In past articles we have examined the challenges of family dynamics when running and operating a closely held, family-run business. We have also talked about the challenges of a parent deciding when, who, and how to pass the family business on to his or her offspring. History is replete with family-run businesses that exist well into future generations. However, it is also full of stories that clearly describe the failings of these businesses and how difficult it can be to maintain a family-run business beyond the first generation.
As challenging as parent/child relationships can be, we have likewise seen in our practice just how challenging it is for siblings to operate as co-owners. Quite a few of our clients are brother/brother or brother/sister owners. Others have several siblings involved in the ownership structure. Even if the siblings started the business from scratch together, it can often be hard when they finally reach the time to exit to do so in an agreeable, orderly fashion.
Quite often the issues we face in getting two siblings to concur on a business sale were created years earlier in the business growth by barriers, walls, and in some cases seeds of outright distrust that were planted by comments or actions that were difficult for the siblings to overcome.
Because of this, I thought I would share with the readers of our blog some great advice I recently came across on Entrepreneur.com from a pair of sibling co-owners. Authored by Matthew Toren, “contributor, serial entrepreneur, mentor and co-founder of YoungEntrepreneur.com,” the piece offers fantastic advice to any of you who are co-owners of a small business (or even a larger one) with one or more of your siblings.
Based on our years of working with family-run businesses, we agree with all of this advice. Each of these is equally important, but to avoid conflicts down the road as the business grows, we have seen how vital the second one is. The siblings we have seen that work best together throughout the years have been those that clearly outline (in writing if possible) what each person will be responsible for – and once these designations are established – stay out of each other’s hair!
We have rarely seen siblings who have the same skill set. Generally what we have experienced is that one will be more comfortable with financial management and/or operations and the other sales and marketing. Now this demarcation does not always fall cleanly into this segmentation, but more often than not, it does. And when it does, as long as the two (or more) siblings have allowed each other freedom to manage and lead their respective groups, the more success we have seen longer term.
This method does not ensure sibling success in operating a business, but it definitely helps. So if you are part owner in a sibling-run business, clearly outline what each of you will be focusing on based on your individual strengths and interests. Allow each other the space to operate and the freedom to make decisions that are not second-guessed. If input is asked about key decisions (see number four above), then give it but be sure that you trust your sibling(s) to do their jobs.
To the great list that Mr. Toren has provided us, I would add a couple of more based on our experience. First, agree with your siblings that family gatherings are NOT the place to bring up business issues, problems, and decisions. We have found this to be not only counter-productive but it can also allow family members who have no ownership in the business to give their “advice,” much of it unwanted and unneeded. If there are a number of family members with minority ownerships, then key decisions should be made at specific meetings of the “board,” not over Christmas Dinner after a few too many of Aunt Martha’s famous spiked eggnogs.
Secondly, and most importantly, sooth and fix hurt feelings ASAP. Do not let bad karma fester in a business/sibling relationship. This becomes especially true if you are on an exit plan that will require the two (or more) of you to agree to a sale. Far too often our dealmakers see a perfectly good financial transaction go up in smoke because of hurt feelings generated by a word or a deed years earlier. As challenging as it is, ferret out these issues so that when the time approaches for the siblings to agree to the business sale, both are in agreement.
Now in many transactions we work on with sibling ownership, it is not necessary or even needed for both (or more) to exit. In many deals we have closed, the OPTIMAL deal was a partial sale where an equity group cashed out an older brother and the younger brother was retained to operate the new entity as a holding of the equity firm. But even with this structure, legally before a co-owned business is sold, both siblings have to agree. So be sure to address any inter-family squabbles that have been allowed to fester longer before hiring an M&A advisory firm to work for you.
Naturally, any enterprise where family members are involved will have the opportunity to create family friction – chafing that would most often not be present if the company were not family run. These issues go back to Cain and Abel, and although they cannot be avoided, their impact can be minimized.
To learn more about how you and your siblings can prepare your company, and yourselves, to be ready to eventually sell, I invite you to attend a Generational Equity M&A seminar. While there you will not only learn a great deal about the overall M&A process, you will also have the opportunity to speak with our one of our managing directors and seminar leaders, many of whom owned (and in some cases) co-owned a family business.
And we want to give a special thanks to Matthew Toren for writing an insightful piece on how siblings can get along even while running a company. You can read the entire article here: 5 Keys to Successful Sibling Partnerships.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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