Sibling Partnership Issues in the Expansion/Formalization Business

It is easy to see that a growing company needs cash. Reinvestment of profits seems like an automatic decision from the business perspective. However, as we have mentioned earlier, families at this stage face an extremely difficult squeeze, as the family also has pressing current and future needs for capital. Consider the various legitimate competing demands for cash that these families face in the short term:

• 1. Reinvestment in the company.
• 2. Launching the children (education, help buying a home).
• 3. Other lifestyle expenses (mortgages, health needs, travel).

In addition, there is the issue of asset diversification. Families at this stage must consider the wisdom of having all their assets tied up in one investment, the business.

The financial requirements of the Expansion/Formalization stage will almost certainly require a combination of reinvestment and new sources of capital. One advantage of the Sibling Partnership stage is that, if the company has managed its transition from the Controlling Owner stage well, there should be solid professional relationships with lending institutions that can be used to generate appropriate debt. With the institutional lenders looking over the family’s shoulders, the pressure is increased in the Expansion/Formalization stage to put profits back into the company, for the expansion of capacity, acquisitions, new product lines, or marketing. Owners in management often find themselves trying to “sell” conservative dividend policies and reinvestment within the ownership group.

Two of the primary competing uses for earnings in the Entering the Business stage are the expenses that the parental generation incur helping their children get established and supporting an increasingly luxurious lifestyle. If the business is successful, there is the natural inclination for its owners to want to experience some of the benefits of that success. That often emerges as a desire to give the younger generation a boost. The family dynamics may work in favor of cash as a reward to those offspring who decide to enter the business, in the form of educational support, help with a home, underwriting of recreation and travel, and many others. On the other hand, the parents may feel inclined to compensate those offspring who choose not to work in the firm (or, even more so, those who are not invited to join). This may take the form of other kinds of educational support, the bankrolling of some other business or professional venture, or a lump-sum compensatory gift.

At the same time, the parental generation may feel that it is foolish to wait any longer to upgrade their own lifestyle in keeping with their seniority in the business. This may be the time they want to move to a more luxurious home or an upscale neighborhood, travel, or take a more visible philanthropic role in the community. Now that the children are gone, a spouse not in the business may want to invest in education or a new entrepreneurial venture of her or his own. All of these investments and expenditures require cash. Each owner will be in a different situation depending on the spouse’s desires, the number and ages of children both inside and outside the business, and his or her values about lifestyle. The debates in the ownership group about dividend policy and public image may become very heated at this stage, even if there has been consensus and harmony in the past.

In many firms, one of the consequences of the transition into the Expansion/Formalization stage of business development is that unspecified “partnerships” are replaced by more formal hierarchies or divisions. This often means that the distribution of power, authority, and autonomy in the management structure is different from the distribution of ownership shares in the Sibling Partnership. This can be a major source of strain and a real test of the family firm’s ability to assess the needs of each of the three dimensions separately. In sibling groups with equal divisions of shares, for example, it is obviously in the company’s best interests to assign management roles according to ability, instead of mirroring the ownership distribution by maintaining equity in management seniority and the size of the division managed by each sibling partner. In those Sibling Partnerships where one or two siblings hold larger blocks of shares, it is also in the company’s interests for minority sibling managers to be allowed to grow and rise in the hierarchy according to their performance, not their shareholdings. Unfortunately, many Sibling Partnerships at the Expansion/ Formalization stage cannot manage this tension, and some siblings feel undervalued and overrestricted. If enough of them feel unfairly treated, they may seek to leave the company or redeem their shares, sometimes forcing a sale. If the business survives the loss of capital, it may revert to the Controlling Owner stage of ownership development.

Finally, an additional stress on capital reserves may come from the retirement needs of the generation that preceded the Sibling Partnership. In the Kopek family, Bernie and Mitch are aware that the company will pay generously to support Miriam for as long as she lives. This is money that will not be available for reinvestment in the company to support growth. Asset diversification may not seem like a real option to the founding generation, but it is a clear option for sibling partners. Careful planning is needed to minimize the impact on operations when cash is diverted to fund current and anticipated retirements.

The needs of nonemployed children must also be considered in investment and estate planning. Parents have several options: to split the ownership of their share between their children or to accumulate other assets, which would go to the noninvolved child. In the Kopeks’ case, to split Mitch’s stock between Mark and Abby would leave Mark without voting control and could disadvantage Mitch’s branch (assuming that Benjy got all of Bernie’s 50 percent). In addition, Mark would have to deal with an uninvolved family member as a significant coowner.

In a second option, Mark would get the company and Abby would get perhaps a small share of the company but also something else. The “something else” is elusive, however. Mitch and Betty both have small IRA accounts, and they own a heavily mortgaged house in need of repairs. All of their discretionary income has gone to pay college bills. In addition, they are in their late forties, and there is not much time left to build a nest egg for Abby, while they are funding their own retirement.

Sibling Partnership Issues in the Entering the Business Family

The second ownership challenge that arises at this stage is planning for the future ownership structure in light of the younger generation’s transition into adulthood. Will ownership become more or less concentrated? How and when will stock be transferred to the new owners? Generally, despite the warnings of some family business consultants, stock ownership tends to become more dispersed at each generational transfer. This happens partly because families often translate treating children “fairly” into treating children “identically.” This is obviously how Miriam viewed the situation. Miriam could have acknowledged Mitch’s greater leadership responsibility and commitment to the business, but her parental value of not differentiating between her sons held her back. As a result, she left neither of her feuding sons in control. Now the second-generation sibling partners must make their own decisions regarding ownership, and the decision is complicated. Coordination between sibling partners is usually challenged by a number of new factors when the family moves into the Entering the Business stage.

First, most sibling partners are eager to see their branch retain at least as much control of the company in the future as it had in their sibling generation. They are unlikely to disadvantage their own children, even if all partners agree that consolidation of the stock would be desirable. For example, even if Mitch had the capital to buy Bernie out (he does not), he knows that Bernie will never sell. Despite his own unhappiness, Bernie wants his son to have every possible advantage in the business. Without explicit rules about entry and career criteria—and even when those rules exist, without confidence that they will be fairly enforced—hanging onto all your shares is the best protection of your offspring’s interests.

Second, sibling partners often have different financial planning needs, which affect how they want to treat their ownership interests. In this case, Mitch must think about Betty’s and Abby’s future needs; the stock has to be considered as an asset for their future support. Bernie, however, with fewer family obligations, is not thinking about his stock in the same way.

Third, siblings frequently approach estate planning differently. They may have different values, for example, which could influence their views about gifting their stock versus having the next generation buy them out. Also, as in the Kopeks’ case, the financial status of each sibling may be quite different and thus require different estate planning strategies.

Finally, many sibling partners, even those who get along better than Mitch and Bernie, do not think to discuss their estate plans with their siblings. Their stock, after all, is theirs. It takes a broad perspective on ownership and a cooperative relationship between siblings to develop a shared vision about future company ownership structures.

Individual Life Cycle Transitions

The Entering the Business stage catches all three generations of family members at major transition points. Mitch, Betty, and Bernie have recently been through midlife—the years between thirty-eight and forty-five. As discussed in chapter 2, the individual development task at this age is a reevaluation of life arrangements and structures, to prepare for the journey into middle age and beyond. The strain on the family business system can be significant, as leaders of the business whose children are considering joining the company question their most fundamental life structures. Some divorce, splitting the family unit in which their children have grown up. Some leave jobs; others go to work for the first time. They sense that time is limited to accomplish their dreams, and they feel a sense of urgency.

Mitch’s marriage survived the midlife transition, but Bernie’s did not. His wife left him in a contentious divorce after he began an affair with a younger neighbor. Bernie is still recovering from the divorce and the loss of his son. Thus he has a strong interest in cultivating Benjy’s interest in the company. Bernie is clear about his agenda: to get his son back, through the business. Mitch understands this, having watched the turmoil around him.

Betty has also been through some changes. After the initial shock of seeing her daughter, Abby, go off to college, she was surprised at how happy she felt with her newfound independence. She knows that Mitch is counting on Mark’s return after law school, so she feels uncomfortable telling Mitch that she really does not want Mark living in their house.

Mark, his sister, and their cousin are just passing out of the adolescent stage and into early adulthood. The task in the early twenties is separating from the parents’ family and establishing an individual identity in both personal and professional arenas. To test this emerging sense of individuality, young adults typically make temporary commitments in their twenties. They sometimes try different jobs or move to new geographic locations. They fall in love and try a serious romantic relationship. Young adults also articulate a preliminary vision for their lives in the future, which encompasses work and family dimensions. This dream (using Levinson’s term) becomes the benchmark for their later assessment (and reassessment) of their own success and the impetus for growth and change.¹

Mark’s own feelings of ambivalence are almost overwhelming. His father, while sounding a constant theme of how overworked he is and how much help he needs, complains endlessly about his older brother, Bernie. Mitch frequently tells Mark, “You’d be crazy to come into this company,” but Mark knows that he doesn’t mean it. Nevertheless, on some days, Mark feels that he would be crazy to do so. The practice of law would give him the secure income and professional identity that he wants. On other days, Mark has ideas that he knows would improve the company. He feels that it would be shortsighted to walk away from the opportunities the business offers him.

Adolescence was a rebellious time for him. He fought with his father all the time. This makes him wonder whether they really could work together. Their relationship seemed to improve dramatically during the year he took off from college to work in Canada. As close as Mark is to his family, he also feels that his college and graduate school offered interesting new perspectives on who he is and what he might do in his life. He feels a strong need to shape his own sense of himself. Could he do that if he came home to the business? Is his current relationship with his father and the other family members the way it would be forever?

Davis’s pioneering work in this area is the best possible example of the application of adult development concepts to work relationships in the family business. He has used Levinson’s life stages to predict periods in the lives of fathers and sons when they are likely to develop good collaborative work relationships, and periods when their relationships are likely to be full of conflict and incompatible agendas. His predictions based on adult development stages are highly correlated with individuals’ self-reports of smooth and rocky periods.² Family members in the Entering the Business and Working Together stages are often relieved to learn that research suggests some of the conflict they are experiencing is neither chronic nor due to irreconcilable personality differences, but rather is due to the stage of development through which one or both of them are passing—and as a result, it may ameliorate with time.³

Miriam, the sole living member of the founding generation, faces her own issues of retirement: a decline in health and vitality, an uncertain future, the need to find some activity that can capture her imagination and commitment as the business did, and the challenge of potentially facing financial and emotional dependence on children and grandchildren. She knew that her sons were too old for her to hold onto the ownership indefinitely, so she made arrangements for her financial welfare and passed the shares on to them. Now she is struggling with forming a new role. She fears that, like King Lear, without the power of control she will have no influence at all or, worse, become invisible. Like others of her age, she has the challenge of finding both purpose and stature in the family circle, without the foundation of authority in the business and ownership circles that used to be the core of her identity.

As individuals, then, the Kopeks are experiencing a complex array of emotional pushes and pulls. The business can become the means of moving family members to the next developmental stage, when parents support their children in establishing their independence and competence through their work in the company. However, the business can also be the way a family gets stuck, as Mitch and Bernie might characterize their own experience. They never left home, remaining under their mother’s strong control for most of their adult years. Although they developed clearly differentiated areas of responsibility, they are still locked in an undifferentiated fifty-fifty ownership arrangement that neither of them wants. Neither would say that Novelty Imports represents their dream.

This family is close and comes from an eastern European tradition of family cohesiveness that leans toward enmeshment. Other families from different cultural backgrounds would make different decisions on how to handle the complex forces of this stage. Some parents actually drive their children away, out of fear of too much involvement. Another factor complicating the situation is generational differences in values. Family norms, strong as they may be, can change when children are exposed to a variety of social classes and ethnicities, at college, work, or other social settings.

Occupational Choice in the Family Business

How does the typical family business heir make the decision to enter the family business? The contemporary view of careers portrays occupational choice as a search for the best fit between an individual’s personality and the job.⁴ Some believe that certain personality types are most happy in particular occupations (artistic types in advertising, for example, or enterprising types in business). This explanation assumes, however, that young adults from business families have an accurate understanding of who they are and what they want. One of the challenges of the Entering the Business stage, for parents and for children, is to clarify whether the business is really what the younger generation wants.

Gender, social class, and family background exert a strong influence on people’s beliefs about who they are and therefore who they can become. Mark, for example, may set off down the path of enterprise because he has learned to see himself as a part of the business, not because it fits his realistic and analytic personality. Unfortunately, many young adults do not truly choose the business; instead, they feel as if they have no choice but to join. The absence of choice at the Entering the Business stage is what can cause disappointment and a sense of resignation, rather than fulfillment, later in life.

Mark’s situation illustrates well the forces that threaten to rob young adults in a family business of their choice. First, family roles and expectations are a crucial influence on a young adult’s self-concept. Mark is the oldest of his generation and thus is perceived as the leader of that group. Second, Mark is male. Even though Mark’s grandmother started the business and is still active in management, their family assumes that only males will be interested in business. Thus Mark’s younger sister, Abby, has experienced no pressure to join the company; in fact, she feels left out because no one seems to care whether she works for the company or not. Third, Mark’s branch of the family, through his father, is perceived as the “competent” branch. Mitch was the workhorse of the company and his mother’s right-hand man. Thus Mark is automatically assumed to be more capable than his cousin. Finally, as the firstborn grandchild, Mark is Miriam’s favorite. Since he was a child, she has been enthusiastic for Mark to come into the company. These characteristics of the family structure (birth order) and dynamics (affiliations and roles) create powerful forces that pull Mark almost unthinkingly into the business. None of these forces has to do with a fit between the skills required to run the business and Mark’s personality and talents.

Business families in the Entering the Business stage also carry strong assumptions about the relationship between the business and the family—assumptions that sometimes propel young adults to join, despite the absence of a real fit between the individual and the situation. One assumption is that to be a real family member, one must also be a member of the business. There is a concern that those who stay outside the firm will get less attention, status, and family identity than those who are employed. A second assumption is that joining the family company is an obligation. Many young adults feel an unspoken message that they “owe” their parents. It feels disloyal to walk away from this family responsibility.

In some cases, there is also a third assumption: if the younger generation does not enter, the business will fail. This guilt-inducing assumption is based, paradoxically, on the family’s perception, sometimes unrealistically fantasized, of a child’s competence. Especially in enmeshed families, where the boundary between family members and all others is very sharply drawn, there can be the principle that “no one else can possibly do it as well.” Therefore an offspring’s decision to do something else is seen as a decision to let the business die. This pressure is intensified by the company’s needs in the growth phase, as the sibling partners may turn to their own. unprepared children as an alternative to hiring outside professionals.

Sibling Relationships

At the Entering the Business stage, the sibling partners need a relationship that can withstand stress, which usually means a relationship in which the partners can communicate openly, resolve conflicts, and support each other’s decisions. For example, sibling partners in this stage almost always have to deal in a new way with fairness. When a controlling owner and his or her spouse strive to create fair conditions for all of their children, they presumably have control over their assets and can make decisions that take the interests of the whole nuclear family into account. When the business is a sibling partnership, achieving fairness is more complicated.

Inevitable competition arises between siblings regarding the opportunities available for their own children. Perceived differences in lifestyle among the nuclear families fuels concern that one’s own branch of the founding family will suffer. This concern, if well managed, can motivate families to create explicit policies and guidelines for the conditions under which the third generation will join the business. If unmanaged, it can lead to endless comparisons and bickering.

Bernie and Mitch are a long way from being able to manage their own conflict and create policies to assure fair treatment. The structure and dynamics of their own nuclear family have predetermined, to a large extent, their inability to create a constructive working relationship. For one thing, their hierarchical relationship is complex. Bernie, as the oldest, was close to his father Jacob and assumed the responsibilities of the firstborn. Mitch, Miriam’s favorite, was always dynamic and outgoing. As their father’s illness became apparent and Miriam took charge of the family, Mitch became the unspoken leader of the two brothers. After Jacob’s death, Miriam was stuck: she could not unseat Bernie, her husband’s choice, but she could not forsake Mitch either. Thus the brothers. inherited a conflictual relationship.

The other key sibling relationship in families at this stage is between siblings involved in the business and those who are not involved. In the Kopek family, given that Bernie and Mitch have no other siblings, this dilemma has become located in the third generation, between Mark and Abby. Parents whose children are at the Entering the Business stage need to attend to how siblings who are not interested in the business, or who have not been invited to join, may feel about their siblings’ involvement. These feelings can have major impacts on the family business for years into the future. If Abby feels she has been treated unfairly, for example—if she is not encouraged by her father and uncle to join the business—will she express this resentment toward Mark? If she inherits stock, will she support Mark’s decisions? Will she pressure him to pay higher dividends? And, later, will she want her children to have the opportunity to join the business? Even if Abby stays out of the business, her relationship with Mark will have an impact on the company.

Other Family Relationships

All of the extended family relationships we discussed in chapter 2 are in evidence in the Kopek case. First, grandparent-grandchild relations can shape the family’s expectations about which members of the third generation should join the company. Miriam had always assumed that Mark would want to run her company. His fear of disappointing her contributed significantly to his ambivalence. Second, the next-generation cousins, who grew up at a greater psychological distance from each other than Mitch and Bernie did, are already having an impact on their parents. How well do Mark and Benjy know each other? Could they trust and respect each other if they were partners someday? Sometimes these relationships are easier than sibling relationships, because they are less intense. However, Mark and Benjy have listened all their lives to their fathers’ complaining about their uncles; they might carry this conflict into their own relationship. This is especially likely to happen if Mitch and Bernie “appoint” them to fill their roles, rather than if both partners welcome and support both cousins.

The relations between in-laws and family members also present challenges for families at this stage. As we discussed in chapter 2, spouses of sibling partners often become the loudest voice of the conflict between the siblings. Also, they may resent each other because of fears that their children may be disadvantaged professionally or financially in comparison to their cousins, as the next generation enters. In-laws may also carry conflict between the sibling partners and their retired parents over financial and other matters.

Because of the emotional complexity of family relationships at this stage of family development, and because of the critical nature of the decisions that must be made, Entering the Business families sometimes seek help. Consultants often recommend the creation of a family council, a representative group of family members who meet regularly to discuss concerns created by the family’s involvement in the business and to develop guidelines for family decision making. This structure (which is discussed in more detail in chapter 8) helps keep family conflict from spilling over into the business by providing a forum for family members to express their views and work out policies that they consider fair.

The Kopeks probably could not start a family council without the assistance of a facilitator, who would identify key areas of conflict in the family and set the ground rules for how this conflict could be addressed. This family’s entrenched dynamic of avoidance between Bernie and Mitch and the polarization of the family branches would make such an effort difficult. However, their collective unhappiness with the current situation, their sense of urgency about growth, and their desire for the children’s fair treatment might motivate them to make a family council work.

Management Changes in the Sibling Partnership Expansion/Formalization Business

Novelty is only beginning the shift to professional management that is required for companies to grow successfully. Bernie and Mitch are not delegators; they prefer to manage every detail of the business themselves. Bernie, whose work style is more relaxed than Mitch’s, has begun to rely on his two key subordinates, the company controller and the office manager. Mitch, the more intense of the two, is overworked. He has complied with his mother’s belief that a family member must do the buying but, as their suppliers and product lines have grown, Mitch’s travel schedule has become impossible. He was hoping that Mark, his son, would join the business and relieve some of his burden. Mark, who is not ready to make a commitment to the business, believes they should hire a professional buyer for the transition period during which he would need to learn the buying trade. However, his father and uncle are skeptical about turning such a crucial function over to an outsider.

Observers would say that the Kopeks need to go quickly down the professionalization path on which they have haltingly embarked. The demands of the Expansion/Formalization stage are putting pressure on the traditions of their Sibling Partnership. The brothers do not have the resources to run the business by themselves; they need a team. However, like many other Sibling Partnerships, there is some ambiguity about how much true interdependence and collaboration is involved in this operationalization of the word partnership. Essentially, they have divided between them the tasks that their mother used to do. As the company has grown, Mitch’s half has grown faster than Bernie’s. Thus Mitch has become the leader of the company, but neither Miriam nor the brothers themselves can acknowledge this reality, nor its far-reaching consequences for the nature of the partnership.

One obstacle to creating a management team, then, is that families may be reluctant to allow the entry of nonfamily professionals, sometimes to avoid having their contentious family relationships or their management skills scrutinized by an outsider. The strongest support for bringing in outside professionals may come from the entering generation. They may have learned the value of professionalization in college or business school; they are less defensive about family dynamics because they see the problems as existing largely in the senior generation; and the buffer of non-family managers would give them some protection from the expectations of the senior generation, as well as needed time to learn the company.

The key problem facing management, then, is building the mix of skills needed for leadership continuity. In some Sibling Partnerships, either sibling could run the company alone if the other were incapacitated. In the Kopeks’ case, neither has voting control. And, although Mitch could run the company, Bernie could not and Mark is too young. Thus, without outside professionals in key roles, the business is vulnerable.

Structural and System Changes

Novelty’s structure badly needs an overhaul as well. Along with professional management comes differentiated roles, and the company’s formal structure should reinforce those roles. Before the growth spurt of the late 1980s, Mitch’s and Bernie’s areas of responsibility were better balanced. However, with the opening of a small European office and warehouse operation and the increase in U.S.-based account representatives, the operations staff has increased significantly. Miriam’s decreased involvement has also left Mitch with more to cover. Whereas Miriam used to watch all the account reps and buying staff closely, Mitch doesn’t even know the names of all the warehouse workers.

Companies at this stage often begin the formalization process by adding to middle management; for example, a head of distribution and a supervisor of the account reps. At some point, the old organization chart absorbs as much growth and as many new positions as it can. This can trigger a more comprehensive reorganization, by business unit, product type, or geography, for example. This is one point in the development of the business when an outside consultant can be very effective, helping define formal job descriptions, firm up an organization chart (or, in some cases, create one for the first time), and add formal cross-functional lines of communication and accountability.

Like other companies at this stage, Novelty also needs a variety of new management systems: a larger and faster information system with the ability to track products more accurately; a more sophisticated cost accounting system (to assess the profitability of each product); and, most important, the capability of connecting its financial system to its operations system. Mark argued these changes, but his father and uncle did not see the benefits of such a “fancy” system and responded that it would be much too expensive. Mark feels they do not take his education seriously and is frustrated that they don’t understand how much a good information system would improve customer satisfaction. He suspects that, although money and skepticism were part of the story, they actually opposed the system because they didn’t want to coordinate their two areas too closely.

Aside from information systems, companies at this stage also need professional human resource policies. Like many other entrepreneurs, Miriam had been reluctant to pay the salaries that well-qualified workers expected. At Novelty, as in other companies moving out of the Start-Up phase, employee salaries were determined as much by history and carelessness as by merit. Another important task of the Expansion/Formalization stage for companies of Novelty’s size is the creation of formal compensation, promotion, and hiring policies, as well as a formal evaluation process. These policies are crucial to recruiting and retaining talented outside managers. Besides their actual human resource value, they signal a commitment on the family’s part to run the business professionally and to create fair career opportunities for nonfamily talent.

Mitch and Bernie are also facing the crucial human resource issue of whether and how their own children will join the family company. Most families begin to discuss options on a case-by-case basis as their children reach college age. However, what is needed is agreement on a range of questions, including qualifications, compensation, evaluation, and training. For example, will children have to demonstrate that they are qualified in order to join? What does “qualified” mean? How much school and how much work experience are required? Should they work outside the company before returning to the company? Most observers agree that outside experience benefits the business and also gives the younger generation a sense that they have options outside the family company. Will all children have an equal opportunity to run the company?

Once the younger generation does join, how will they find a role in the company that meets their skills? How will their performance be evaluated? Companies like Novelty often declare that they support open and fair treatment for all members of the next generation, but family politics may undermine the creation of the necessary formal human resource procedures. The younger generation will watch carefully to see if the power relationships in the senior generation will determine opportunity, or if children from all sibling branches are given equal opportunity to prove themselves. In the Kopeks’ case, the fact that Mark is Mitch’s son and the oldest cousin might effectively close the door for Abby and Benjy if policies are not in place to allow all the cousins a chance to show their talents and interests in the business. In chapter 8, we present some of the techniques family businesses can use to oversee the career development of both younger-generation family members and nonfamily managers.

Strategic Challenges

Most business owners look forward to the time when their company’s growth takes off, seeing it as a time when doing business itself will no longer be a problem. However, ironically, business conditions can be extremely tough for the Sibling Partnership in this phase. These Expansion /Formalization companies face serious new challenges because their success and growth have put them up against different, usually stronger, competitors. The best-established of these competitors will have been riding the growth curve for some time already. They usually have cash to reinvest, have secured market share, have developed a strategic focus, and if they are well managed, are actively involved in developing new products to balance their mature ones. Companies like Novelty must learn to play with the “big kids” fast, and they must have a clear understanding of how they can compete against this new and stronger opposition.

The strategic challenges of family businesses in this situation can be broken into three main areas: capital/financing choices; market and product issues; and planning, particularly strategic planning. In Sibling Partnerships at this stage, decision making is a critical capacity. Effective sibling teams usually follow one of three models. The siblings may make all major business decisions jointly; they may divide the company into clearly demarcated areas of responsibility and each cover his or her own area; or they may set up a top management group to decide with them on major issues. Whatever process is followed, coordination is crucial.

Coordination with younger-generation members who are thinking of entering the business is also important. Sibling partners who function well together, especially in the second or third style described above, often discuss with their children major strategic decisions that will shape the future of the company. This gesture indicates an understanding that the business will be, in the future, a collaborative effort and that the older generation respects the younger’s opinions. However, parents at this stage can also make the mistake of pressuring their children into joining the business immediately, because they are anxious about the strategic decisions that they face.

One issue where business development and ownership development interact at this stage concerns financing. Like many entrepreneurs, Miriam hated debt. However, most Sibling Partnerships in the growth stage badly need capital to finance growth. When Miriam ran Novelty, she refused to deal with banks. Bernie had to twist her arm to set up a line of credit during their first growth spurt in the 1980s. At several points during that time, when they ran short of cash, she stretched payments to suppliers and postponed paying family salaries to meet payroll. Bernie gradually stabilized the cash flow, but their seasonal business pushed his talents. Faced with more growth, he worries that they will lose control again.

In addition, Mitch has been pushing Bernie on the need to expand their European operation. He wants to buy a warehouse and a small fleet of trucks, to protect them against the vagaries of the eastern European delivery companies they have been using. Bernie argues that the idea would cost millions, which they don’t have, and require them to go to the bank for a real loan. Bernie knows that the company could afford the extra debt load, but he worries about the impact of their cash flow instability on their credit.

The Kopeks face the challenge of matching the selected strategy to the family’s ability to generate capital, either by minimizing withdrawal of retained earnings or by accepting an increased level of debt. Unless the business has a dominant position in a very well protected niche, the Expansion/Formalization stage and the demands of competition almost always require a more aggressive approach to investment. However, this is a time when cash needs in the family are high: children are in college, and retired parents like Miriam may still receive dividends plus a generous salary from the company. The constraints on options may also depend on the norms that the founder established. Miriam was always clear that, after the business’s basic needs are met, all the extra cash should go to the family. Since the company has always operated that way, it will take a good collaborative process for Mitch and Bernie to evaluate whether or not those norms still serve the best interests of the family business at this stage.

Often the growth stage is sparked by a company’s entry into a new market or the launch of a new product. Entering a new market places strains on operations and cash flow. For example, Novelty has made a practice of buying from craftspeople in small towns, mainly in Poland, but also recently in the Czech Republic and Slovakia. Given the recent surge of interest in eastern Europe by U.S. consumers, their large department store accounts have been ordering more and with greater frequency. However, Mitch and his mother are aware that they might soon become victims of their own success. Larger, diversified importing companies have already approached some of their suppliers. While working to keep their suppliers’ loyalty, Mitch and Miriam also considered broadening their reach to some formerly communist countries, particularly Bulgaria and Romania.

In some ways, all of these operational and investment decisions stem from a central strategic choice that the family must make: to reinvest in an effort to sustain the Expansion/Formalization process into the future, or to pull back, letting the company move into the Maturity stage and redeploying family capital and the talents of the younger generation into other ventures. Family owners like Mitch and Bernie Kopek may suddenly recognize the need for strategic planning at this stage of development in the family and the business. Whereas company operations may have appeared relatively straightforward in the past, the changes we have described here can make essentially the same operation astonishingly more complex. Suddenly, an imprudent decision can have catastrophic consequences. The strategic process requires developing a variety of future scenarios for the company and analyzing the potential risks and rewards of several paths to growth.

In Novelty’s case, the company is being increasingly squeezed between folk art importers and diversified novelties suppliers. To compete successfully against larger players, they need to clarify the focus of their business, analyze their strengths and weaknesses in comparison to their competitors’, and then decide how they are going to compete. Perhaps the single most important change they are considering is creating a board of directors to help them through a stepped-up strategic planning process. That could add significantly to their chances of successfully negotiating the Expansion /Formalization stage and emerging at a new level of operations.