Only an Einstein could unravel this mess

Some bosses spin legal and organizational webs of such complexity that the company can’t function without them.

By Léon Danco

Too many entrepreneurs I know are like busy spiders. They are quite ingenious in spinning around themselves elaborate legal and financial networks that nobody else — not even the family members in the business — fully understand.

Not long ago I came across a nightmarish example of this spider organization. The father had spent most of his life as a lawyer in a big company. As a sideline to help guarantee his financial future, he had invested with a couple of silent partners in a small manufacturing company.

After he retired from his first company this man began to spend all his time running the second, which had become quite successful. Over 25 years, this little manufacturing firm had secured a portion of a very profitable niche market and was throwing off money like an oil gusher. The father was enjoying himself immensely running what had earlier in his life been a hobby.

The trouble was that he was now 81. The company had become a $50 million conglomerate with about 100 employees and he was running it like a spider, spinning webs of such complexity that it would take an Einstein to unravel them.

The father had set up multiple, overlapping corporations which bought and sold from each other. The companies were owned in varying proportions by family members and outside investors, including the 50-50 silent partners who had been the fatherÕs original backers.

Three of the manÕs six children were in the business, and each had several jobs in each of the companies. The three sons were talented but competitive and greedy; they did not appear to like each other very much. Kept in the dark about the finances of the whole, they were constantly threatening to quit unless they received raises. The other kids, two sons and a Òbaby daughterÓ (age 29), didnÕt have the foggiest notion of what was going on, but they knew they were going to be rich.

There was no board, no middle management. Just the father and the sons and some assorted ÒdomesticsÓ — production and maintenance workers and office personnel who did what they were told without complaint — or they were fired.

No decision of any importance was made without the fatherÕs involvement. For legal work, he relied on various attorneys on an ad hoc basis instead of a single firm. He used two separate accounting firms, neither of which communicated with the other or consolidated their activities. To make up for accounting shortfalls in one of his companies, another of his entities would buy from it at inflated prices. Needless to say, this paper shuffling between companies kept everyone confused and off-guard, except, of course, the spider at the center.

Almost every entrepreneur starts off with a spider organization, and there must be tens of thousands of businesses that are still structured this way. But not many this big. When you have three children in your business, 100 employees, and multiple companies, they simply canÕt be run like a personal fiefdom shrouded in secrecy, with no thought for a future without the founder.

So the question becomes: How does a savvy businessperson like this father fall into this trap? The follow-up question is: Can anything be done to fix it?

This man was happily married to a lovely woman 15 years his junior and had turned over all his stock to her. He had not given any thought to succession planning, however. Probably at her urging, he came to me for counsel: Did I think his sons could run the businesses so he could have more time Òto relax?Ó

Before anything could be done, I told him, he needed to enter the modern world. He had to simplify and professionalize his corporate structure; combine his companies into one; arrange his sons in some sort of managerial hierarchy; get some competent middle managers; buy out his silent partners; hire a single accounting firm; share his estate plans with the family. All that and more.

The father was happy with his head stuck in the sand and was not about to do any of this. It became clear that he had no real interest in Òrelaxing.Ó Although his spouse controlled the company stock, she valued her marriage more than any solution. She was happy that the husband was happy, and she was not about to risk disharmony in their marriage by insisting that he cooperate in succession planning.

Entrepreneurs like this remind me of the famous prediction attributed to Louis XV, ÒAprés moi, le déluge.Ó They seem to care little about what happens following their demise. What is certain is that the widow and the sons and a lot of lawyers will work on the destruction that will be left in his wake. The family and the employees will be the victims.

It is almost as if all these intricate webs are spun with an unconscious design, so that the spider at the center can never be replaced. Since only he knows what the legal structures are and how the various parts relate, the whole is totally in his head and dependent on his presence. In short, he must never die.

Founders like this father usually have a hard time imagining the plight of the business and the family after they are gone; they are not really planning to be gone. ItÕs a little like the story of the man who is paid to stand in front of a bar and fend off elephants. When a passerby points out that he doesnÕt do much, he answers: ÒYou donÕt see any elephants, do you?Ó

Such cases are clearly extreme, and there is little that can be done to fix them unless the weaver of the complex web — the spider — entrepreneurÑhas a real change of heart.

Secrecy is present in varying degrees in many family businesses. Families like to call it privacy. I call it secrecy. In the early years, the family doesnÕt have anything and they are afraid people will find out that they donÕt. Later, when they have made something, they are afraid someone will try to take it away.

But secrecy is a disease that spreads and eventually becomes destructive.

The biggest drawback is that it doesnÕt allow good people to help. In the case weÕve discussed, the founder is eating his own bait; when he is through, nobody else will be able to fish. He is unwilling to expense the price of succession, which demands a solid management team, a team of qualified advisors, and an objective outside board. Others will have to pay a far higher price when he is gone.

 

Léon Danco is the founder of the Center for Family Business in Cleveland and the author of four books on family business.


The basic spider organization

Spider Boss Graphic