Log Jam

By Robert Charm

WHAT WOULD YOU DO?

Two sons are near-polar opposites in temperament, personality, and business style. A toe-to-toe argument between them has put everyone in the company on edge. Fearing the tension could paralyze the business, the father calls an urgent family meeting to decide on a plan of action.

The conflict at Ward Log Homes Inc., a $9-million manufacturer of kits for prefabricated cedar homes in Houlton, Maine, is common to many family businesses. After the story, read what five astute observers recommend the company do to resolve the conflict. A postscript describing the actual outcome of the family battle at Ward Log Homes appears below. —Ed.

After weeks of feuding that was tearing his family and his business apart, Aubrey McLaughlin came to a conclusion. The last month had been the worst of his life, and he would not go through anotherlike it. As father of the family and owner of the business, he was calling a meeting: his sons, their wives, his wife, lawyers, accountants, everybody. They were going to confront this problem and come to a consensus even if it meant selling the business or splitting the business; they were not going to let it go to hell by default. That was his way.

It was 1984, and his two sons, Michael, 37, chief operations officer for the family business, Ward Log Homes Inc., and Jon, 27, director of sales, were fighting. They'd had squabbles before, but nothing like this. Yes, the company was big enough and their responsibilities were such that they could avoid each other. Michael managed operations, Jon, sales. And yes, the company was running smoothly enough that nothing vital required immediate joint discussion. But how long could that last? Besides, the employees had been walking on eggshells for weeks. Some were thinking about looking for other work.

Aubrey McLaughlin prided himself on never shying from any of the many problems in running a family business. At 63 years of age, a descendant of Irish farmers who settled the bleak farm country of northern Maine, Aubrey McLaughlin was a compact bull of a man with a stentorian voice. Hadn't he already faced up to the twin dragons of delegating responsibility to his sons and easing himself out of power? He retained the title of president and chairman but turned over the day-to-day running of the company to Michael.

The trouble was his sons were so different. Michael, was lean, intense, and aggressive, with a stern demeanor and self-contained manner that intimidated some of the workers. Something of an introvert, he was a real organizer, analytical, logical, detail-oriented, and hard-nosed about business. He liked money and the good life it could buy, and he wanted the business to grow in a careful, calculated way. "A hell of a good CEO," Aubrey thought.

He tended to dominate Jon, who was quieter and more casual in his appearance and tastes. Jon shied from difficult decisions and confrontations. Administrative details bored him and though he too wanted the company to grow, he was more impulsive in his ideas as to how that should happen. He was quicker to push that the company buy new equipment or take financial risk. Jon tended to defer to his father and older brother, however. Employees liked Jon, and regarded him as one of the boys. He liked the other social aspects of business too and was active in the Chamber of Commerce and the Rotary. "He's got great people skills," Aubrey thought. "He's good for employee morale."

Aubrey wanted his sons to run the company, and run it with equal authority. But he knew that the balance of power tipped in Michael's favor by sheer force of personality. So, day in and day out, Aubrey worked to build parity between his sons, as well as respect for them in the eyes of the workers. For a couple of years this worked, especially with Michael. Lately, though, it seemed that all his efforts had done was to drive a wedge between them. And Aubrey found himself thinking about selling the company to strangers rather than passing it on to the next generation.

Houlton, Maine is a small town in the farthest northeast corner of the United States. Up here people have always made their living on the farm and in the forest. But in recent years farming has declined and the forest products industry has consolidated. Most people in Houlton either work for the mega-corporations or run the small local shops. Aubrey McLaughlin and his sons, in building Ward to more than $9 million in annual sales, have successfully bucked tradition.

Ward Log Homes sells its kits from catalogs, through commissioned agents. A few weeks after the buyer orders his kit, a tractor-trailer shows up with everything needed to build the house — pre-cut cedar beams, boards, logs, planks, joists, nails, doors, windows, and instructions. The buyer puts it all together himself or hires a contractor.

There are more than 300 manufacturers of log home kits in North America. Ward, founded in 1923, is the oldest and the fourth largest. "Log home" is deceptive because these aren't simple one-room affairs. They are elaborate multi-room, multistory homes with every modern amenity. Prices range from $60,000 to $200,000 and even higher. The industry, as a whole, has grown dramatically over the past two decades, and Ward has enjoyed annual growth rates averaging 20 percent.

The company was failing when Aubrey bought it. It had developed a modest reputation for well-made, relatively simple log homes sold primarily in northern New England. Over the years, the Ward family scattered, however, and the company languished in the hands of disinterested absentee owners.

Aubrey had grown up in Houlton, on a farm that his family lost during the Depression. He worked his way through college and then held a succession of state jobs, ending up as director of Houlton's quasi-public industrial development agency. When a fire leveled the Ward factory in 1964, Aubrey contacted the owners and found they had no plans to rebuild. With a dozen investors, Aubrey bought the company for a song. They inherited a dispirited workforce of 10 people and no physical plant, but they invested $129,000 in rebuilding.

After a year, with personal loans from friends and money raised against the cash value of his life insurance, he bought out his partners. Then he gave small gifts of stock to his two sons and his wife. One reason he did that was legal: Maine requires a corporation to have at least three stockholders. But he also had another reason: He was building this company for his family. Michael was entering college then, and Jon was nine years old.

Right from the start Michael and Jon worked summers at Ward, doing the grunt work. In 1974, after college and a stint in the army, Michael came aboard as assistant general manager.

He found he had two main challenges: He had to win Aubrey's confidence in his ability as a manager. And he had to win employee respect. The problem was that Aubrey, like any entrepreneur, had started out doing everything himself.

"In the beginning I was the sales manager, the estimator, the purchasing agent, production superintendent, and accountant," Aubrey says. But by the early seventies, the company was pulling in $3 million annually, the payroll had passed four dozen, and Aubrey had hired middle managers to take over these jobs.

The father found he had more trouble entrusting responsibility to Michael than to the strangers he hired. "I gave Michael authority and then undercut it by overruling his decisions," Aubrey admits.

Even when his father didn't directly interfere, Michael says, his presence still had an effect. "Knowing your father, knowing how be thinks, you tend to do it his way, even though it might contradict your own ideas."

This made it difficult for Michael to win the respect of employees. "I was still young and new [as a manager," he remembers. "It's hard to oversee people who previously had the authority." Often when Michael made decisions that employees didn't like, they would appeal to Aubrey to change them.

"My mistake was I wouldn't send them back down to Michael," Aubrey says. After several years of this, he recognized himself as a poor delegator and saw only one solution. "I had to get out of the office."

Every winter the housing market goes into hibernation, and so in 1980 Aubrey and his wife went down to Florida for the season. For four months, Michael was left in charge. Jon had just begun to work full time, as head of sales. "My father called in every day," Jon says. "He checked up on everything and came home every few weeks."

Nonetheless, the Florida trip had the desired effect. "I came into my own," says Michael. "Right or wrong, people had to accept my decisions because Aubrey wasn't there to countermand them."

The trip also gave Aubrey more confidence in Michael's ability to run the company smoothly in his absence. But just when it seemed that Michael had met his first two challenges, a third arose. Jon had come into the business and was assuming a larger role. "This complicated everything," says Michael, remembering the early days.

Michael had mixed feelings about his brother as a manager. "I felt I'd been there for seven years working my way up and learning the business," be remembers. "Now here was this shy kid, 22 years old, and I thought, 'Gee, he doesn't know anything.' " On the other hand, he wanted Jon to be more assertive. Michael wanted to be taken seriously as a professional manager, and he wanted a brother he could take seriously as a professional co-manager. "Every time someone wanted something, they came to me," Michael says. "In arguments and disagreements, Jon would give in to me. It wasn't good."

In some ways Michael's attitude toward Jon resembled Aubrey's attitude toward Michael during his first years with the company. "My brother saw me as young and irresponsible," Jon, now 33, says. "He's 10 years older than me, and he used to act like a second father." Michael knew Jon as something of a wild teenager, out tomcatting with his buddies. "Mike would tell me, 'You gotta get serious with your life!' "Jon says. "He thought I was much too impulsive.

"Sometimes we'd argue," he adds. "We'd get hot, but rather than stand there and ass chew, we'd walk away." Later in the business day, they'd encounter each other and start talking about something else.The dispute would be over as far as Jon was concerned, or so he says. For his part, Michael feels that Jon was all too often backing down in these disputes. That worried Michael.

Aubrey watched this day-to-day struggle. But he did not decide to let them work it out themselves. Instead, he tried to back up Jon by siding with the younger son in disagreements with Michael. "I'd make a decision," Michael remembers, "and my father and Jon would override it."

Once when Michael was new in the business and Jon still in college, a friend of Aubrey's suggested that the father might be "forcing Mike and Jon into the business, without allowing them any alternative." This made a great impression on Aubrey, who immediately met with his two sons and made a little speech that went something like: "Maybe you want to work somewhere else. If you do, I'll stake you to the value of your equity."

He hadn't gotten very far when Jon stomped out, saying he wanted to work with his father, and that was that. Michael stayed long enough to explain, in measured tones, that he wanted to work in the family business, too.

Aubrey still seems to see Jon as the "younger son" — more emotional, more in need of protection than Michael. When Aubrey and Jon are in a meeting with business associates, for example, Aubrey seems selfconscious about his own assertive personality. He constantly checks himself when he thinks he's talking too much, to let Jon get a word in. "What do you think, Jon?" he'll ask. "Do you think that's true?"

Jon says he wasn't aware that his father often sided with him against Mike in day-to-day differences. If Aubrey was doing it, Jon says, there was no need. His brother's sometimes peremptory style never bothered him as much as having older workers, who didn't like a 20-year-old telling them what to do, go to his brother on end runs to reverse his decisions.

He also had little trouble with Aubrey's managerial involvement, which waxed and waned as the dynamics of the place changed. "When I was overruled on a job by my father, I accepted it," says Jon.

There were times, too, when Michael thought about leaving. "The lack of respect, the interference, I thought, 'Is it worth it? Should I go to another company or start my own business?' But I knew I didn't want to work for someone else." Still, he was frustrated. That frustration led to the big blowup with his brother in 1984. "It was some stupid little thing," Jon says about how the incident started. "But it just rolled from one thing to another — name calling, yelling. Once it started, it was too late to pull out. We let loose with everything."

The blowup started a month of what Aubrey calls "terrible tension," which affected employees as well as family. "People in the company were very aware of the tension," says Michael Doody, accountant and controller for Ward. "It was awkward to be around. There was a lot of skepticism as to whether they could work it out, and fear of what was going to happen next. Aubrey made it very clear at one point that either they were going to straighten up or the company was going to be sold immediately. He even went to a business broker for an appraisal. This was common knowledge."

Aubrey didn't know who to turn to for advice. The company did not have a board with outside directors who would help; the business's traditional advisors were not trained to deal with personality conflicts.

In fact, Aubrey didn't want to sell the business, but he was upset that the trouble had expanded to other family members. His daughters-in-law got involved. "There was a lot of jealousy between them over how the estate would be left to the boys," Aubrey says. "There was a lot of trouble that way,"

There had never been formal discussions of how Aubrey's estate would be disbursed after his death — only occasional casual talk. Jon says he recognized that it's important for family business members to talk about it, but still he avoided the whole subject.

"I didn't like to talk about Dad dying," Jon says. "I always said, 'Its not going to happen.' Well, of course you know it's going to happen, but I didn't want to talk about it. I'm more emotional. I didn't care about the stock. I knew I'd get my share eventually. I didn't care that Dad had it now. Maybe Mike did, because he felt a personal need."

Mike did. Aubrey still held 90 percent of the stock; the remainder was split between his wife and his sons. Michael says he wasn't worried about who would inherit what after Aubrey died. He was concerned with the here and now. He resented the fact that Aubrey gave him authority in name but not in equity. He wanted more stock as a confirmation of his position and of his father's confidence in him.

Michael's wife, though, saw that Aubrey often sided with Jon against Michael and began to speculate that Jon might inherit more than her husband. This couldn't help but affect Michael's view. Jon's wife, not surprisingly, sided with her husband. "The two wives could be a real handful," says an employee of Ward, who did not want to be identified. "I think they helped aggravate the whole situation."

It got so bad that Aubrey wondered whether selling the company to finance separate business interests was the only way to heal the family rift. So Michael got a call one day, and so did Jon. Aubrey ordered them to come to a family meeting. "He was blunt," Michael remembers. "He said 'You will be there, and we'll have this out until we figure out what to do.'"

Michael recalls that Aubrey saw three options: "One was to sell the company, and Aubrey would do what he wanted with the money. Another option was to split the company legally: Jon would take part and I would take part."

According to Gary A. Severson, the company's attorney, Aubrey had explored this option with him when he despaired of the boys ever working together again. Severson recalls: "He toyed with the idea of splitting the company into two separate companies, or creating a holding company with two operating divisions, one engaged in something that was Michael's forte, and one that was Jon's forte."

The third option was to continue with the company as it was. It would pass into his sons' hands, the stock being split evenly after Aubrey died. Everyone would agree to bury their differences and get along.

That, of course, was the solution that Aubrey had always wanted, the one that would assure the survival of Ward Log Homes as a family business. But had Aubrey waited too long, and let circumstances deteriorate to the point that it could never work? What were the chances that it could work? What would be necessary to make it work? And, if it couldn't, what was the best alternative for the family and for the business?

What follows are some suggested answers. See if you agree. Then find the actual outcome of the Ward Log Home story. — R.C.

HOW THE EXPERTS SEE IT

CONSULTANT

IVAN LANSBERG
Fellow, Yale University, New Haven, Conn.; Editor, Family Business Review.

By retiring from the management of the company but not from ownership, Aubrey maintains his influence in the company and keeps his sons dependent upon him. That doesn't lead to a good relationship. It's easier for the brothers to fight and work it out than it is for them to fight with the father.

The situation is unlikely to be resolved the way the father wants it with the sons co-managing the company as equals — unless they get lots of help. The differences in age and style and (reading between the lines) managerial competence are such that the two will have difficulty working together.

Aubrey should pass on the stock, and then one brother should buy out the other. I would put my money on Michael's doing the buying.

But Ward Log Homes seems to be in a mature industry; it may need capital to grow, and a buyout might put the company in a cash squeeze. Selling is also problematical. In a declining market, the family might have a hard time finding a buyer; if they can't get their price, Aubrey's retirement income may be in jeopardy.

The best alternative would be diversifying the company. Michael would run the basic log homes business, and a new business could be created for Jon within the company — in a naturally related field like real estate. Then a board of directors could be established to oversee both brothers' businesses. Aubrey should stay on as chairman, but the rest of the board should be outside directors. If Jon proves his ability as an entrepreneur over time, the board might create an investment fund to raise capital for other ventures for Jon and other heirs to manage.

It would also be useful to establish a family council to manage family issues; the family needs some forum to discuss and clarify their long-term commitment to the company.


OWNER

GREGORY POOLE JR.
Chairman, Gregory Poole Equipment Co., second-generation Caterpillar dealer, Raleigh, N.C.

If Aubrey wants to work it out, he should announce to the boys that he plans to turn the stock over to them provided they can resolve their differences. He should give them 30 days to come up with a plan for working together that will be acceptable to him or a facilitator.

If they can't do that, the father has to say, "Michael, you will run my company. Jon, we will buy out your stock, but you are going to have to go somewhere else."

Michael seems best qualified to manage the company soundly, Jon seems to want to run it like his father — as an entrepreneurial company, which it isn't.

If the family can't resolve the issues, selling the business is definitely a better alternative than splitting it; the business seems too vertically integrated to split.


FINANCIER

MATTHEW H. KAMENS
Director of wealth transfer for CMS Companies, a Philadelphia financial consulting firm.

Aubrey clearly waited too long. The basic issue isn't legal or financial, it's purely emotional.

What I found most striking is that everyone wants the same outcome. Michael wants to run the business. Jon wants to be in the business. Aubrey wants the business to survive with both sons in it.

Aubrey has to come to a clear understanding of the role he will play in bringing the sons together. The sons haven't gotten a clear message from him. What's needed is an outside communicator, a third party who is not emotionally involved.

When you think of it, the sons are well matched to work together. One's an inside man, the other's an outside man. One is organized and methodical, the other's more creative. One's a numbers man, the other's good with people. Once they get the green light from the father, and with the guidance of an outsider who's not under the father's thumb, they should make a good team.

The problem is solvable. But Aubrey and his wife should not risk their own security. They should do all they can to mend fences. But only when the sons establish a smooth working relationship can the family plan a transition period that will allow equity to be turned over to the sons, while providing an income to the parents and minimizing transfer tax liability. This can't happen right away, though. You can't engage in tax or estate planning with people who can't get along at the dinner table.


ATTORNEY

DAVID A. LUDGIN
Specialist in estate planning and administration at McCarter & English, Newark, N.J.

To keep Michael and Jon out of each other's hair, the company should have a written operating agreement that defines the responsibilities of each brother. It seems that the younger brother may always be reporting to the older one. But if such an agreement made clear, for example, that Jon, as head of sales, has final responsibility for hiring and firing sales representatives, it would make his life easier. Legal agreements cannot remedy every problem, but they do help to eliminate uncertainty and misunderstandings.

Aubrey ought to explain the terms of his estate plan to his sons now, so the sons are not taken by surprise later. Children should not learn about their parents' estate plan for the first time after the parents die — when the parents are not there to explain it. That leads to hard feelings among the children. Once the sons learn the details of Aubrey's estate plan, the daughters-in-law may become less intensely involved in the brothers' disagreements.

Also, the boys should have a buy-sell agreement between themselves, in case one of them dies unexpectedly.

Aubrey should set up a formal or informal board consisting of himself, his sons, and a few knowledgeable outsiders, to assure Michael and Jon that their views will be heard by an impartial panel. The board might exist as long as Aubrey thinks necessary, or might be institutionalized in the operating agreement to last for a limited time, say three to five years.

It's hard to tell if Ward Log Homes could be split into two viable companies which would not directly compete with each other. Perhaps a related business could be set up for one son.


CONSULTANT

JOHN DAVIS
Executive director, Owner Managed Business Institute, Santa Barbara, Calif.

Everyone at Ward has had a hand in permitting what is a normally ambivalent relationship between two talented and committed brothers to collapse into overt and covert warfare. Mike and Jon didn't openly discuss their goals, resentments, and suspicions with each other. Aubrey has withheld important information on his estate plan, a difficult issue for heirs to raise; he has created uncertainty that is the breeding ground for suspicion.

It's always better to manage conflict before it becomes warfare. That requires facing up to the brothers' mixed feelings about each other, creating opportunities for all members of the family to talk openly about their goals and concerns, and assigning responsibilities and authority to each brother that are clear and well-matched to each's talents.

The bottom line in managing Michael and Jon's relationship is to find ways for them to appreciate their differences as much as possible, and encourage them to support each other. They shouldn't attempt this as a puppet show; they should sit down together and openly talk about how everyone (family and nonfamily) can create such conditions. Aubrey should also level with his sons about his goals. The key is openness. The vehicle is the family council.

Be realistic: Don't expect Michael and Jon to be buddies outside of the office. They have very different styles and are 10 years apart in age. But they must learn to cooperate in the business. If they can't find a way to work together, a board of directors (a good addition to Ward) should choose one to run the business and find a way to compensate the other. Announce this up front as an incentive for them to cooperate.

WHAT THE FAMILY DID

The family meeting called by Aubrey McLaughlin was perhaps long overdue. It lasted for many hours and went surprisingly far toward relieving the tensions at Ward Log Homes.

The breakthrough began with a simple insight. "We discussed the options," Michael says, "and although it was tense to begin with, you could soon see everybody really wanted the same thing — everyone working harmoniously for the betterment of the family company."

The turning point for Michael and his wife was the first explanation of why Aubrey hadn't transferred any stock. Gary Severson, the company's attorney, recalls that up to that time neither Michael nor Jon really understood the intricacies of the estate plan. The reason had nothing to do with lack of confidence. It had to do with federal gift and estate tax laws.

Severson says that if Aubrey had given stock to the sons during his lifetime and they eventually decided to sell it, they would have had to pay more in state and federal income taxes than they would pay in estate taxes if they inherited the stock.

Of course, Aubrey could have opted for an estate freeze, in which he would turn over a majority of common stock to the sons and retain preferred stock for himself; they would later have to pay estate taxes only on the value of the preferred stock at the time of his death. But, Severson said, Aubrey was not yet ready to turn control of the company over to his sons because of their arguments.

Aubrey, Severson, and other advisors had worked out a plan that would allow maximum transfer of stock to Jon and Michael at minimum tax liability.

"Once we started getting into the facts of the plan," Severson says, "how [Aubrey] hoped the business would develop and the transfer of power would occur, everybody concentrated on the needs of the business, not the personality problem."

There were subsequent meetings with lawyers and accountants to work out the specific details of the plan but the first meeting broke the stalemate. "That one big meeting was like a purge. It got out what was bothering us," Jon remembers.

In the weeks that followed, there was, all agree, a marked change in family relationships. Severson says that Aubrey repeatedly remarked on the improved atmosphere. It was, he felt, safe to retire. In 1985, he relinquished the title of president and chairman to Michael, and Jon was promoted to vice-president of operations.

Not all the potential for friction was defused, though. "We're not real chummy," Jon says of his brother in the years since. "We have different lifestyles and different circles of friends."

Future disagreements would be moderated by a final mechanism Aubrey installed at the time of the meeting: an outside board. Aubrey, who was on a bank board in Bangor, Maine, asked two of his fellow board members — a banker and a lumberman — to serve as an advisory board to counsel Ward. Although they have no legal authority over the company, their advisory role is taken very seriously.

"Putting on outside directors is probably the single thing that's melded Mike and me since Dad's retired," Jon said. "They put tough questions to us. You don't go before the board without doing your homework." The board makes up for weaknesses in both brothers' decision-making styles and also serves Michael's need for a managerial check and balance.

Ward saw strong growth in the four years following Aubrey's big meeting. Revenue reached more than $9 million in 1988. Last year, though, the housing market slumped badly, particularly in the Northeast — the heart of Ward's market; revenue dropped 20 percent. Nevertheless, the brothers experienced no major conflicts. Each had more confidence in the other.

"Our challenge now is strengthening our marketing outside the Northeast," Michael says. Last year Ward opened up a sales office in South Carolina, the first outside of New England.

Although retired, Aubrey still comes in for a few hours each morning. "We'll discuss some ideas. I go to the board meetings and I say what I want to say. But I draw no pay, I don't want to deal with any details, and nothing is dependent on me."

Aubrey's greatest fear was that after he dies, personality friction would split the boys and the company apart. With the resolution of estate questions and establishment of the board, this seems far less likely. "I think at this point," says Michael Doody, Ward's accountant, "the way things are now, it may draw them a little closer." —R.C.

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July/August 1990

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