Mediation Saves Family Business Enterprises
Hon. Sheila Prell Sonenshine (Ret.)
It is hard to find anything good to say about today¹s economy. The story is worse for family owned businesses. While they account for approximately 75 percent of all North American companies, only one-third survives to a second generation even in the best of times. Tumbling markets hit families and the businesses they own with a double whammy. Financial pressure ignites and fuels business disputes. In turn, those squabbles further accelerate family discord. Bloomberg.com reports business bankruptcies are occurring at alarming rates, increasing 50 percent from 2007 to 2008. The expectations for 2009 are the same or greater. Factors fostering this crisis include the worldwide scope of the debacle, its ill effects across all industries and the disastrous credit markets’ repercussions.
Family owned businesses are particularly susceptible. Facing weaker demand, inability to secure financing and plagued with poor planning, many such families are finding it difficult to divest and hard to stay afloat. Longevity or past success is often not enough in this economy to save a family business. Consider for example, Gottschalks, a 58-store chain of family owned department stores which closed its doors after 105 years in business. Fortunoff, a New York-based family owned jewelry and department store, is another case in point. This spring, after being in business for 87 years, the firm was unable to keep going when it could not find a buyer or arrange for new credit. Subsequently, the company filed for bankruptcy. Given the state of our present economic situation what should family businesses do? Recognizing their issues and mediating them gives family business owners a better chance for survival. They will reduce the quantity and intensity of their disagreements thus ensuring family health and business continuation. While selling the business may not be an option now, appropriate planning allows for greater rewards in the future.
Mediation is particularly appropriate NOW. Our past prosperity fostered a lot of bad habits. Companies were able to get away with weak strategic planning, poor financial management and inadequate succession considerations. Not so today. These issues, coupled with underlying and usually unaddressed family dynamics, are causing many family business owners to face personal liability or worse — the loss of their company. And in these times of economic uncertainty, business owners need to make quick decisions. To do this, they must have contingent plans in place.
There is another reason that makes timely and constructive business dispute resolution so important. Most of today’s generation of family business owners knows only good times. Our last two recessions (1990 and 2007) lasted only 8 months. The two prior recessions occurred from July 1981 to November 1982 and November 1973 to March 1975. As a result, this generation’s business owner is inexperienced in today’s scary market conditions.
Early and proactive mediation permits family business owners to address and resolve their issues in a timely, cost efficient, objective and constructive manner. By short cutting the normal litigation process, very often family members can achieve a creative resolution, taking into account tax ramifications and family personalities. And best of all, this can be confidential and in advance of major and disruptive conflict, avoiding the debilitating effects of the adversarial process on families and business. Mediation is always a good choice for family owned businesses. Mixing family and business creates lots of agendas. Added to this are emotional undercurrents, generational politics and subjectivity. Mediation encourages better communication unprovoked by role confusion. Such emotions as envy, fear, and anger as well as family political divisions and other relationship problems dissipate. In short, mediation allows an objective third party to intervene, ask hard questions, see the forest from the trees and without taking sides, broach tough calls.
For mediation to work, family business owners must recognize they have issues. Lawyers, accountants and financial advisors can help by conducting a comprehensive business plan review, starting with the most pressing problems and including matters relevant for business continuation.
The key to successful mediation is choosing the right mediator. The mediator should be experienced in legal and business issues along with family dynamics. Personality and a track record of successful settlements are other key considerations. This person, also referred to as a neutral, will act as a catalyst between opposing interests, bringing them together by defining issues and eliminating obstacles to communication. The neutral assists the parties in the negotiation of their differences while moderating and guiding the process to avoid confrontation and ill will. Family advisors should welcome the mediator. Most business owners retain lawyers, accountants and financial advisors for the benefit of the business and all of the parties. Individual conflicts emerge as the family members acknowledge and start to work out their differences.
Moreover, lawyers particularly are advocates representing one party‹and not looking at the whole as does a neutral. Once engaged, the mediator might have a pre-meeting phone call or just schedule a session with all the parties and their professionals. The first meeting generally begins with all parties and their lawyers attending. The neutral sets an agenda, defines the issues and ascertains the position and/or concerns of the parties.
Next is a separate caucus between the mediator and each individual party or their counsel. In confidence, each side explains and expands their positions and mediation objectives, permitting each to articulate their goal and vision. This process continues until resolution. Sometimes one session is sufficient, other times it takes longer. However, a good mediator and engaged litigants should be able to conclude their issues in a timely manner. Keep in mind that this is not decision by fiat or decree. The mediator does not decide what is fair or right. The neutral does not assess blame or dwell on the litigation aspects of the case. The point of mediation is not who is right or wrong but what will work. The neutral crystallizes the issues and the parties’ positions. The mediator puts matters into perspective and separates business and non-business issues. Ultimately, the neutral enables the parties to be self-determining, finding their own solutions. In mediation, the decision power remains entirely with the parties.
At the outset, the neutral may ask the parties to forbear from litigation during the mediation process. The mediator may also request they deem everything said as confidential and not as an admission or to be used against any party in any other proceeding if mediation fails. All business stakeholders and everyone affected by the outcome should take part in the discussion. People are more apt to buy into a decision when their feelings are taken into consideration and they have a say in making it. Determining the outcome and announcing it without prior discourse is the surest way to sow business and family discord.
The In-N-Out Burger story is illustrative of what can happen with poor or no planning. The chain is alive and doing very well. However, along the way, the granddaughter of the founder, his 86-year-old widow, a non-family member officer and director, a brother-in-law who sits on the three-person company board and a major CPA firm were involved in nasty and public litigation. Founded in 1948, the patriarch, who died in 1976, led the company to great success. His then 24-year-old son took over and ran the company until he died in a plane crash in 1993. The founder’s oldest son became the president but six years later died of an overdose of painkillers. His daughter, then 23, stepped in to lead the business. Within a short time, the litigation began and culminated a few years later with a defamation suit filed by the non-family member against the brother-in-law and the CPA firm.
Succession planning is at the top of list of topics family members should discuss. Mediation makes this conversation easier. Because entrepreneurs often define themselves by their businesses, turning the reigns over is a monumental task. It is harder today. Second generation business owners are not as actively involved in the business as were their counterparts in years past. Upcoming generations do not possess the same sense of duty and obligation to join the family business. Whether the founders envision a multi-generational business dynasty or a quick turnover, succession or exit strategy focus maximizes the availability of funds for retirement possibilities and estate planning. If continuation is the goal, it helps guarantee the next generation¹s success.
A 2008 Silicon Valley Bank and Scion Advisors’ study illustrates the problems with inadequate succession planning. Recognizing it takes 5 to 10 years of planning to turn a family business over to heirs or sell it to a third party, the report concluded family owned western U.S. wineries are neither strategically nor financially prepared for a generational change of hands. These failings have big consequences because they set up ill advised heirs for failure, or worse, disappoint the founder with the market value of their life’s work. Key obstacles to successful transition were ineffective planning and lack of communication. The study found 80 percent of the significant stakeholders had no knowledge of the senior generation’s share transfer intentions and more than 70 percent of those planning to transition ownership within 10 years reported having done no planning at all — including defining roles and responsibilities to their heirs .
Mediation encourages better communication because the neutral can say things to the founder another family member may be embarrassed to articulate. The first generation entrepreneur may look to his daughter to take over but she has neither the business skills nor interest. Maybe a non-family member is the first choice or selling is the best call. And if the family is going to sell the business, how will they share the wealth? The mediator, after appropriate discussions, can pursue these issues. Determination of business valuation, family member roles, responsibilities, compensation and liability, retirement benefits, divorce, health and financial problems are also obvious topics to include in the mediation. How are non-participating family members to be compensated? Are they salaried, what about other employment benefits and dividends?
Family business owners must also plan for down turns. The appropriate time for that is before action is needed, when calmness still prevails. It is never too early to consider the future‹good and bad and sadly better late than never. Conditions change quickly — just ask car dealers. What seemed a certain bet as little as a year ago is now a dying business. Planning may result in minimizing the damage or ultimately lead to success. That may be the hope for Shane Co., a family owned jewelry retailer with 23 stores in 14 states. Despite a bankruptcy filing in January 2009, the company is planning to survive via reorganization and a $10.5 million loan from an entity controlled by a family member. The company was very proactive over the last several years by significantly reducing its work force, closing stores, reversing new stores openings and relocating to new headquarters.
One final mediation benefit is privacy. One does not have to be a celebrity to achieve notoriety. Everybody — industry leaders, socially preeminent, even those who shun the limelight - take on their own status with their own kind of fame. The internet, personal search engines and social networks make our stories accessible to everyone. And, of course, more publicity fosters increased government and regulatory scrutiny. Mediation avoids public analysis and irrevocable damage to family relationships. Keeping disagreements within the family and out of the public eye stops unwanted business gossip which can adversely affect employees, customers and suppliers. While most family business owners are not public figures, the media is replete with sagas of family owned businesses’ disputes. Headlines abound telling tales of generational infighting. Journalists’ pain-taking research uncovers family member details starting even before the dynasty’s founder through to the latest born. Accounts of illicit parentage, addictions, sexual foibles, and business acumen (or lack thereof) fill the pages. A case in point is a law suit Curtis Carlson filed alleging his mother caused his deceased grandfather’s company to deny him a leadership position. As the 2007 June-July Franchise Times explained the lawsuit exposes a family rift years in the making... [including] “accusations of broken promises, bad business decisions [and], drug use.”
True, it is hard to find something good to say about today’s economy. However now may be a time of opportunity for family owned businesses. Because they tend to be more responsive and flexible than their non-family counterparts, historically, times of economic hardships have been their greatest periods of development and growth. Mediation is the key. The outlook is bright for those who make the commitment to succeed and invest the time to make it happen. Looking to the future rather than accessing blame for the past, mediation offers the promise of better business practices and family reconciliation and ultimate unity.
Hon. Sheila Prell Sonenshine (Ret.), is a mediator and arbitrator based in JAMS Orange County, CA Resolution Center. Over the past 40 years she was a lawyer, trial judge, appellate justice and a business owner.