Family feuds

How to handle kin conflict in business

Frank and Dominic Giuffre started their business relationship in 1965 with a handshake in front of their parents.

More than 50 years later, the brothers found themselves in a court fight over how to divide and untangle their business interests, including Milwaukee-based Giuffre Bros. Cranes Inc., a marina in Florida and a number of real estate holdings. Dominic sued Frank in June and while court records say the two sides are engaging in settlement talks, the complaint filed by Dominic makes clear just how far things have come since that initial handshake.

The complaint, filed in Milwaukee County Circuit Court, accuses Frank of “increasingly oppressive and at times illegal and fraudulent” business conduct. It alleges he committed or tolerated the wasting of company resources, paid himself disproportionate amounts of profits and used the business as an ATM.

Frank allegedly backtracked on an agreement to pay a bonus to Dominic’s daughter, fired Dominic Jr. on Dominic’s birthday, cancelled once weekly company meetings and restricted access to company financials.

Dominic sought a temporary restraining order in June to block any additional actions. Attorneys for Frank argued such an action would cause challenges for the business and contended the two sides could have continued negotiations. They said the outstanding issues included the value of the businesses, capital account imbalances and resolving loans to shareholders.   

“He has built his entire life around this company and this company around his life,” John Finerty Jr., an attorney for Frank, said of his client at the hearing. “It bears his name. And his brother just decided to air this poor family’s dirty laundry for the whole world to see.”

Disagreements happen in all business settings, but fights in a family business have a unique way of spreading beyond the office. When people reach their wits’ end in an average business, one person might be forced to leave. Maybe the person is fired, maybe he resigns, or maybe she leaves with a nice severance package and goes her own way.

In a family business, the fights always threaten to creep into the conversation at daily dinners, and losing a business partner can also mean splitting a family apart. Family or not, disagreements between owners can be complicated and sometimes, they may end up in court. Before long, long-simmering disputes end up as allegations in public records, immortalized in a way they were not before.

SEVILLE FLEXPACK

Take the case of the Yakich family and Seville Flexpack Corp., an Oak Creek-based flexible packaging manufacturer founded by Walter Yakich. Less than six months after Yakich died in 2014, his heirs found themselves in Milwaukee County probate court, with one daughter seeking to remove the other as the executor of the estate.

There were disputes over how to handle a Volkswagen Phaeton that Walter had owned, along with a Navy chest, a German mug and a professional-grade lawn mower.

Jan Drzewiecki, one of Yakich’s daughters, was also accused by her siblings of giving herself a substantial raise after taking over operations at the business.

Drzewiecki countered that the raise was the same one all employees at the company received and argued the allegations against her were the result of misunderstandings and resentment that she was chosen by her father to run the business.

Nearly four years after the initial court filings, the family and attorneys continued to sort out Walter’s affairs, but not before family members were jailed on contempt of court charges and the company was ultimately sold to the German firm Sudpack.

COUSINS SUBS

Cousins Submarines co-founder William Specht and the estate of co-founder James Sheppard engaged in a four-year legal battle over the sale of the estate’s shares in the business to Specht.

Another family feud involved the near sale of Menomonee Falls-based Cousins Submarines Inc. to the British firm Crosslane Ltd. Co-founders and cousins James Sheppard and William Specht were negotiating a potential sale of the Cousins Subs sandwich chain operator to Crosslane in 2007 when Sheppard died.

According to Wisconsin appeals court records, the duo had a memorandum of understanding in place to sell their stock to Crosslane for $12 million in cash and debt. After Sheppard’s death, the deal fell apart. Sheppard’s estate alleged Specht unilaterally ended the deal with an eye toward buying the estate out and then selling the company himself. Specht contended, in court filings, he did not like the way Crosslane was negotiating and felt he could not trust their offers. He also had second thoughts about selling a company he had founded and was rejuvenated by not having to deal with conflicts with Sheppard that prompted the cousins to consider a sale in the first place.

Specht did offer to buy the estate’s shares for around $3.2 million by the end of 2007. The estate countered with $6.9 million. When negotiations stalled out a few months later with the two sides a little more than $500,000 apart, Sheppard’s estate went to court. After more than four years of litigation, a state appeals court in 2013 upheld a court-ordered appraisal and sale, valuing the estate’s stock at $2.6 million.

PAYNE & DOLAN

The sign outside of the corporate office for Walbec Group, which includes Payne & Dolan, in Waukesha.

In an ongoing case, Nancy and John Dewey are suing Walbec Group Inc., which includes Waukesha-based paving and asphalt company Payne & Dolan Inc., along with Kurt and David Bechthold, over what the Deweys call “a classic freeze-out/squeeze-out oppression formula.”

The company and the Bechtholds say John and Nancy “have been at war with their fellow shareholders since 2012,” according to a motion to dismiss filed in mid-January.

Nancy is one of three children to whom Walter Bechthold passed his ownership interests equally, along with Ned Bechthold and Ellen Bechthold. Nancy and Ned have both passed some of their ownership interests to their children, including John in Nancy’s case, and Kurt and David in Ned’s case.

John and Nancy claim the companies are hiding the value of the shares through rapid depreciation of assets and concealing real estate holdings. They also object to the use of “book value” to determine the value of their shares and claim Kurt controls a majority of the shares, using his power to freeze them out of the business.

In its filings, the Walbec Group says Kurt owns between 3 and 12 percent of the entities involved and, like every other family member, is a minority shareholder.

“This is not fraud or oppression; it is shareholder democracy,” the filing says.

The Walbec filing also points out Nancy was on the company board when the “book value” valuation method was adopted. It is part of a right-of-refusal provision in the bylaws intended to prevent the destruction of “the family character of the business,” the filing says.

The current case, filed in the U.S. District Court for Eastern Wisconsin, follows an earlier lawsuit John filed in Waukesha County Circuit Court in 2013 that was ultimately dismissed. In a statement, Walbec spokeswoman Summer Strand said “these latest bogus claims sound like a broken record that has been heard and rejected before.”

“The Walbec Group and its affiliated companies have been successful for more than 85 years, and a scurrilous lawsuit with trumped up falsehoods won’t change that,” Strand said.

Attorneys and representatives for those involved in other cases in this story either did not respond to requests or declined to comment on their cases.

PRE-PLANNING AND COMMUNICATION

In the Giuffre case, Milwaukee County Circuit Court Judge William Sosnay ultimately denied the motion for a temporary restraining order, but he also urged the principals in the case to use available settlement options, noting it would be less expensive than litigation.

“The principals themselves are not necessarily the sole cause of why we’re here today,” Sosnay said at the hearing. “They have relatives and those relatives I’m sure are pushing buttons which are pushing the principals and further separating them from achieving the ultimate goal that perhaps both of them want to see happen.”

Family fights, particularly those that end up in court, can drag on for years and drain value from a family-owned business. But family businesses also have advantages. They can offer some financial stability and independence for owners, along with the ability to create a legacy.

Family businesses also have an edge in recruiting workers, with 54 percent of respondents globally saying they would prefer to work in a family business, according to a 2017 Edelman survey. The same survey found people – by a 45 point margin – are willing to pay more for products or services when they know they are buying from a family business.

“When it’s your name on that door, there is a tremendous amount of responsibility that goes with that,” said David Borst, executive director and chief operating officer of Family Business Leadership Partners.

How, then, do families avoid reaching a point where their fights spill into the public eye? When does a simple handshake agreement built on loyalty and trust need to turn into a formal set of policies and procedures? How can one generation ensure the next generation will follow its wishes? As families grow, what does it mean to treat everyone fairly? How does a family welcome in a new spouse while protecting a legacy?

The answers to those questions are as simple and as complex as communication and prior planning, experts say. While many families might think they are close-knit and, as a result, won’t have to worry about conflict, Borst says they should expect the opposite.

“It will happen to your family, regardless. I have seen literally fights over a nickel,” Borst said. 

“Expect that there is going to be a problem,” Borst added. “If there isn’t, it’s probably an indication that you’ve done a good job of pre-planning and getting your ducks in a row and having the right conversations with the right people.”

Brad Herda, a certified FocalPoint business coach based in Sussex, said it is important to have planning conversations when family members are in good health and relationships are strong.

“Waiting until the primary equity owner doesn’t have a voice is always very, very dangerous,” Herda said.

“There’s lots of ways to do it,” Herda added. “Without a plan, though, and when you’re not in good health or in good relationships, it becomes really, really ugly when you’re starting to talk about potentially hundreds of thousands or even millions of dollars.”

HOW THINGS GO WRONG

The Giuffre Bros. headquarters in Milwaukee.

While there may be plenty of ways to set up a family business or manage the transition from one generation to the next, there are also plenty of ways for things to go wrong.

Herda said many of the conflicts he sees involve family members not understanding the differences in compensation for those working in the business and those who simply own part of the business. Other challenges include dealing with changes in the business value or having clearly defined buy-sell agreements.

Borst said he’d like to think most families would be challenged by the intricacies of succession planning or how the business is structured. But in reality, he said many families are confronted with personal issues like a father approaching retirement but refusing to share financials with the next generation.

“It’s those kinds of interpersonal conflict issues that really, I think, are more difficult to overcome because it involves ego,” Borst said.

He added that many of the conflicts he sees involve an older generation trying to stay on too long or a younger generation trying to take control too soon.

“That creates tremendous interpersonal conflict,” Borst said.

The reality is in many cases, particularly for founders, the older generation has put decades into building a company. The business has become the founder’s largest asset and represents future financial security, either through a buyout or some other system. Borst said older generations have also watched the next generation grow up. They know about their children’s strengths, but they also know about their faults and mistakes.

“They come and they say, ‘I’m ready to take control of your company.’ You have to really trust that they are prepared and that they are confident that they can do the job, because in a lot of situations your future, financially, is going to rest in their hands,” Borst said.

Founders may be right to have some concerns. A 2018 survey of global family businesses by PwC found 42 percent of first-generation firms were experiencing double-digit sales growth, compared to 32 percent in the second generation and 27 percent in the third generation.

At the same time, the next generation can bring new ideas and direction to the business, particularly in the area of technology, Borst said.

“That new generation brings in a newness, lots of possibilities and a lot of hope,” he said.

Herda and Borst both emphasized the importance of planning ahead. Herda said it provides everyone certainty on what they will do when the business arrives at certain transitions or milestones.

“Pre-planning, it gets you about 85, 90 percent of the way,” Borst said. “Then as you really kind of close in on the last six months before the handover takes place, then there are some other changes that are dependent on the times we’re living in.”

He pointed out that things like changes in the tax code can mean a planned transfer of an asset should be handled differently. It’s important for business owners to continually review their plans to adapt to changes in regulations and in the business, Herda said. Both recommended business owners utilize a team of service providers, including lawyers, accountants, bankers and insurance agents. Borst said it is important to turn to those with experience working with family firms.

“There are some businesses that simply just don’t understand the nuances of family businesses,” he said.

Herda said there are many business owners who do not consider those nuances themselves. The founder assumes the title of president and focuses on day-to-day operations without paying attention to return expectations or succession planning.

“Many family business owners go to work every day saying, ‘I’ve just got to go to work every day,’ and they don’t think about the ownership piece,” he said.

MAKING THINGS RIGHT

German firm Sudpack acquired Oak Creek-based Seville Flexpack Corp. Family members fought over the estate of the company’s founder.

With or without a long-term plan, more communication among family members can help de-escalate a situation when conflict begins to emerge.

“It’s simple to say, hard to do,” Herda said.

Consider a family business in which four people – a father, son, daughter and uncle –  each own a 25 percent stake in the company. The father and son are the only ones working in the business and grow it from a $4 million to a $15 million valuation. Should everyone’s stake still be worth the same given the time and effort the father and son put into the business?

“That’s where the resentment piece starts to come in,” Herda said. “Having clarity as to what happens when that increased value comes about and how that’s split, that’s very, very crucial to have that conversation.”

Herda said families also need to understand the differences between payroll compensation from the business and ownership compensation.

“They’re really two different things and then that’s when things get messy, when you start taking it out to the family members who aren’t working for the business, but they’re expecting compensation,” he said.

“One of the biggest problems we have in family businesses is people like getting the dividend checks, but there’s also a whole group of people that are getting the dividend checks and are actually working in the organization,” Borst said. “Those are some distinctions that need to be made.”

Money and the emotions of family relationships can be a spark for conflict. Absent regular communication and planning, families could be forced to jump into the deep end when issues emerge. Borst said he recommends families hold an annual retreat to have important conversations. The retreat can include fun and recreation, but should also have time set aside for a business meeting. Having a planned time for tough conversations, after all, is a much better venue for them than waiting for an issue to pop up at the dinner table on Christmas Eve.

Particularly for larger families, Borst also recommends a monthly or quarterly update to share the latest happenings in an honest, open forum. He said it is easier to keep communication going when there are one or two children and both work in the business. Communication across large groups and multiple generations becomes more difficult.

IN-LAWS AND THE NEXT GENERATION

Passing the business to the next generation also presents the potential for conflict.

“There’s an assumption that a lot of people make that just because mom and dad own a family business that it’s mine, too, just because I was born from them,” Borst said. “That’s not necessarily the case.”

A business might eventually be passed on by inheritance or some other method, but Borst said there is no requirement to do so and that should not be an expectation. He suggests letting children experience the business as young as six or seven years old, even if it is just taking the garbage out or coming to visit. In high school and college, parents should have more serious conversations about the future and make plans accordingly.

Introducing children to the business presents one challenge, but the prospect of adding spouses to the ownership picture is even more fraught with potential conflict. Borst said he recommends prenuptial agreements to protect families, noting that nearly half of marriages end in divorce and it is not worth the risk to the family business.

“That’s a very awkward situation because typically the young person doesn’t want to tell their loved one that, ‘Well, we’re going to start our relationship on the basis of mistrust,’” Borst said.

An in-law can also present an opportunity to pass the business to the next generation, but Borst said owners “need to be darn sure they understand the values and everything that’s gone into the business.”

Whether the business will transition to an in-law or someone else in the family, Borst said he recommends owners record an ethical will to convey the values of the business. He said making a video provides a more visual reminder for future generations and can include ethical policies or specific acts, like an annual Christmas bonus.

As families grow and ownership of the company expands, both Herda and Borst said it’s important to note dividing things fairly does not necessarily mean making the division equal.

“Maybe it’s a straight split of the shares, but maybe it’s not all voting, because you don’t necessarily want your dentist brother making decisions on an injection molding business because he doesn’t know anything about it,” Herda said.

He added that it’s important to set expectations for everyone on the company board or in ownership, calling it an “underplayed” area of family businesses.

Depending on the conflict and existing relationships, Borst said it is OK if a business owner decides it is necessary to cut off or distance the operation from a family member.

“You may have to do that,” he said. “It may be in the family business’ best interest.”

As a business grows, more people beyond the family count on it, including customers, vendors and employees, Borst said.

“You have to keep in mind that when you’re in business together, it’s not just about the family; it’s about others, as well,” he said. “That’s what you sign up for. That’s the tough calls that you have to make when you have a family business.”

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Arthur Thomas
Arthur covers manufacturing for BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.