A modified approach is required.
May 2018 Vol. 7 No. 5

Closely held businesses with a handful of key players are different than those with a single, dominant owner or most other public or private companies. 

As a result, working with them, particularly in times of financial distress, also requires a modified approach.

Today's newsletter takes a closer look at how to proceed.
All the best,

Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue...
Closely Held Businesses: Why They're Different; How to Work With Them

Often, my clients are closely held businesses with just a handful of key players. That is to say, there are effectively several owners and/or operators involved, along with their respective personalities, life histories and interests. Taken together, all of this leads to potential conflicts and, often, obstructive behavior.

Typically, these are family run businesses. But they can also be businesses owned by a small group of involved owners. The common thread is that there are a handful of active players with different interests, concerns, motivations and personalities.

In a family owned business in crisis or strain, Dad, for example, may be concerned about his legacy, while his children (who have never worked anywhere else) are concerned about being thrown on the street with limited funds and job prospects. Or maybe there is a CEO who has all his wealth in a business in which he controls just a small piece, and he is worried about losing everything.

Whatever the specifics, closely held businesses with a handful of key players are different than those with a single, dominant owner or most other public or private companies. As a result, working with them, particularly in times of financial distress, also requires a modified approach.

What follows are my tips for outsiders in the position of helping one of these companies when time is of the essence:
  • Don't try to "fix" or resolve conflicts among the ownership parties. It's too late. Yes, there may be partial or complete solutions to make things run more smoothly, but they take too long to contemplate and a new, outside party is rarely in a position to propose such a solution. As an outside advisor, assume that you must work around existing difficulties.
  • Stress the facts behind your analysis. While it is always important to be objective and fact-based, this is especially true in these situations. Doing so shows impartiality among the players.

    This can become tricky, however, when the data is not readily or quickly available. Often, and because there is limited time for validation, a CEO's or other executive's views on how markets work and so forth are used as a starting point. Be careful here: Push for validating facts from the operator or wherever you can find them. Otherwise, the other parties will consider your views to be "his" views.
  • Don't become a proxy for the bogeyman. Whomever the bogeyman happens to be in a given situation - the lender, one of the owners, etc. - you don't want to be aligned with him. Once that happens, the owners' frustration with that party gets transferred to you and operating becomes that much more difficult.

    On one assignment, for example, I was brought in by a Federal Receiver to run a business that was being sold. The founder/owner lost big time litigation with a mega-company. While the owner had many shortcomings, including all sorts of deception, troublemaking and so forth, the Receiver had become one and the same as mega-corp in the owner's eyes. So, the owner aggressively obstructed the Receiver.

    My success was due in large part to my coming across as objective, respectful, and willing to listen to the owner's "henchman" on site. That didn't stop me from executing the Judge's orders to close a sale of the company, but it made things go a lot more smoothly.
  • Try and get the owners/family to have their own set of advisors, particularly legal advisors. In many situations the legal interests of owners and the company can diverge. Moreover, a good advisor can address other concerns of family members, etc.

    For example, I was involved with the bankruptcy of a scrap metal company in the Midwest with operations in several states. Dad stayed at home while his daughter priced most scrap purchases. Until we arrived, the owner personally counted bags of money delivered by an armored service (the loan agreement wouldn't let the owner use his own truck drivers anymore!). Several other children were employed in the business too. One ran one of the larger scrap yards, another was in sales.

    The family brought in its own counsel (in addition to the company's) and that helped immensely. The new family counsel did a good job of protecting family assets and, importantly, got Dad to lay out the family finances in sufficient detail so that the children were no longer concerned about their own financial futures. (Note that, as mentioned earlier, the advisor did not attempt to resolve long standing family conflicts and other issues during the bankruptcy process.)
  • Identify the proxies for the owners and various parties; use them to get the job done. Often, the owner, former CEO, one side of the family, etc., has "their" person on site. They act as the owner's eyes and ears and sometimes as an advisor. If you want to know what is on their backer's mind, listen to them. If you want to sway the owner or similar parties' thinking or interests, work through their proxy.

    In the Federal Receivership case mentioned earlier, there were two guys who were the primary eyes and ears for the owner. One was a technical expert (and martial arts master on the side). The other was "muscle" to move heavy equipment and so forth, as well as an amateur boxer, convicted car thief, and technical expert on obsolete equipment. Both would come to me with "issues." I took the time to listen and address their concerns. As I earned their trust, the level of owner problem-making subsided.
  • Set forth the objective to those involved. In my experience, that is usually to sell or liquidate the business to maximize recovery for creditors. Most people expect (and appreciate) being led. So if that is what you are there for, share your objectives and lead them. Done properly, this new goal can focus the organization and divert (or at least reduce) attention paid to outside, interfering parties.
Closely held businesses are unique. When jumping in, don't try to lead as the conductor. Success comes from having the Quartet play as well as possible together, and by themselves.
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About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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