Succeeding in Your Business by Cliff Ennico

"I am the 100-percent owner of a business. I work with two other guys that act as my general manager and my sales guy. Now they believe they are entitled to ownership of the company because they have gone the extra mile, put in their 'all,' and so forth.

Here is my problem. I am the guy who brings in a large majority of the sales and designed all the corporate structure, the planning, the systems, the process and so forth. My two colleagues have certainly been helpful, and I couldn't have built this business without them, but they are requesting huge chunks of ownership, well above what I think they deserve.

My general manager has been around since day one of this business but has consistently underperformed, made repeated mistakes and self-admittedly can't perform the tasks to the level we need done. My sales guy is outstanding, but more of an 'order taker' rather than a 'rainmaker.'

What are some of the ways I can make sure they are happy, incented and protected with some ownership, but give them a realistic understanding of their value to the company?"

As Shakespeare would say, "the lady doth protest too much, methinks" (for you literary geeks, the quote comes from "Hamlet"). On the one hand, this reader says he values his two colleagues, couldn't run the business without them and so forth (perhaps out of concern they read this column?). Then he turns around and says, "but they're really not very good, and I'm not sure they have what it takes to help me grow the business."

Don't get me wrong. I'm not accusing this reader of being "two-faced" or deceptive. Not at all. What has obviously happened here is something that happens in just about every startup or early stage business. The owner has "fallen in love" with the people who have helped him build up the business from scratch — they are now "friends and family." The business has outgrown their ability and skills, and everybody knows it, but the owner would have a huge "guilt trip" if he just fired them and hired people with the skills to move the business to the next level.

Let's look at the facts.

Fact No. 1: Since this reader is the sole owner of this business, the two colleagues are employees, and nothing more. In most states, they are "employees at will" — they can be terminated at any time by the business owner, either with or without a good reason. Giving them a piece of the business puts them in a much stronger position where they will have to be "bought out" if the owner wants to get rid of them — bad idea.

Fact No.

2: While the colleagues' "past performance" has been acceptable, their ability to help grow the business is in serious question. Giving them a large piece of equity would leave a lot less equity for the owner to give the new employees who will help the business grow (probably out of his own share, as the two "partners" will not want to see their equity diluted) — worse idea.

Fact No. 3: To grow the business, this reader may need to downsize these two colleagues at some point, or subordinate them to new hires who can do the job better than they can. Either way, they won't like it. Giving a piece of the business to people who may become hostile to the company down the road would be the worst idea of all.

Frankly, given their position, these two employees should be grateful for anything this reader chooses to give them at this point (if that sounds harsh, keep in mind that they probably have been receiving a decent salary for their work all these years). If they wanted to receive a significant chunk of the business, the time to negotiate that was at the beginning, not now. Recognizing that this reader wants to give his colleagues something to keep them around, though, he has a couple of options:

— He can give his colleagues "options" to acquire a small amount of equity (say, 5 percent each) over the next five years if certain performance targets for the business (sales, revenue, pretax earnings and/or net profit) are met each year — this will give them an incentive to "rise to the occasion" and show the owner what they are capable of doing; or

— The owner can give each of his colleagues a letter stating that in the event the company is sold during the next five years, each of them will be entitled to receive 5 percent (5 percent) of the "net proceeds" of that transaction (the gross sales price for the business less the cost of getting the deal done — attorneys' and accountants' fees, brokerage commissions, and so forth) — that way the two colleagues, while not receiving any real ownership of the business, can be assured they will profit handsomely if the business is "sold out from underneath them."

Whichever way this reader decides to go, he should think first about the future of his business, put a hiring plan in place to build a management team that will get the business growing again and then (working with his accountant or CPA) figure out a compensation scheme for that entire management team as a whole . . . whether or not his two colleagues-cum-friends are on board for the ride.

Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2009 CLIFFORD R. ENNICO.

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