Tag Archives: Profits

Is It Wrong to Hire Family Members? Six Considerations

Situation: A small but very profitable business was founded and has been run for two generations as a family-owned and operated business. To boost performance, the CEO hired a general manager with a good background who is not a family member. The general manager has told the CEO that he feels that there are too many family members in the business. The CEO likes hiring people she trusts, particularly friends and family that she has known for a long time. Is it wrong to hire family members?

Advice from the CEOs:

  • Don’t try to change what you’ve already done – plan for the future.
  • Acknowledge the GM’s idea. Tell him that you appreciate his suggestions. Suggest that he test hiring more non-family members to cover one of your low risk market segments. Measure the performance of this team versus the other teams within the business.
  • The challenge with family members is accountability and objectivity. The question for the family owners is whether they have the freedom to act in the interests of the company. Can they put family ties aside when someone is not serving the interests of the company?
  • The essential question for the family that owns the business is – what do you want to maximize? If it’s loyalty and longevity – keeping the family together, employed and in harmony – they can be good. If it’s profits and performance – family and friends can be difficult if emotional ties cloud business objectivity.
  • The upside to family is loyalty and trust. That said, family and extended family friends are different. The latter don’t have the same ties or sense of loyalty.
  • Can you keep employees for too long? Yes. Make sure that you evaluate all employees every year. Establish job and performance standards and make sure that all employees – family and non-family – are held to the same performance expectations.

How Do You Respond to Demands for Process Upgrades? Five Suggestions

A company manufactures components for an important large customer. That customer now specifies that all components need to be manufactured under clean room conditions. The company can’t afford to lose this customer but is at a loss as to how they should respond. How do respond to demands for expensive process upgrades?

Advice from the CEOs:

  • Start with a discussion. Ask them exactly how clean production must be, and what their concerns are. You can also offer to perform destructive testing (at the customer’s expense) to demonstrate that your current processes meet their specs.
  • Look at the overall cost of the clean room conversion versus your anticipated profits on the job. Make sure that your profits justify the conversion.
  • Increase your prices to the customer based on the new requirement, and make sure that the increased price pays for your conversion at a minimum. If they ask why your prices have increased, explain that the process that they now demand is more expensive because of the costs of operating under clean room conditions.
  • If the customer is a very large player and is doing this because of demands placed on them by their customers or regulators you may have little bargaining room other than complying and adjusting your prices accordingly.
  • Consider a prefab clean room. Especially in high tech areas like Silicon Valley you may be able to find older rooms at a bargain rate. If you don’t have space in your current location or upgrades will be very expensive consider leasing new space for this job.

How Can You Best Use Excess Profits? Five Suggestions

Situation: A company, an S Corporation, produced substantial profits during the first 6 months of their fiscal year. This becomes taxable personal income to the owners if it remains profits. How would you advise the CEO and owners to make best use of these excess profits?

Advice from the CEOs:

  • Use some of the funds to invest in new opportunities for the future growth of the company.
  • Prepay significant costs like software licenses multiple years in advance. Make sure that you attend to your accounting so that you properly reflect the ongoing profitability of the business. Otherwise, what you may believe is profitable in future years will not reflect true profitability because you will not be accounting for all of your true expenses.
  • Is anyone in the company deserving of a one-time special bonus for performance or a salary increase?
  • It may make sense to take dollars out of the company and to diversify owners’ investments by investing in real estate, stocks, etc.
    • Check out the current rules around 401K programs that may allow you to invest increased amounts per year per person. Talk to your financial advisor about the details and regulations surrounding these programs.
  • List your alternatives and compare the anticipated ROI, on an after-tax basis, of the various options. This will help you to evaluation options including:
    • Reinvesting in the business – various options.
    • Investing outside of the business – various options.
    • Talk to your financial planner about the choices.