Present, Accounted for, But Not Productive: Does Your Family Business Suffer From Presenteeism?

by Lauren Owen, MBA, Redpoint Coaching

You suffer from “presenteeism” in your business if you have one or several staff members who are physically present at the job but whose productivity is limited due to physical, mental, or emotional afflictions. They may be employees who are toughing out illness or chronic afflictions. Or, they may be physically healthy but have a high desire to leave their job but don’t. These employees tend to have lower commitment, be more dissatisfied with their jobs and reduce morale on their team. In effect, they’ve “retired on the job.”

Presenteeism is estimated to occur three times more often than absenteeism. (Health & Wellness Research Database, 2005)

In our work with family businesses, we’ve seen both managers and rank and file employees who suffer from presenteeism. Besides the impact on team morale, they cause work load issues for those who work with them. By far the worst impact, however, is when it’s either the founder or next generation member who suffers from presenteeism.

Maybe it’s a founder who lost his passion for the work 10 years prior but never retired because he couldn’t think of something better to do. Maybe it’s a son or daughter (or cousin or aunt) who was never suited for their job, never wanted it, but felt pressured by other family members to join the company and ended up staying. Or maybe it’s the sibling who didn’t get picked as the next leader, stayed with the company, but has harbored resentments and ill-will resulting in poor (or no) performance on the job.

The impact of a presentee owner or successor on a family-owned company can be devastating. Opportunities are lost, key employees leave, and potential suitable successors walk away in frustration. The value of the business (typically more than 90% of a family’s networth) spirals downward.

Presenteeism often is THE huge “elephant in the room” (issues that everyone knows about but no one wants to talk about) for many family businesses.

As with any other elephant in the room, the best way to deal with it is to 1) bring it out into the open and 2) put structures in place to prevent it from happening in the future. Easier said than done we know (especially when you have a presentee founder), but here is some food for thought:

• Does your company have a culture of continuous improvement and open and constructive feedback, for all employees, including the owners?
• Are there formal evaluations and informal one-on-ones for employees, including family members?
• Does your ownership report to an outside board and is that board composed of members who can and will hold the owners accountable for their performance (or lack thereof)?
• Is there a policy in place for hiring family members that includes written job descriptions, interviews, and evaluation for job fit before they are brought into the company?
• If there is an existing family member not performing up to expectations, what’s the plan for addressing the issue? What needs to happen for this “elephant” to be dealt with?

Do You Have a Business — Or A Perpetuity Project? Protect Your Greatest Asset with Clear Thinking and Solid Planning

By Lauren Owen, Redpoint Succession and Leadership Coaching

I just finished reading Tom Deans’ book, Every Family’s Business. I’ve already given away my two copies of this book to clients and will likely give away more because of the excellent points Deans makes.

According to Deans, the most important thing that a founder can do is to think of the business as a money making asset, not as a legacy for the family. The true legacy is the wealth the family business creates, not the business itself. Part of this responsibility, he states, is in always asking the question: in whose hands would this asset create the most return? If the answer is “in someone else’s”, then that option must be explored.

Too many founders think in terms of what Deans calls a “perpetuity project” with the goal of keeping the business in family hands trumping the goal of the business as a money making asset.

When the goal is to keep ownership of the business in succeeding generations no matter what, the costs, Deans says, can be devastating. Next generations members can get stuck in declining businesses they either did not want and/or are unsuited to lead. Businesses can fail due to ownership that turned a blind eye to market realities or unqualified management. Ultimately, family relationships can be damaged or destroyed as a result. The wealth that the family was counting on to continue on to future generations (or, more importantly, pay for their own retirement) is gone forever.

One of the biggest mistakes, Deans says, is gifting ownership to children or key employees as a form of compensation. Bad idea! Ownership transfer should be treated separately, again after asking the question, “In whose hands would this asset create the most return?” Don’t mix stock ownership with employment compensation. Children (or key employees) should be fairly compensated for the work they do in salary, not stock. Another reason for gifting is to avoid taxes. A bad decision made for tax purposes…is still a bad decision.

Deans lays out a series of 12 questions that every owner needs to ask of themselves and then ask of their children and/or key employees at least once a year.

Here are Dean’s first four questions to get you started:

1. What does your business look like in five years? (to both owners and child/key employee)
2. Are you interested in selling your stock? If yes, to whom? (to owner and child/key employee if they own stock) _____Yes _______No If yes, To Whom __________
3. Are you interested in buying stock and acquiring control? (to child/key employee)
4. Do you understand and agree that in the interest of maximizing shareholder value, this business can be sold to a third party at any time? (to owner and child/key employee) ____Yes ______No

If you are like most of the business owners we see in our practice, your business is likely the single most important asset you own. And, if you are in the 80% of business owners out there who do not have a succession plan in place, for the sake of your family and your future, make it your business to explore the issues raised in Deans’ book. For more information on Deans and/or to order his book, visit his website.

The Partnership Pre-Nup: Why Your Business Needs a Good Buy-Sell Agreement

Quick show of hands for those of you out there with one or more partners in your business.  (If you are a sole owner, you’re not off the hook that easily – keep reading till the end of my article) How many of you…

have a formal buy-sell agreement in place,

have read it in the last year, and

could accurately summarize what your buy-sell agreements states would happen in the event of a death/disability/departure of a partner?

If you’re like the majority of business owners we see in our workshops and performance groups, I’m guessing the number of hands still left in the air by the last question is a bit sparse.  That’s a little scary, considering what’s at stake here. The cost of dealing with a partnership that’s gone bad without a good buy-sell can be significant. The reason I bring up this issue is because not only do I like to help people figure out how to make more money in their companies, I also like to help them keep it. Without a good buy-sell in place, you could be in jeopardy of losing a lot of your hard earn dollars.

For example, a company had three shareholders – the founding shareholder owned 60% of the stock, and two other shareholders owned 20% each. One of the 20% shareholders died suddenly. The spouse contacted the surviving shareholders and demanded to be bought out. Because there was no written agreement delineating who would purchase the deceased shareholder’s 20% interest in the company and the price that would be paid for the shares, things got a little sticky, to say the least.  In the absence of such an agreement, the spouse of the deceased shareholder entered into negotiations for the price of the stock with the two surviving shareholders.  To make matters worse, the surviving partners didn’t have anywhere near the funds with which to purchase the decedent’s shares. As so often happens, their negotiations failed and the details finally got worked out in court. The resulting legal costs, time and energy spent were enormous and had a significant negative impact on the business for years to come, all of which could have been prevented with an effective buy-sell agreement in place.

In the most simple terms, a buy-sell agreement is a legal agreement between one or more parties, which outlines the manner in which the ownership of the company will transfer in the event of retirement, voluntary resignation, disability, or death of a shareholder/partner in a business. Think of it as a “partnership pre-nup.” As with most relationships, business partnerships start off with the best of intentions, but often don’t end up that way. Life and death happen.  People move on, die, or suffer debilitating health problems. In my opinion, the best time to deal with such concerns is before the occurrence of a problem, not after.

A good buy-sell agreement addresses all of these possible occurrences, plus it will have:

• Some type of formula or appraisal method to determine the value of the stock
• Purchase terms in the event a stock buy out is triggered
• A non-compete clause that would hold up in court in the event that your partner(s) leaves and decides to open his/her own store

A lawyer experienced in buy-sell agreements can help you draw one up or review an existing one. A good insurance agent can review it as well and recommend cross life and disability insurance for your partners so that surviving family members can be bought out with the insurance policy proceeds. This is a good example of a project where a team approach involving several of your professional advisors is a great idea.

For you sole owners out there, a good buy-sell agreement is still essential. In virtually every state, when a single shareholder/owner of a corporation dies, the corporation will die or pass to the spouse or heirs of the decedent.  In many cases, the surviving spouse is ill-equipped to run the company, dealing with the customers and clients of the firm, managing employees, and paying the bills, including estate taxes.

My intent here is not to scare but to create a sense of urgency among all of you to take action now. If you have an existing buy-sell, dust it off and read it with a “what-if” frame of mind and ask some of your experienced advisors to do the same.  If you don’t have one, get going now!

Partnership Checklist: Things to Think About When Going Into Business With Someone Else

by Lauren Owen, Principal, Redpoint Succession and Leadership Coaching

Here is a checklist that I share with clients who are thinking about going into business with someone else to help them think ahead of time about some important issues:

“Big Picture” items for your Partnership:

• What are each of your short term and long term goals for the business?
• Who will be responsible for what? Job descriptions for each of you would be a good idea. Where do you place each other on the org chart?
• How often do you meet and how?
• What can you each do on your own and what do you need to check with each other about? For example, spending limits, hiring and firing, contracts, etc.
• Are there administrative functions, including bookkeeping/inventory management/buying that could be centralized under one business to save money? How is that accounted for between the two businesses?
• Work schedules/expectations – hours, vacations, sick leave, time off, etc.
• What happens if you don’t agree—what’s the resolution process?
• What is each of your worst fears/concerns about working with each other?
• How will you communicate/deal with staff? Does your partner have some human resource documents (employee manuals, job descriptions, evaluation processes) that could be used/adapted at your business?
• What tends to frustrate/tick you off about other people you work with?
• Short term and Long term personal goals for each of you? For example, retirement, kids, travel…
• Compensation – both salary during the year and how year-end payouts will be determined.
• Lease renewal – can’t remember when it comes up but does your partner sign it as well?
• Legal structure – you’ll need legal and accounting advice on this one but will you be llc, c-corp, s-corp? Partnership? Or? Who does the research on this and when does it get done?

Buy-Sell Agreement

Even if the bank doesn’t require one as part of the loan process (and I would guess that they will), you’ll surely want one for your partnership.  It should address what happens in the event of several “D” events. None of these events are fun to contemplate but much better to deal with know and reduce your risk (and reduce stress to your loved ones) with adequate insurance:

Death – if one of you dies, the other will want/need to pay off the other’s estate, unless you want to be in business with the other’s widow (probably not!). The Buy Sell should stipulate how will the deceased partner’s shares be valued and who will buy out be funded (usually through life insurance). Since it’s just the two of you, you could do a “cross purchase” plan – each one owns a policy for the other.  If the policies are owned and paid for by the business, the proceeds are taxable. If you own them, proceeds are not taxable.  You could each “gross up” your pay to cover the insurance premiums.

Disability – more likely to happen than death. How will a disability be defined? When does it kick in? Again, this is usually funded through disability policies. Same thoughts as above on premiums. They might end up excluding any disability due to pre-existing conditions.

Divorce – if one of you gets divorced, you don’t want an ex-spouse running around with stock in the company.  A buy-sell provision can ensure that this doesn’t happen.

Disagreement/Departure – if one of you leaves, how and when does the other get paid out – so you need to think about terms of pay-out and how it will the shares will be valued so the business isn’t crippled by a huge pay out at once and/or a big fight about the value of the shares, which leads to:

Valuation – You’ll need to come to some agreement at the time of the buy sell agreement execution as to how the business will be valued at the time of any of these events in the future. As the value of the business changes over time (hopefully up), this valuation method will need to take that into account.  Some buy sells use a formula (value = one year’s revenue for example), some stipulate that an independent appraiser that it is approved by both parties will be engaged at the time the buy sell is activated by one of the seven D’s.

It’s a good idea to talk through these issues beforehand and then go to an attorney, who will most likely bring up lots of things I haven’t even thought about – but these are the biggies.