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Put Business Strategy Before Family in Deciding Firm's Expansion Readiness

November 05, 2001

Executive Roundtable is a weekly column by TEC Worldwide, 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 in a round-table session. The following question and answer summarize a discussion at a recent TEC meeting in Southern California.

Question: I run a small commercial roofing company in Southern and Central California. My brother-in-law, who currently 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 a capable production manager, but he has no experience managing an entire operation. If he weren'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, says 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 of 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 for the business 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 three to five years? If so, does opening a branch in Oregon fit within 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," he explains. "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."

Mike Valentine, president of Tustin-based DMK Inc., strongly recommends going into the market with a specific business plan that has clear goals and key performance indicators.

He also suggests setting a limit in terms of the amount of capital you will invest so that if the project turns sour, you know when to pull the plug.

"Without some guidelines and financial goals, you can easily lose perspective and keep pouring money down the drain," he says. "As the business owner, only you can decide how much to risk. But you dramatically reduce that risk by drawing some lines in the sand before you take the plunge."

Even with adequate research and proper precautions in place, Don Dressler, president and CEO of Western Growers Insurance Services in Newport Beach, feels the risks are too high. His approach would have the brother-in-law get a job in Oregon and prove himself with another company. Once the brother-in-law demonstrates the ability to manage an entire operation, then you could seriously look at opening a branch and putting him in charge.

"It's always easier to enter a new geographic area with someone who knows the ins and outs of the local market," Dressler says.

"Let him get a job up there and learn the market. If he's a hard worker and willing to learn, he shouldn't have too much problem finding a position that will test his skills and abilities. If it doesn't work out, let him know he has a job waiting with your firm back in Southern California.

"This involves a family issue and a business issue, and my experience is that you just can't mix the two."

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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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