Employing family members can be tricky business. To your benefit, common culture, work ethic, trust and loyalty often run strong among family members who work together.
However, having relatives on staff or in leadership can also present a challenge. What if that person isn’t a good fit for the job? Or the job isn’t a good fit for the person? You may all feel as if leaving employment in the family business is tantamount to being ripped from the family portrait.
Separation involving a family member can be a minefield with the potential for doing long-term damage to personal relationships. During these times, you must preserve the family while also doing what’s best for the business.
That was the challenge for Rick and Marilyn Nelson, owners of Nelson’s Ace Hardware in Whitefish, Montana. They began their careers in retailing with a difficult family partnership situation and had their doubts about whether the business would survive at all.
Today, sales are strong and they are preparing for a successful transfer to the third generation. Getting to that point wasn’t easy, but along the way, the Nelsons gained a wealth of insights about working alongside family.
Whether the family members working for you are dream employees or you’re facing the challenging situation of their departure, you can make managing family equitable and positive for all involved. Many delicate situations can be managed with proper planning and open communication.
At a Stalemate
Rick and his brother Don grew up in the family business. Their parents had purchased a failing hardware store in 1948 and worked hard to make it profitable again. When the senior Nelsons bought the business, there were six other hardware stores in the area. By the time they were ready to retire, their operation was the only one left. They were proud of the business they had built and assumed their two sons wanted to follow in their footsteps.
“The problem was that neither Rick nor Don had chosen hardware for themselves,” Marilyn says. “It was more of an expectation from their parents that their children would be the next owners. There were expectations, but they never really talked about them as a family. Both sons received a 50/50 ownership in the business, and that was the beginning of 32 years of a very challenging partnership.”
Neither brother wanted to disappoint his parents. Despite his misgivings about being an owner, Rick decided he would dig in and work hard. Don was more interested in other pursuits, such as serving on city council and developing other business interests. He spent twenty years dutifully showing up for work he found unsatisfying, before following his heart in increasingly frequent trips abroad. But family considerations led him to keep his shares of the business. Overworked and lacking resources to hire additional help, Rick struggled to pay the bills. Marilyn took a second job to bring in extra money. Tension in the family was growing.
“Rick couldn’t force his brother’s hand due to the 50/50 partnership,” Marilyn says. “He just continued to work long hours with little vacation. There was no capital to hire someone else to alleviate the workload because both brothers were taking an equal salary.”
Then, starting in 2005, a series of unfortunate events broke what seemed like a never-ending stalemate. Don and his wife decided to divorce, and the business shares were marital assets. Through a series of negotiations, Rick was able to purchase Don’s shares so he would have full ownership of the business. He then reconfigured the corporation for estate planning purposes, but, learning from the lessons of the past, Rick retained majority ownership in a new partnership with Marilyn. Whatever might happen in the future, there was now only one person, Rick, with final say in what happened in the company.
Rick also wanted to make sure the transaction was fair to his brother to guard against lingering resentment from that side of the family.
He paid full price for Don’s share of the business, which was based on a value assessed by an independent appraiser. Getting an appraisal from a third party assured the deal was fair to everyone involved.
Minding Family Business With a Business-Minded Approach
There may be little you can do if faced with a situation similar to the Nelsons, created by two owners with equal share in the business. But you can make sure it doesn’t happen again. David Karofsky is senior consultant with The Family Business Consulting Group. He has extensive experience helping family businesses be successful in areas such as leadership transitions, strategic planning and conflict resolution. He offers three ways you can mitigate conflict and help set up the next generation for success.
If you own a business and have children, clarify what you do or don’t expect from them. Make sure they know that they are not letting you down if they decide to choose a different career path. Some retailers, like the Nelsons, even insist their children step away from the family business for a time and explore other career paths or work for another company.
One way to avoid potential problems is to make sure family members have a skill that matches what you need.
“Find the right seat on the bus. If you can match the skill sets of the individual to the needs of the business, then that is what will drive it forward, but you have to find that best match.”
Leadership ≠ Ownership
When passing the business on to the next generation, arrange the leadership structure to set your children up for success. There needs to be an opportunity for majority rule, and it’s possible to do that while still treating the children fairly.
“You have to separate leadership from ownership,” Karofsky says. “Ownership may simply represent having a share of the company. Leadership has to do with the day-to-day operations of the business.”
“Always be asking yourself what is in the best interest of the business and what is in the best interest of the family. Those two answers are not always going to be the same.”
Have the Right Documents
Whatever arrangements you make, having the proper legal documents will make sure everyone knows what to expect. Karofsky suggests multiple owners set up a shareholder’s agreement, which will define who has controlling shares and who has voting shares.
Compensation should reflect the role an individual performs. Two siblings with equal equity in a business do not necessarily need to have the same compensation just because they are both owners.
“Set up equity arrangements ahead of time. Two children may each get a 50/50 share in the business, but only one will have voting shares and the other will only have equity shares.”
After that, the family was able to put the tough situation behind them. And Don was able to spend his final years doing work he loved, as a gifted nature photographer and international adventure traveler and guide, until his untimely death in 2017. The remaining family still gets together for holidays and family events, including recent celebrations at the store.
Key to the Nelsons’ success through the process was putting family and business in their proper place. Protecting both is important, but putting the interests of the family ahead of business interests may be counterproductive. A poor decision made because of a family situation could cause the business to fail. It’s better to separate the two when it comes to making a difficult decision involving family members.
“To survive a separation from long-term family partners, you need to air what needs to be aired and try to depersonalize it. The family is more important, but by depersonalizing the dialogue and putting the business needs first, we were able to navigate very difficult conversations around our joint desire to protect the business that Rick’s parents had worked so hard to create.” Marilyn says. “You have to preserve the business without letting your personal issues get in the way and always seek the ‘win-win.’ We are so grateful that Don was able to really embrace his life outside the store in his remaining years.”
The Nelsons made deliberate choices to avoid having similar challenges in the future. Whereas Rick’s parents had the expectation that their children would continue the family business, Rick and Marilyn made it clear they would not do the same with their three children.
“We went as far as telling them that the business wasn’t going to be available to the third generation,” Marilyn says. “They all got their degrees and moved away, working other careers.”
When their youngest daughter Mariah announced her desire to someday run the family business about 12 years ago, it was on her own terms. Trusting she was up to the task, the Nelsons began a succession plan that would allow Mariah to purchase the business and maintain full control of the leadership while making provisions for the other siblings. She is poised to take ownership next year.
In 2005, when the Nelsons were struggling with the dual ownership, annual sales were around $1.5 million; this year they will top $3.5 million. The family just moved the store to a new location in a new building, and they’re looking ahead to continued growth in the future.
Rick and Marilyn have taken the lessons learned from a difficult situation to develop a succession plan that serves the business and the family well into the next generation.
Knowing You’re Not the Right Fit
A difficult conversation with any employee, family member or not, can be easier if you know their perspective. When the Nelsons’ son-in-law, Brett Nail, was looking for a new opportunity, Rick and Marilyn offered him a job at the store. As Brett showed the potential to be a future leader in the business, they began to transition him into a managerial position.
While Brett worked hard to learn the business and his new managerial role, it became evident that the pressures of the job were taking a toll on him and his family. He was increasingly unhappy.
“We were clear in our expectations of what the job entailed,” Marilyn says. “And we never tried to sugarcoat it. But as time went on, we all began to realize that leadership at the store may not be the best choice for Brett and his family long term.”
Fortunately, Brett had the courage to make the necessary change. He approached Rick and Marilyn to say he needed to leave the business and make his way elsewhere.
Brett worked at Nelson’s Ace Hardware for about seven years before he decided to move on. Today, he’s a realtor and owns a rental franchise, and he loves working for himself. Here’s what he had to say about his decision to switch careers.
Choosing to work in hardware.
“My plan at first was just to work through the summer until I found another job. Then seven years later, I was managing the store. I’m a people person, so I always enjoyed being with customers, especially in a small town where you get to know a lot of people by name.”
Deciding to leave.
“Managing employees was difficult. What triggered my decision was that I got to the point where I was waking up in the morning and wasn’t happy to be going to work. Once that started happening, it was time to move on. It’s not productive for anyone to be unhappy with what they’re doing.”
Having the talk with his bosses—his in-laws.
“It was hard to make the transition out of this job, and it weighed on my mind for a while. Once I finally decided to have that conversation about leaving, my in-laws were understanding. They are great people and easy to talk to. They always said from the beginning that if the job wasn’t for me, then I shouldn’t do it.”
Helping others handle a similar situation.
“Be upfront and honest with your feelings. If you’re not happy in your job, let your boss know. It doesn’t do anyone any good if you don’t enjoy what you’re doing. Employers need to have that same openness with their workers, too. If someone wants to do something else, let them do it.”