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The Partnership charter

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Families Prevent Second and Third Generation Business Failure through Sensitive, Provocative Dialogue

Norm Cates' The Club Insider. The Pulse of the Health and Fitness Club Industry

by Richard Yocum
The Club Insider
June 1998

Imagine the following profile: Their vision was clear; all made sense. Barry and Sandy Gilman would naturally turn over the clubs to their three children while Barry and Sandy eased towards their retirement, split between the villa in Costa Rica and the lake home in Michigan. Naturally, the kids could call anytime to seek advice (hopefully not too often); but the Gilmans just knew things would work out. After all, this business was a wonderful environment in which to raise a family. Maybe their grandchildren would eventually come on board. The future looked promising.

William, age 43, the oldest child, had a keen sense for the operations and focused a conservative eye on the numbers. While his “people skills” were not as polished as his Dad’s (Barry was known in the industry for his negotiation smoothness and his way with people), William was respected for the business integrity he always displayed. A proper family man, he was stable and dependable. Eric, 40, and the second born, was gregarious, playful, and well-liked by the pros and the staff. His early trouble with alcohol and mild drugs was in check, and his marriage appeared secure. A natural athlete, he brought a competitive spirit to the business and the fitness community. You could count on him for creative events and promotional ideas—a real marketing asset. Jennifer was turning 35 and was in a serious relationship now, a few years following her divorce. She split her responsibilities between being a part-time tennis pro and running membership sales. A bright, intense woman, Jennifer was a risk-taker and pressed her parents to open the fourth property, already a successful venture.

Barry was confident the right instruments were in place to protect Sandy, should he predecease her. Naturally, she would sell the business if he died tomorrow. Their unanswered questions, however, were numerous:

  • Sell the business? Really?
  • Turn over the clubs to the next generation?
  • Retire? When?
  • Chairman of the Board?
  • Leadership? Who? How? When?
  • Fifth and sixth properties?
  • Spouses and third generation involvement?
  • Equity sharing with key staff?
  • Sabbaticals for one or more of the siblings?
  • Roles and power?
  • Equal, greater, or less compensation, vacation?
  • Funding for post-graduate education?

In every family business, so many things can happen—there are so many “what-ifs” and so many possibilities. Why do we avoid open, blunt communications about these “What-if?” scenarios? Fear. We often are afraid to concretely express our own intentions (with dates) for fear of letting go of the identity we enjoyed, the success we founded, the “place to go to fulfill our dreams and our obligations,” the pain and the privilege of owning and growing a successful family business. Perhaps the next generation can run it better. Perhaps not. What else prevents us from having heart-to-heart “what-if” discussions? Sometimes there are things we would rather not hear. Denial is a powerful tool.

The Gilman business is a case full of opportunities or land mines, depending on how they handle this transition. Already, we have guessed what might come out of these scenario discussions:

  • William, the stable one, and Jennifer, the visionary, each want to be President.
  • Eric has a dream of leading treks through the Himalayas and starting an “outward bound” business capitalized by the clubs.
  • William’s wife, Amy, talks about working part-time, now that all four of their children are in school.
  • That new freeway the city keeps talking about could affect two of the properties in about three to four years. William considers politics.
  • Jennifer wants to develop a new sports beverage.
  • To date, six third-generation children require education funding. Jennifer wants a baby.
  • That sexual harassment complaint filed against a staffer is still a nuisance. Eric thinks about law school.

It is no wonder second generation family businesses experience such a high mortality rate. Life happens. We would like to believe rational minds prevail but we know better. So often when the founder(s) of the business “check-out,” they take with them the roles of wise decision-maker, referee, visionary, leader, mentor, and parent. Predictably, siblings will operate in business similar to the way we watched them (and sometimes did not observe, or chose not to see them) grow up in the family. Facing the sensitive issues prior to, during, and following succession is critical for healthy transitions. How do families effectively deal with such sensitive topics? Some have a long tradition of operating family councils, a setting which is natural for engendering such open dialogue. Council meetings are planned well in advance and the attendance rule is inviolate. The agenda is organized and often incorporates “play.” It is not uncommon for spouses to participate; in some cases, a significant other may be included, as appropriate. Council meetings are not business meetings—these are family business meetings. It is not unusual for these sessions to be facilitated by a non-family third-party. This individual is responsible for helping to set the agenda, facilitating the session and summarizing and distributing notes and agreements produced in these sessions.

Without establishing a family council formally, family principals need some process in which they can address sensitive and hard questions. They need some method for prioritizing issues and generating agreements, providing the foundation for action plans and genuine accountability. Some families are able to manage the process without third party assistance but this can be challenging when issues of power prevail as they usually do.

Let’s examine characteristics of effective sessions:

Facilitation: So that each member can be expressive with parents, siblings and others, everyone is required to listen and acknowledge each others’ views. The facilitator makes progress happen.

Operating Agreements: Developed with the help of the facilitator, these guidelines establish how participants in the session will run their meeting (preparation, participation, session conduct, parameters of time). These set the “culture” of the sessions.

Documentation: When agreements are reached, all parties literally sign-off on them. Session notes are summarized and distributed, keeping the on-going process on track and productive.

“What-if?” Scenarios: A vital part of the process required early on and renewable over time, these scenario discussions evoke feelings and considerations; when shared, they contribute to healthy decision-making and, so often, prevent family crises from developing over the business. Scenario discussions are best spread out over several meetings.

Expectations: The more clear family members become about what each wants to bring to the business and what they expect from each other, the less likely the business is to run into problems because of unexpressed assumptions, hidden agendas, and family secrets.

Location: Due to the level of intimacy achieved in these sessions, it is advisable to meet off-site in comfortable, neutral surroundings.

Frequency and Duration: At first, biweekly four to eight hour sessions are indicated. As progress develops, monthly and then quarterly meetings provide spacing and continuity.

Conflict: It is likely disagreements will surface. Count on your facilitator to help mediate disputes and determine the level of priority for conflictual issues. Some conflicts will not be resolved in one session. The subject of and process for conflict resolution should be an agenda item of its own.

The Gilman family enterprise appears to be intact and vital. The family itself seems loving and healthy. Yet, without a prospective, preventative process in place, the business is at risk of becoming a statistic in the research on failed second generation businesses. Over a period of four to twelve months, Barry and Sandy and their children can engage in the most valuable strategic initiative related to their business: the family business dialogue.

Our attorneys and accountants masterfully craft instruments to protect us and our loved ones from untimely death or disability. Necessary…but not sufficient. It takes honest, open, provocative dialogue about sensitive issues to help keep the business in the family, and the family in business.