I'm not certain why I should have to write this chapter. This idea seems so obvious. However, I also expect that at least half of you have already done this, and you likely disagree with me. “My business hasn't failed,” you tell me. The problem with hiring relatives isn't that your business automatically fails instantly. What really happens is that your business dies a slow death.
Imagine a business where employees are hired based on family relationship instead of competence. The bookkeeper was hired because she is the owner's wife. The sales manager is the owner's brother-in-law. The operations manager is the owner's brother. Oops – is this your business?
Let me ask you a few questions. Did you hire your wife as bookkeeper, because she has an accounting degree and tens years of bookkeeping experience? Did you hire your brother-in-law for his experience running a competitor's sales department? Did you hire your brother, because he spent fifteen years in charge of distribution for Wal Mart? Of course not. You didn't hire any of them for their qualifications. You hired them because you trust them (hopefully), and because they were convenient hires. You didn't have to search much to find them. Did you hire the rest of your staff this way? The problem with hiring relatives is that they aren't qualified in any meaningful sense. What do you get from unqualified employees? Misery. You know better. Nonetheless, you did it and will continue to do it.
One of my clients. Ted, had a brilliant idea no one had ever thought of before. That concept alone should set off alarms. I have never had an original thought in my life. You haven't either. Every time I think I have one, I end up losing money. The best ideas are stolen ones. Let someone else prove there really is a market for toilet paper with George Bush's face on it – either George Bush. Personally I would buy it with Jimmy Carter's face on it. Maybe not, my butt has standards.
Ted owned an average white guy small IT firm. It was really small – just him. He hoped to land some lucrative federal contracts. However, the federal government really doesn't award many contracts to average white guy small IT firms. To get these contracts as a small company, you have to prove some sort of historical discrimination or disadvantage. Ted thought for awhile. He was the stereotypical average forty year old white male on his second marriage with two rotten kids. To make matters worse, he paid his taxes on time, had no felony convictions, and gave money to his church. What government would possibly want to do business with a guy like this?
Ted knew of a Small Business Administration (SBA) program that allowed companies owned by women, racial minorities, and other oppressed groups to receive special preferences in bidding for federal contracts. He thought, “Hey, I'm married! This must be God telling me why I got married. I couldn't figure out why otherwise.” Ted had the brilliant idea to make his wife, Cindy, the 51% owner of his company.
The SBA isn't completely made up of morons, idiots, and ne'er do wells. Ted's idea wasn't exactly original. In fact, thousands of average white males have thought of this trick before, and the SBA has attempted to enforce rules against sham ownership to qualify for set aside programs. However, since the SBA is made up of bureaucrats, who spend most of their time before congress shilling for more money, this scam works pretty much 100% of the time. Nonetheless, women-owned businesses are supposed to be run by qualified women.
Here were Cindy's qualifications for running a small average white guy IT firm. She had spent her five years with Ted doing the laundry, cooking poorly (according to Ted),and wiping the noses of snot-nosed little spawn of Satan. Actually, that last part really is a good qualification to run an IT firm. It pretty much describes the IT work force of the twenty first century. So you think I'm being harsh? Have you ever wondered why Windows crashes so often? In fact, it just auto rebooted on me during the previous paragraph. I rest my case. Children of God wouldn't have created Windows. No, they didn't create the Mac either. The developers of Windows are snot-nosed spawn of Satan billionaires. No I am not envious – as I drive my Kia down to the Smart Shopper to purchase generic gruel for my family. Really.
Ted went to his attorney and signed over fifty-one percent of the stock in his S corporation to Cindy. Ted went off to secure a few really nice federal contracts and hired twenty little spawn of Satan programmers to service the contracts. Cindy, now president of “her” company, continued ruining laundry, embarrassing the culinary world, and wiping snotty noses.
Life was wonderful for a couple years and Ted was able to pay Cindy and himself six figure annual salaries with generous pension contributions. However, heaven apparently can't last forever. Maybe Ted was tired of ruined laundry and dog food meals. Maybe Cindy caught him tongue dancing and doing the horizontal bop with her best friend. I was just the CPA. Who am I to judge? In any event, they decided to split.
Actually Cindy decided to split. As president of the company, she ran down to the closest bank branch, walked right up to a teller's window, and demanded to close the company's accounts. She wanted the $300K in the accounts on a cashier's check made out to her personally. Of course, we have all been to bank branches. The tellers have less authority in most banks than the janitors. The teller sent her over to the branch manager, who excused herself and called Ted. The game was on. Cindy didn't get the money. The branch manager told her she needed to have a resolution from the company's board of directors authorizing her to close the accounts. This was about half true, but it stopped Cindy from getting the money.
Divorce lawyers were summoned, and the real fight began. Cindy claimed that she owned 51% of the company and she was firing Ted. Ted claimed the ownership transfer was a sham. Yes, he really did argue that he had committed fraud with the SBA regarding the woman-owned business classification. I don't believe that Cindy actually wanted to fire Ted and own the company. What would she have done with it? By the time of the divorce, the company's major government contract had expired and was not renewed. There really wasn't anything left to own at that point. I suspect she just intended to use her majority ownership share to get more of the remaining money. Ted and Cindy reached a property settlement and divorced. Ted kept the company – what was left of it. The moral to this story is clear. If you make your spouse an owner, you have a problem if you get divorced. Since about half of all marriages end in divorce, consider yourself hereby warned.
