PHILADELPHIA — Few family businesses have the staying power of the Zildjian Cymbal Co., noted Michael Bohinc, a Cleveland, Ohio, accountant and CFO of a family owned contracting firm. Zildjian was formed in Turkey in 1623 and moved to America in 1929. Only about 30% of family businesses make it to the second generation and only 10% to the third.
Bohinc addressed family business problems during the 130th Plumbing-Heating-Cooling Contractors – National Association annual convention here in early October. He is also a member of and contributor to The Service Roundtable. He runs Keeping Score Inc., his own accounting and tax advisory firm, as well as being CFO of Norhio Plumbing Inc., the family contracting business.
Family owned contractors fall victim to all of the usual issues — a faulty chain of command, lack of shared vision, no documented systems, generational splits, and poor succession planning. All of a family’s wealth is often in the business and if the brothers own the business, one of their soon-to-be-ex-wives could end up owning a chunk of it. Then there’s money, Bohinc said, like getting to Friday and not being able to meet payroll.
Getting a family business in order is like joining a 12-step program, Bohinc told the contractors. The first thing the family members have to admit is that they have a problem. When Bohinc’s dad had a triple bypass operation back in 1998, there was no succession plan in place. After that, the siblings had to admit that the business would have been in turmoil if he had died.
Family members have to be clear-eyed in order to face a myriad of issues. Sibling rivalry can turn into a strategic rivalry about how to run the business. Some have different life goals. Some of them may still be looking for approval from their parents. Family firms, Bohinc noted, often don’t have a clear vision and goals — where are we going and how do we get there?
Compensation is a minefield. Equal and fair are not the same things. The owners have to decide how family members will get paid versus non-family members and how that compares with compensation in the outside world. How will the business be divided among family members when the founder dies? In Bohinc’s case, the non-business sibling gets the house, the ones working in the business get the contracting firm.
Some issues highlight the difference in rules for family members and for non-family members. For example, do family members take material out of inventory? What if a family member needs a new disposer for personal use and takes one? What if a non-family member sees that?
How do the family members talk to each other, especially when they disagree? Would they talk the same way if they had a disagreement with a non-family member?
Regarding generational issues, why do children join the family firm? There are several reasons that Bohinc delineated. Some want to influence the family in ways that may be good or bad. Others sincerely want to help the business and the family succeed. Some want to further their own careers. Some really like contracting. Others want the challenge. Some may feel a sense of duty to the family. And a few only want money.
There is, however, a completely different mindset between generations, Bohinc pointed out. The founder made huge sacrifices, working 60-80 hour weeks and missing holidays, family events, games and school functions. The successors believe in work-life balance. They leave early for kids’ activities and volunteer in the community. Each generation has its own characteristics, Bohinc said, and understanding their motivations will improve communications, create more motivated employees, improve recruitment and retention, and increase productivity and teamwork. This is easier said than done, he noted.
All businesses need a succession plan and only one out of 10 for which Bohinc has consulted has one. It often arises because of a medical crisis. According to accounting firm PriceWaterhouse Coopers, a quarter of family firms will change hands in the next five years. Of those, half will remain in the family. Families will typically spend nine months planning a wedding that lasts a few hours, and two days creating a succession plan that will be in place for years.
Why? It’s difficult. It must be done, however, Bohinc told the contractors, and it has to combine a succession plan for the business along with the founder’s tax plan, retirement plan and estate plan. It’s a process, not an event, and it may take one to five years to complete.
Once it’s done, however, it completes the founder’s dream. It provides continuity for everyone. It identifies and developments new leadership, provides career paths and helps retain key employees. If a business fails to plan, it runs the risk of losing key employees, having the wrong employees stay, and the family might end up losing big to estate taxes.