Case Study: Case of an Ownership Dilemma

The following story is based upon a number of situations. Names, locations and other facts have been changed to illustrate and simplify the case presented. As such, any resulting similarity to any one business or person is coincidental.

Business transitions, or lack of them, can cause some unusual issues in a business. Red Lily Printing is an example of how this can create a standoff in which owners aren’t paid for performance; rather they are paid for hours worked. The result is the business is rudderless and it has created a tangle of time “having to work”.

Red and Mary Lily started the shop in 1980. Red did everything printing-wise while Mary focused on the books and helped in bindery. James, one of four brothers, began working in the shop straight out of high school. Red was the go-to guy on everything regarding business decisions until his passing in 1999, at which time complete ownership was transferred to Mary.

Mary didn’t want to run the business, so she asked James to do so. His background was graphics, press work, and a little selling, but with no business training. Later, James married Susan, who worked as a secretary in a nearby plant.

 

Confusing Maze

In a classical “organize around people not functions” move, Susan came to work in the family business after losing her job to downsizing. She took over some of Mary’s responsibilities in bookkeeping, although Mary continues to hold on to some tasks (the checkbook) and to work daily in the bindery.

Susan is paid an hourly wage based on what she was making at the plant ($11 an hour), while James was paid a salary of $70,000 per year. Mary also earns a nominal salary of $9 an hour for half-time work, which is a classic example of paying family members based on need rather than performance.

The kicker was that James and Susan’s expenses continued to grow and they needed more than their combined salaries to make ends meet. In my opinion, because neither James nor Susan was paid more if the business earned more, James extended Susan’s hours to 60 hours a week. This put her income around $34,000, meaning that combined, James, who is 50, and Susan earn slightly more than $100,000 a year, while Mary, who is now 70, earns about $16,000 a year.

Because of the 60 hours a week Susan needs to put in, there is a time management problem. She doesn’t work on Sunday, but puts in six hours on Saturday, so she must work 54 hours during the other five days or almost 11 hours every weekday. This, in turn, means every night is a late night and, since Susan has to work, James stays with her and does “stuff” until 9:00 p.m. most weeknights.

James says that he “gets more done when people are not here.” I don’t disagree, but much of this is due to him putting off work he would otherwise do during the day, like writing up jobs. These evening hours free up his day, but those daytime hours have been filled with a diffusion of tasks to fill the hours.

His mother, Mary, on the other hand, is paid for her labor, but is not compensated for the use of the business to generate the $100,000 yearly income for James and Susan.

 

Stuck in Neutral

Now here’s another important factor. The business is rudderless because, in my opinion, no one is paid based on the performance of the company. It bumps along adequately while everyone earns what they earn through good times and bad. What’s needed is to unlock the potential of the company through a transition.

Mary should be paid for the business. We estimated the value and a payout which would pay her around $20,000 per year, or slightly more than what she is earning now. However, she would have to do no work to earn it, and thus could do some of those other things, which she indicated to me, that she wants to do.

Now, if James and Susan owned the business, they could focus on tasks that needed to be done instead of busywork. They could pay themselves what the business earns and wouldn’t have to spend the hours bulking up their time sheets. Additionally, if they can unlock pay for performance, this business will no longer be rudderless.

Yes, sometimes the lack of a business transition can cause some weird issues and this is a good example of one.

 

Tom Crouser is chairman of CPrint International, teacher of business courses at CPrint University, and principal of Crouser & Associates, Inc., 235 Dutch Road, Charleston, WV 25302, (MyPRINTRresource.com/10004688), 304-965-7100. Contact him at 304-541-3714 or tom@crouser.com. Connect on Facebook and LinkedIn and follow his tweets at www.twitter.com/tomcrouser.

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