When a family business implodes

NEW ROCHELLE, N.Y. (June 9, 2016) — As someone who has personally experienced poor family business succession planning, I feel I understand the incredible importance of proper business planning, especially for succession purposes.

Born and raised in a family business in the automotive sector, it was only natural for me to know the different makes, models, year and trim levels as well as all the brand names of vehicles by my early teens. I grew up in a family that lived and breathed the American dream.

Two brothers thought of a great idea and manufactured it in their garage to great success until poor planning ended it all. I want to share my experiences with the hope that it might help other business owners prevent similar issues.

The idea they had grew into a famous auto accessory in the aftermarket and even became a Tier 1 part on the General Motors Hummer.

As a member of Specialty Equipment Market Association (SEMA) and a long time reader of Tire Business, I look to this close community of readers as my extended family. My story begins growing up as a first-generation American who had the best childhood anyone could ever ask for. I was the son of two immigrants who both worked hard to provide their children with a life that was more comfortable than they had before.

Hard work, struggle

We were and are a close-knit family. I consider my mom to be my best friend and my dad remains a person of great honor and honesty. Ours was a story with a great beginning but one that ended in turmoil due to poor planning.

My dad's and his brother's business began, in 1980, like most typical businesses do. They were once mechanics and saved up enough money to open up a small accessory and rim shop. Eventually they came up with an innovative idea for a product that was very hard to find in the U.S. and had demand.

They borrowed some money from their father and off they went. A 30-year-long manufacturing business — which made plastic and rubber-based automotive accessories — was born. And there were many years of high margin returns, but primarily the business provided just a stable income.

Once grossing anywhere from $2 million to $10 million annually, the family business was a success. We prided ourselves on our hard work, integrity and personal relationships with our clients. And those clients comprised small rim shops all the way up to big auto industry players like General Motors Co. and Toyota Motor Corp.

However, due to the extreme rising costs of operation and the continued manufacturing pressures from China and Mexico, our once-thriving family business began to struggle. After 30 years of manufacturing, Dad's and his brother's pride of self-work caught up with them. The brothers believed in American self-made ingenuity and were never willing to outsource or open up a plant in Mexico or China.

The entrance of new technology had also caught up with them. Their small, 50-person company was now in jeopardy as petroleum hit all-time highs and they couldn't compete with the overseas pressure.

Over the years the brothers' relationship deteriorated and eventually fractured over different expectations of the business and what direction to take it. The icing on the cake was when the petroleum crisis hit and all the raw materials costs skyrocketed. This plus not winning any new contracts caused a 50-percent drop in sales while raw materials prices forced the costs of goods sold to triple in just under a year.

Our family motto has always been to work hard and “do everything yourself.” While our beliefs were based on honesty and hard work, these same ideas ultimately led to the demise of the family business. There was no way we could compete with Mexico's or China's labor rate. There were times when even Canada had a favorable exchange rate, and even selling goods at a slight loss meant a 30-percent margin for those competitors.

 

Lack of planning

The main issue for our family business was planning. There wasn't any plan for extraordinary circumstances or emergencies. When bad things happened — like family illness, death, workplace accidents or markets taking a turn for the worse — there wasn't any way to handle those crises. Arguments between the owners became frequent because emotions were already high and the stress was overwhelming.

The strain began to weaken the business and the family bonds.

When I took over the business, my father was already the sole owner and left me to run the day-to-day operation. Sales were meager at best and it seemed the writing was on the wall.

Still, our emotions kept us from accepting reality and we didn't close up shop. Instead, we lived in a slow, miserable death of the dream of two brothers for another five years until we could no longer keep the doors open.

In 2011, we shut the business, many years after it should've been done. The two brothers who started this business in their garage stopped speaking. As the business sank into disintegration, one brother ended up suing the other over the breakup of the company.

The family legacy and fortune has disappeared.

So what happened? Why did a once successful business end in turmoil and heartache? Why didn't anyone ever come up with a plan?

The truth is, life happens and people don't like to talk about it. No one wants to discuss possible deaths or emergencies or tragedies that can and do come up in life and business.

As a full-time 911 New York emergency medical technician in some of the city's busiest districts, I've seen life happen and, frankly, most people aren't prepared for it. It is too uncomfortable and depressing to think about beforehand and too emotional to deal with during the emergency.

Plus, when life starts happening, emotions are too high to discuss them reasonably. But this doesn't have to happen to you or your business. You can make a change. You can prevent most of the struggles, disagreements, and prepare for emergencies with some simple succession and legacy planning.

Heirs to the throne

Family business succession planning generally doesn't happen, so don't feel bad if your family hasn't planned.

Interestingly enough, this also is a major problem within multinational corporations and goes up as high as the CEO level. It is the duty of a firm's board of directors to always think of possible heirs to the throne, but in reality, most admit that this isn't actually happening. Succession planning in any business should be equally as important as marketing or paychecks. This is especially true for family-owned businesses.

Family businesses are a major asset in our markets. They account for a majority of the GDP within the U.S. These businesses also account for more than 75 percent of new jobs created in the marketplace, according to Forbes magazine.

Unfortunately, family businesses are extremely susceptible to market fluctuations and changes in the law. As I write this article, we are coming down to the end of a very volatile presidential campaign season. Our country is close to seeing its next two presidential nominees and in the fall we will vote on a new leader. Politics aside, the questions for family-owned businesses are: “How will the new regime affect you and your family business?” and “How can we prepare for it?”

Do you have a plan today? If so, does your family or partners know about it? Here's how to start answering these questions and prepare for the future, whatever it might bring.

Plan now and write it down. The very first thing you need to do is start a plan, and the beginning of any business plan should start with a mission statement. This is true even for family businesses. The best way to do this is to sit down calmly and discuss what the business means to you and your partners. Ask these questions:

• What is the mission statement of our company?

• How does it align with the goals of our business plan?

If you don't have a mission statement, start developing one and ask some of these questions:

• What are the goals of our business plan?

• Are we trying to preserve something, grow a business, sell a product or provide a service?

•  How do we stand apart from our competitors?

•  What's important to our company officers and partners?

Once you've come up with some ideas and standards you want to achieve, write them down and make sure all partners agree on the mission statement.

If you have trouble finding something you can agree on, start simple by just finding a few things the partners are all on the same page about. For example, great service, guaranteed work, community involvement and straightforward pricing are all great things to include in a mission statement.

Your mission statement is the blueprint to your company's success. It should set reasonable goals, be easy to understand and be completely agreed upon by all members.

It is also a good idea to get a non-biased third party to help with the mission statement and any business plan the partners are developing. Getting a professional mediator or a business consultant will help clear up disagreements, create a more focused plan and help all sides see things more clearly. A consultant also can help take emotions out of business decisions.

After your mission statement, you need to come up with a plan for possible emergencies and unexpected events. That will help you plan because it sets up a goal and standards to aim for during any circumstance. As you make your plan, you will need to consider possible issues, tragedies and disasters that might occur. Make sure you know what the plan will be for the company when issues like these come up:

• An owner becomes ill, injured or dies.

• Markets start to place extra stress on the business.

• Equipment or building issues occur.

• Natural disasters strike.

• Someone files a lawsuit against an owner or the company.

• Theft occurs.

A lot of these problems can be covered with the right insurance, but you also have to consider what happens in the business outside of creating financial stability.

While life insurance on any partner should be included in your plan, you might consider other types of insurance to keep the business running during unexpected events. Beyond that, your family-owned business needs to have a clear chain of command included in the plan.

What about trusts? Have you spoken to your lawyer yet?

Besides the owners, there should be at least one to three other people who could take over at any time and create a smooth transition should the unforeseen occur. This is very difficult for many owners — it was for my family — because owners often want to do it all. The attachment to the business and the incredible bond among partners often makes it difficult to fully trust anyone else with the knowledge and care of the family's company.

Still, appointing a few people to step into leadership roles before they are needed will actually give you peace of mind and save a lot of sorrow later on.

As you create a plan, do not avoid or overlook this step. Create a succession or transition plan. Make sure you know who the successors will be and try to be open and honest about it. Transitions will be easier and more successful when everyone knows who will be taking over in emergencies or when an owner is no longer able to work. Doing these things before the events occur will help everyone stay calm and keep emotions out of the business.

Be prepared

Unfortunately, sometimes businesses can't be saved.

Part of your plan should include when, how and for how much a business should be sold. Do this so everyone can go away healthy, happy and still speaking to each other. Planning for a possible end does not mean planning for defeat. It simply means being prepared. It will also save you a lot of money and give you the opportunity to start again.

Over 96 percent of businesses don't make it past their 10-year anniversary—I read that stat and was truly amazed! I want to congratulate all those businesses that make it past a decade through their own hard work and perseverance.

But have you thought about what would happen if you were suddenly unable to run your company? Who would step in? Your kids? Your family? A close friend? A longtime loyal hard-working employee?

You should have these conversations today, now or this afternoon while you are alive and well and, hopefully, times are good.

As a former sales operations manager for a Tier 1 tire company and the acting COO of a small family-owned automotive manufacturing business, I understand the necessity of planning. In my experience, most people don't take the time to make plans because they think, “It won't happen to me.”

The time it takes can save you a lot of stress, money and heartache. Don't allow what happened to my family happen to yours. Make plans for every step of the way. Then you can look back and enjoy the dreams you made come true—through perseverance, hard work and planning.

____________________________________________

Mike Cioffi is owner/account manager of New Rochelle, N.Y.-based Efficient Business Solutions Inc., which does business as www.TireRecruiter.com. He is a consultant in the tire industry and his day-to-day job consists of finding top talent for tire manufacturers, wholesalers and retailers. He also helps set up trusts, succession plans and similar services for small businesses. He can be reached via email at [email protected] or by phone at 843-732-8473 or 843-REC-TIRE.