Private companies represent almost all of the businesses in the United States. Hundreds of thousands are born each year and about as many die. They generate more than half of all paychecks and most net new jobs. They employ almost half of high tech workers and account for a high portion of all U.S. exports.
The size of this group ensures that the companies that occupy this sector vary in almost every way. But one theme tends to be constant. Their character and fortunes are subject to sharp, sudden change. Yesterday’s successful company may not be suited for tomorrow’s challenges. For many companies a basic fact of life is the risk of a downturn and even of going out of business altogether.
While the following story of a private, family business is fictional, it exemplifies many aspects of the story of companies of its kind.
Family Business Advice: From A Common Scenario
Tom Finley returned from World War II in 1946 with an idea. As an artillery officer, he’d seen heavy equipment parts that had repeatedly failed under extreme conditions. With his farm upbringing and engineering background, he had ideas about couplings and joints that would avoid most of these problems.
To create the foundation of the Coupler Corporation, Tom brought in an army buddy and a childhood friend. Financed by savings and a fortuitously timed inheritance, they spent two years creating prototypes and getting the company off the ground.
In the 1950s and 60s the business grew steadily. This enabled other family members to get involved in the company, which diversified as it expanded. The growth of its top line hid the seeds of several problems that started to hinder the company’s effectiveness. As the U.S. economy leveled out in the 1970s, some members of the family grumbled that it had lost focus on its core business.
Replacing a Leader
The founder’s unexpected death produced a drain on the business' finances; there were estate taxes to be paid and a few related party transactions that needed to be cleaned up. When the smoke cleared, Finley’s son Tom Jr. took over the business. But he had more the character of a banker than an entrepreneur. Saddled with the economic drain of its founder’s death and struggling with the need to modernize its equipment and computerize its operations, the Coupler Corporation found itself under cash flow pressure and at risk of violating its covenants. Lenders were not as comfortable with the son as they had been with his father. They talked him into a limited recapitalization and an expansion of the board with two “money men," the introduction of a new debt structure, the sale of an under performing business line and bringing in professional managers, one of whom was installed as the CEO.
By this point, stock in the company had radiated out to the third generation. The CEO brought in outside board members, who were given the opportunity to invest in the form of Class ‘B’ stock and promissory notes, solving the problems of cash flow but introducing a new dynamic into governance. These investors were really bridge loan holders, who hoped to earn an outsize return. While these expectations were never explicitly discussed, they formed the backdrop for decisions about the company’s investments, dividend policies, valuations and compensation practices.
Recap of the Family Business Scenario
What is the big picture of this typical company so far? A business arose from the talent, insight and drive of a founder. It got a boost from a growing economy and the founder’s ability to satisfy customer needs. The idea of professionalizing management and providing financing for growth, while good in itself, introduced complexity and perhaps inflated expectations of the wealth the company could generate. The company is now at risk of losing its reason for being and its ability to solve problems that are critical to its customers’ success, while making a profit doing so.
In the next article in this series we will see what happens to Coupler Corporation and consider the lessons of its story.
If your company is in a situation similar to Coupler Corporation, you may be looking for outlets and resources that can aid in bringing profits. This eBook, "3 Step Strategy To Improve Your Profitability," shows several tips that can do just that.
About the Author
As a CEO, Director and Advisor to CEOs on strategy and governance, Mike has compiled a track record of navigating complexity, refining business models and cultivating leadership. Learn more or contact Mike directly here.
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