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Preventing family warfare during a business split

By Dr. Donald J. Jonovic

THE PROBLEM: Are there ways to help keep business divorces
from turning into drawn-out family warfare?

Submitted by B.P., via email:

My wife and I attended a talk you gave in 2006, and we took
it seriously. We thought then that we were most of the way through transition
planning. We had a buy/sell, but it was very weak and provided no scheme for
how any buyout would actually work.

We were a textbook example of your family business rake
structure: Dad at the top with all the authority and everyone else far below
with little or no authority. The eldest son had died, so his widow
(sister-in-law number one) was involved in ownership. My wife was the third
child by age, second child by business seniority. I was the
son-in-law/consultant with a Ph.D. in agronomy and part-time CEO/marketing
director/technical director of our orchard and greenhouse businesses.

The second son was a high school dropout, pot-smoking poet
laureate-type. He was also manager (in his own view, anyway) of our largest
greenhouse. My father-in-law, 95, owned 1% of the equity, 100% of the vote, and
caused 95% of the problems. Sister-in-law number one was the business manager
(which meant she ran payroll by paying the accountant to do it). She didn’t
know what depreciation was and when asked about it, she said, “You mean that
button in QuickBooks you click on if you know how to fill in all that stuff? I
just let the CPA do that.”

I’m not making any of this up. Your organizational chart
nailed us big-time!

The rest of the family thought the business was “too large”
and took “too much of their time” to run. The actual demands were mostly weekly
production meetings and monthly board meetings, held to make sure that I
“didn’t steal all the money.” Yes, really!

It clearly was time to sell. My wife and I offered to buy
all of them out under the existing buy/sell (remember, no implementation plan).

Brother and sister-in-law number two, who owned one third,
refused and said, “What? Sell the family farm?”

We then requested they buy out our one third. They refused
and said, “We don’t know how to run the farm!”

So three years ago, we co-opted the remaining one-third
owner (sister-in-law number one whose only income was the farm) and convinced
her to join us in a structured sale.

We got an M&A firm from San Francisco to come in, value
the farm as a business, and put our combined two thirds of the shares on the
open market. When we actually got nibbles, Dad, the brother, and sister-in-law
number two got nervous and put together a buyout combining employees, family
money, debt, and a promise to sister-in-law number one of a share in future
profits if she would take a small cash down payment.

My wife and I got cash at 40% of the estimated value of the
business, and we left. Sister-in-law number one and I became out-laws. The rest
of the family got a business, grossing just slightly above total debt (i.e.,
they now work for the bank).

We are successfully out of it and happy. Because of your
talk, we saw the danger (a dysfunctional family business) and recognized it for
what it was (not structurally repairable as long as Dad was alive and
manipulating everyone). It took 35 years. Could we have done it sooner?


Commendably, B.P. and his wife acted on their realization
that the only thing they could change was themselves. That weak buy/sell was
their roadblock. It should have spelled out who could own shares and a detailed
process for settling any business divorce.

This is painful to negotiate up front, but it can prevent a
lot of misery later, if and when it’s needed. 

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