Working With Family Businesses - A Lender's Perspective For Trusted Advisors

By Walter Einhorn, President & CEO Sunrock Capital

Most trusted advisors and consultants understand that many family businesses have long and complex histories and structures. When working with family owned or operated business an in-depth knowledge of the players and operations becomes essential.

For some lenders and trusted professionals information about a client company can be acquired over long periods of time by working closely with principals. Important information and insights into family dynamics are frequently obtained through regular, personal communications with clients and their family members. Many advisors, not just lenders, find that they not only provide their clients with services but also develop long-term close personal relationships and friendships. This sound strategy for maintaining clients over long periods of time, comes with a price.

Personal relationships should never conflict with professional services and the trusted advisor needs to keep this in mind at all times.

However, the clients of trusted advisors sometimes experience cash flow and other operational issues. It may require the advisor or lender to rely on the value of personal property or make other accommodations based on non-business assets. For example, lending funds to a business based on the personal assets of the owner is a regular practice. At Sunrock Capital we review all aspects of every situation and where possible make asset-based credit accommodations. In some instances these accommodations are based on personal assets or guarantees.

However, I have seen many struggling companies, many in desperate need of financing, go to outside consultants and break away from long-term lending relationships to find quick funding fixes. Certainly companies in need of financing should review all their options. However, very often it is the longstanding relationships that clients have with lenders who can place financing requirements in their proper perspective. This is extremely important when working with client companies that are owned and managed by families, possibly with several generations involved.

It is not uncommon to change lenders, but the familiarity that a lender has with a corporation’s management (especially one that has extensive family attachment) can be an important factor in the company’s long-term success or survival. For instance, a company may experience “lender’s fatigue,” a need to break away from a lender and to look for new sources of funding. There are many reasons behind these types of changes, some I will outline below. Generally, it is a change in management.

Lender fatigue will occur, not during the early years of a corporation’s existence but several generations down the line. Changing lenders and other key advisors is often found in businesses, that are in second, third or even later generations. Because many family-managed businesses develop financing issues and operational troubles over long periods of time it is hard to find methods of financing and immediate operational changes that will facilitate a rapid return to business viability.

As mentioned earlier, family managed enterprises often have long and intricate histories associated with them. Business viability can have a number of different meanings. As younger generations enter the situation the viability issue could be as simple as changing product offerings or increasing product pricing. Not hard to do if clients agree to pay higher prices. These modest changes can provide needed revenue to keep both generations happy. However, complex changes or approaches may need to be implemented to keep large extended families financially satisfied. For example there are some family enterprises that are the main source of revenues and income to many (possibly hundreds of individuals).

These complex situations require a keen understanding of lending practices, family dynamics, corporate management practices and problem solving. This is a precarious juncture where a lender or trusted advisor needs to balance both personal relationships and fiduciary responsibilities. It is important to simply provide information and offer solutions that hold to sound business principles and practices. No matter if you are a lender, accountant, turnaround consultant or attorney with operational models and business plans in place to support your efforts, you and your clients should be spared the added grief and turmoil of family squabbles. It is you, the trusted advisor who needs to leave the emotions behind and deal with only the cold hard facts, figures and business solutions. You will remain true to your fiduciary responsibility, to do what is best for your client company, and not solve issues as they relate to individuals. By adhering to these principles, in the future the independence of the advisor or lenders will never be questioned.

For example earlier in my career I was assigned a longtime borrower of the bank as a client. After several months working together the client invited me to lunch with his business consultant. The consultant spoke about a number of ideas to increase profitability through several “questionable” or “alternative” management techniques. Some of them I recognized immediately as being problematic and pointed this out to my client. Several weeks later my client tells me that he is retiring to Florida with his wife, and he has placed his son in charge of running the business.

Before departing the father’s request that as a long time bank client, I keep l him informed if his son did something wrong or questionable. About a year later I was invited to dinner with the son and the business consultant that I had met earlier. At this meeting I was given information about a poorly thought out expansion program and was asked to finance it. Per the father’s request, I asked the son what his father thought about the program, (It was the father and the mother of course, who had a personal guaranty supporting the loan.)

This is where family dynamics or politics, depending what you call it, came into play. After my question the son stated "I’m in charge of this company now and I don't need my father’s consent." It was no surprise to me, his consultant supported him 100%. I reviewed the plan and followed up with the son shortly thereafter. I strongly recommended he discuss this expansion program with his father and I told him that I would also be calling his father. Begrudgingly the son agreed. Several days later I called the father, gave him my observations. He was most appreciative and thanked me for my warning. Several months later I received notice that my bank was being repaid and replaced because the company felt I was not supporting its needs. I was somewhat surprised but in the long run I am proud that I maintained my credibility and independence by keeping the father in the loop.

Subsequently, this company launched its expansion plan. The program failed miserably and eventually the company was required to declare Chapter XI. They continued to struggle and today the only people profiting from this once thriving enterprise are several turnaround consultants and lawyers.

In this case I did what I believed was proper and tried to assist the company by reaching out to the father. Would I handle a similar situation the same way in the future? I would, especially since I believed I was communicating with the true owner of the enterprise. If I had not warned him- he could have and probably would have held me and the bank I worked for responsible for the company’s failure and possibly some jury would find us negligent.

Since our nation’s family and entrepreneurial spirit are so intertwined a significant number of family-run businesses carry on through many generations. The beneficiaries of this equity often own high-priced assets such as luxury homes, vacation homes, high- ticket motor vehicles and pleasure boats. Many are big spenders and generous to themselves. As the years and generations pass the demands on corporate cash flow needed to support these individuals can bring an enterprise to the breaking point. This problem stage is even more dramatic during hard times and slow business cycles. When dealing with these situations it is essential for the trusted advisor to identify the real seat of power and work with them.

Recently I faced the challenge of financing the remains of a family empire that was supporting over fifty individuals for all or part of their livelihood. The years took a dramatic toll on this company. The business’ management used borrowing and other techniques to mask its cash shortfalls. Eventually these strategies failed. While conducting my due diligence, I saw the company’s business decline rapidly. Unfortunately a short time later it failed all together. Once a very reliable cash generator, it lost its value and was no longer an income source for all of these relatives.

What should be learned from these examples? Stick to the proven fundamentals of business operations and adhere to the rules for lending. Advisors must understand that long-term relationships with lenders, while helpful, do not guaranty that financing will be available. However, if a corporation, family owned or not, operates properly following proven techniques, it is becomes more conducive for the lender.

Lenders and advisors need to have a keen understanding of both complex business issues and family dynamics. For the professional advisor, the key to successfully navigating family businesses is to secure both the professional and personal skills needed to objectively review each situation. It would be unfair to say that even the trusted advisor does not feel certain personal friendships and loyalties pulling at them when working with struggling clients. However, the trusted advisors are doing a huge disservice to these people if they are not forthcoming and hedge on the facts to appease a friendship. Then those professionals who utilize both their personal perspectives and professional skills are the most likely to have the greatest success navigating and assisting clients in solving these problems.


This article was provided by Walter M. Einhorn President and CEO of Philadelphia, PA based Sunrock Capital Corp. Sunrock Capital Corp. is a leader in asset based lending and business finance. A 1959 graduate of Villanova University where he earned a BS in Economics with an accounting major. Mr. Einhorn is a Certified Public Accountant.

Walter M. Einhorn
President and CEO
Sunrock Capital Corp.
1600 John F. Kennedy Blvd. Suite 1030
Philadelphia, PA 19103
Tel: (215) 861-9402
Fax: (215) 861-9460
Web: http://sunrock.com

BIOGRAPHY
Walter M. Einhorn

Walter M. Einhorn is President and Chief Executive Office of Sunrock Capital Corp. Sunrock Capital Corp. is a leader in asset based lending and business finance. A 1959 graduate of Villanova University where he earned a BS in Economics with an accounting major. Mr. Einhorn is a Certified Public Accountant. Walter is a past chairman of the Commercial Finance Association (the international trade association representing commercial finance and factoring organizations). Prior to his affiliation with Sunrock Capital, Walter served as President and CEO of Meridian Commercial Finance Corporation. Prior to that he was Senior Vice President and Business Finance Division Manager of Mellon Bank Corporation for 25 years. Mr. Einhorn has over 40 years experience in the financial sector.

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