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Executive Roundtable: Business Owners, Company Presidents
and CEOs Share Advice

Hiring a Family Member Takes Careful Thought

July 29, 2001

TEC Worldwide is an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems. The following questions and answers are based on discussions at recent TEC meetings in Southern California.

Question: I run a small commercial roofing business in the Southern and Central California areas. My brother-in-law, who works in the business, intends to move his family to Oregon, and my wife wants me to set him up with his own branch of the company. He's a hard worker and capable production manager, but he has no experience managing an entire operation. If he wasn't my brother-in-law I wouldn't even consider it. I want to keep peace in the family, but this seems like a risky venture to me. How should I proceed?

Answer: As often happens with family businesses, there are two separate issues to consider here: the family dynamics and the strategic issue of whether expansion into Oregon makes sense for your business.

Before doing anything from an expansion standpoint, said Steve Driscol, president of Thermal-Vac Technology in Orange, first have a serious conversation with your wife about the potential risks to the business.

Common sense would argue against putting an unproven manager in charge of a remote location.

Often, however, family members outside the business don't fully understand the implications of these kinds of decisions. It may help to bring in a family business expert to present an objective, unbiased opinion.

If your wife insists and you decide to move forward with the expansion, you then have a host of business issues to consider.

First, have you done the proper market research? How big is the market in Oregon? Is there room for expansion? How many competitors will you face? How big are they? What are the barriers to entry?

Next, consider the start-up costs for opening a new branch. Do you have the cash on hand to open a remote division? If not, do you have access to it through your banker or other types of lenders? If you take on additional debt, what will that do to your balance sheet? If the new branch should fail, how much of a hit would your bottom line take? Would your core business survive?

Your overall strategy also should play a major role in the decision. Do you have a written strategic plan for how your company needs to grow over the next two to four years? If so, does opening a branch in Oregon fit in with that plan or at least support its primary goals and objectives? Or would such an endeavor dilute your key strategic initiatives?

Finally, since your brother-in-law doesn't have the skills or experience to manage the remote operation, are you prepared to spend time traveling between your two locations? Or could you afford to hire a temporary branch manager to run the operation until your brother-in-law demonstrates a clear ability to take the helm?

Assuming you can answer these questions to your satisfaction, here are some suggestions for proceeding.

To minimize the risk, Dan VanderPyl, chief executive of Sonic Air Systems in Fullerton, suggests separating the two ventures.

"Because this involves a family issue, I would address it outside the corporation," VanderPyl said. "By that I mean setting up a different company with a different name. If it fails, a separate corporation won't drag down your current company, which likely represents your entire financial nest egg.

"Other less risky options might include acquiring an established company rather than starting from scratch, or expanding closer to home as a test. If the test works well, you can use what you learn to install your brother-in-law in Oregon."

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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, Ext. 3177. To learn more about TEC, visit http://www.teconline.com.

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