enough, and their lack of focus can cost you dearly.

So I say to hell with family. Unless someone is dying or having some kind of epic crisis, your relatives can wait. Real profits and success come only when you put business first. Always.

—with Samantha Marshall

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