Mark Ford on Why You Shouldn’t Hire Friends or Family

This interview was originally published in the May 23rd, 2011 edition of The Palm Beach Letter

The interview was conducted by Tom Dyson, publisher of the same publication.

Tom: I’d like to talk about a topic I’ve been thinking about lately—going into business with family and friends. What’s your view of nepotism?

Mark: Actually, it’s funny you asked that. Just last night I had dinner with an old friend. Our sons were best friends when they were young. A few years ago, his son went to work for him. Now, at twenty-eight, he’s president of the company, and he’s making big money. My friend asked me if any of my kids were working for me.

I told him that my first two sons are making their own ways in the world. But my third son, who’s graduating college this year, has expressed an interest in the family businesses.

“He wants to follow in his dad’s footsteps?” my friend asked.

“Not exactly,” I replied. “He just wants to step into my shoes.”

He laughed.

“But that would be great, wouldn’t it?” he said.

I wasn’t sure how I felt. What I want most for my children is for them to be independent and kind. Working for my business—is that independent?

Tom: I guess that depends if he has a real job.

Mark: Exactly. The last thing you’d want—for your kid or your business—is to pressure your son into the business. Nor do you want to offer him a secure way of receiving income.

Tom: Is that what your friend did?

Mark: Not at all. His son is the real deal. He’s really running the business. And it makes his father proud. Having his son work for him has allowed my friend to take on a secondary role in his business. He is able to work less and spend more time traveling.

Tom: That’s a good thing.

Mark: Yes, that’s a good thing. But in my experience, it happens rarely. More frequently the child is over-promoted, and it causes problems. Sometimes it wrecks the business. Sometimes it wrecks the relationship.

Tom: So how does one prevent that?

Mark: By following three rules: make sure they start at the bottom, let them earn their own promotions, and never let them work directly for you.

Tom: I get the first two. But why wouldn’t you want your child working directly for you?

Mark: I’ve hired friends and family before. When I followed all three rules it worked out fine. It was clean. But I’ve also broken the third rule and had them report to me. Half the time that got messy.

Tom: How so?

Mark: In a few cases, they disappointed me, and that lowered my estimation of them. Other times, I disappointed them—usually because they thought I was being especially tough on them (which was probably true). That lowered their estimation of me.

My personal relationships are more important to me than my business relationships. Having a friend or family member report to you risks ruining you personal relationships. I won’t do it anymore.

Tom: You said that half the time having friends and relatives working for you didn’t work out, and you explained why. What about the other half?

Mark: The other half worked out very well. And I’m happy for that. But I’m not willing to risk my personal relationships based on a 50/50 chance.

Tom: I noticed that the last film you produced listed no fewer than four of your family members on the credits.

Mark: (Cough, cough) You got me there.

Tom: Do I smell a bit of hypocrisy here?

Mark: If it were not for hypocrisy, I’d have no good advice to give at all.

Tom: Seriously…

Mark: It so happens that four of my siblings and two of my children have experience in the movie business. It was a low-budget ($500,000) movie. They were willing to work cheap. Nepotism, in this case, was good for the balance sheet. And strictly speaking, they didn’t report to me.

Tom: No?

Mark: (Cough, cough) Can we get on to another question?

Tom: What about the idea of creating a family business? What’s wrong with creating a business that you can leave to your heirs?

Mark: In theory, nothing. If you build an enduring business, it is natural to want to make it available to your offspring. But history shows us that, for the most part, one’s children will destroy the business. And if they don’t, their children certainly will.

Tom: That’s very cynical.

Mark: That’s history. Look at all the mega-businesses built during the industrial revolution. How many of them still have family members at the helm?

Tom: I can think of only one. Ford Motor Company.

Mark: Me too. The truth is, I like the idea of one of my kids taking over one of my businesses. But he’s got to earn it based on his accomplishments, not on his blood.

Tom: What about the equity in your business? What do you think about leaving that to your children?

Mark: Now you are talking about inheritance. That’s another big subject.

Tom: One we can talk about in depth another day. But give me a hint. Do you intend to leave any of your businesses to your kids?

Mark: Well, I can’t talk about that honestly. My wife and I have told our boys that they won’t inherit a nickel from us. We’ve told them they have to make their own way in the world.

Tom: So you are lying to them?

Mark: You seem to be exposing parts of my personality I would rather leave hidden. What are you, my publisher or my shrink?

Tom: Okay. You’ve said enough for today. We’ll talk about inheritances next time.

Mark: So long as the interview is published posthumously.

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Seeking Comfort

There are basically two sorts of people: those who find pleasure in comfort and those who find pleasure in disturbing comfortable notions. You cannot choose which kind of person you are. It is an essential component of individual temperament.

I am a comfort-destroyer. And yet I have many friends who are comfort-seekers. But this is common. Relationships are often complementary.

Ironically, comfort-destroyers eventually make life more comfortable for comfort-seekers because they lead them to products and practices that make life easier.

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Teach Your Children Well: How to Develop Successful Kids

When I was a young father, I wanted my young children to be very good at everything they did. I wanted them to be very good students, very good athletes, very good thinkers, etc.

Although they never took a great deal of interest in sports, they did well enough in school and became bright and athletic thinkers.

By the time they had become young men, my desire for them to excel at everything had evaporated. And in its place was something else: pride and satisfaction in knowing that they had become independent and kind.

Many parents, I believe, experience the same shift. When their children are small, they want to see them excel because they believe that childhood performance is an indicator of future success. But as time passes, they come to have a more realistic view of maturation.

One of the most important recognitions is that the most important stages of childhood development are all marked by the need to separate in some way from the parents.

This makes perfect sense when you consider us as creatures of evolution. When our children are helpless, our instinct is to nurture and protect them. As they grow older, they acquire habits (biting the nipples that feed them, breaking free of the hand that holds them, discovering music their parents abhor, etc.) that promote independence.

This is as it should be. A mentally healthy parent learns to accept and eventually desire his children’s independence.  

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Focus on Your Strengths

Some people are intrinsically social … others are intrinsically thoughtful.You can’t change these proclivities and you shouldn’t try. Instead, you need to discover them and make use of them. I have known extremely successful people whose only talent was in socializing.

But socializing won’t make you rich … strategic networking will.

Likewise, Rich Schefren and I are intrinsically thoughtful. But thoughtfulness won’t get you rich … strategic thinking will.

  • Step One: Discover your hidden talent.
  • Step Two: Unleash it.
  • Step Three: Direct it.


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Dealing With Debt

A dream:

You are on a beach of golden sand. You have a large bucket, large enough to carry a million dollars’ worth of golden sand. You put a scoop of sand in the bucket. Then another. With each scoop, you feel richer. But then you notice something. The bucket isn’t getting fuller. There is a hole in the bottom, out of which sand is escaping.

You work faster, hoping to fill the bucket by adding more sand quickly. Yet, as fast as you fill it, the sand escapes. Still you move faster, and still the bucket will not fill. In fact, the level of sand in the bucket is getting lower!

This is the problem with trying to get richer through debt. Debt allows you to have things that you can’t afford. But there is a cost to it. And sometimes the cost is very high—so high that, no matter how hard you work, the wealth you hoped to acquire disappears.

At some rudimentary level, we all understand that debt is dangerous. But in our daily lives, many of us view it as a necessity. We buy homes with it. And cars. And boats, and toys, and vacations. Some use debt to buy the basics: clothes, food, and furniture.

Debt is not necessary. It is a luxury. Sometimes debt is useful. Sometimes it is wasteful. But debt is always dangerous.

I had my first serious run-in with debt when I was thirty years old. My wife K and I were renting a condominium in Washington, D.C. Our landlady came to us with an exciting opportunity: We could buy the condo for $60,000 with no money down. For just a hundred dollars a month more than what we were already paying for rent, we would be paying a mortgage. It sounded like a great deal, so we took it.

What we bought was a negatively amortizing mortgage with a three-year term and an 11% interest rate. What that meant was, every three years we were paying $19,800 in debt service and another $3,000 in closing costs.

We didn’t realize what was going on because our monthly payments were only $550. I was too foolish then to ever ask myself, “What is the cost of this debt?”

I tried to find another bank to take me out of this scam but none would. The mortgage we had signed was not backed by the government (Freddie Mac/Fannie May), which meant that no other bank would touch it.

It was like the dream with the leaking sand. Our golden condominium was nothing but fool’s gold.

And we were the fools. I wasn’t able to get us out of that deal until years later when I was wealthy enough to pay off the mortgage. Even after calculating the rental value of living in that condo, the deal cost me more than $30,000, and I had nothing to show for it.

I learned that when banks make it easy to borrow money, it’s not because you are a nice, deserving person. I learned that if you can get a loan despite poor credit (as ours was at the time), there is usually a scam involved. It also taught me to always ask the two critical questions about debt, “How much will it cost?” And, “Can I afford it?”

It was an expensive lesson. But the lesson seemed cheap thirty years later when, in 2005, the real estate market bubbled out of the pot. I sold my speculative properties and got out of the market. I made and saved millions, while my friends who ignored my warnings got killed.

Debt is unnecessary and it is dangerous.

It is unnecessary because there are always less expensive ways of getting what you want. And it is dangerous because it can sometimes be very expensive.

Let me give you two examples.

Let’s say that, like most Americans, you are in the habit of buying things with credit cards. After a while, you notice that you have accumulated $30,000 in total debt. You decide to cut up your cards and repay your debt. You can devote $400 a month to paying it back. How long will it take, and how much will it cost you?

The answer may surprise you. It will take you ten years to pay off the credit card debt. And your total payments will be $47,428. Of that, $13,278 will have been in interest payments.

Or let’s take a $150,000 home on which you take a $120,000 loan with a 6.5% interest rate. The mortgage payments are $914 a month, which you can afford. But how much will that house really cost you? Including interest payments? You will end up paying $329,303 for that house. Almost half of that—$153,050—will have been to interest payments.

The commercial community (bankers and manufacturers) doesn’t want you to be afraid of debt. And neither does the government, as I explain in the box. These institutions want you to like debt. They want you to use it. They want you to go into debt because it is good for them.

When you take out a mortgage to buy a home, or sign a lease on a car, or use credit cards to pay for your lifestyle expenses, the commercial community profits. The manufacturers make money on products you may or may not need. And the banks make money on your debt.

The mainstream financial media rarely talks about the dangers of debt. That’s because they make their profits from the financial institutions and manufacturers whose advertisements support their publications.

And the government actually encourages its citizens to take on debt. This was the recommended strategy for getting us out of the Great Recession that the (second) Bush administration (and the Federal Reserve) advocated and it’s the same scheme that Obama’s people are advocating today.

Debt is like a cancer. It lurks within. It guts your wealth, while you are paying attention to other, seemingly more important things. Then one day, it breaks through and gives you a fever. You call in the doctors and they cut you open, only to have them find the mess that is your financial body. The doctors then sew you up and walk away.

Here’s what you should know about debt:

As a general rule, you should live without it. You should find other, less expensive ways to acquire the things you need.

There are some cases where debt makes sense. I’ll talk about that at the end of this essay. But let’s look at what you should not do.

Unless you are wealthy, don’t lease your car. Buy it. Buy the car you can afford, not the car you believe will make you happy. Any non-appreciating asset (such as a car) will never make you happy if you have to pay its debt service. I didn’t buy my first luxury car until I was a multimillionaire.

Don’t buy anything with a credit card. Keep only one credit card for renting cars. Use a debit card to buy clothes and groceries. If you don’t have enough money in your bank account to use your debit card on a purchase, don’t buy it. If you don’t have enough money in the bank to buy something, it means you can’t afford it.

If you can’t afford the debt on your house, sell it (if you can) and buy something cheaper. In any case, start paying off the principle balance of your house (the amount you owe, not the interest you will owe) as fast as you can. Make it a goal to own your house free and clear as soon as possible.

If you have debt, pay it off as fast as you can, but not before you have filled up your bucket for emergency savings. By emergency savings, I mean money you will need to pay your bills if you lose your job. Six months’ income is what some financial advisors recommend. I’d recommend a year. It may take you that long to replace your lost income.

Pay off your debt even if the interest rate is low. In theory, you should put your extra money elsewhere if you can earn more on it than you are paying in interest. If, for example, you can get 4% in municipal bonds and you have a student loan at 2%, it makes more sense to buy municipals bonds and pay your student loan off slowly. But in reality, the extra 2% you are earning on the spread is not worth the risk in carrying the debt.

When I started earning money, the first thing I did was get rid of that terrible loan on the condominium I told you about earlier. The next thing I did was pay off the mortgage I took on a home. I paid it off in two or three years, even though it was a thirty-year mortgage. I loved the idea of owning my home free and clear. So I put every extra dollar I had toward paying down that mortgage. The bank didn’t like it, but the day I tore up that montage…I felt like I had been emancipated from financial slavery.

If you are troubled by debt, know this: you can get out of it just as I did.

When you are debt free, you can begin to use debt strategically. But to do so, you must always ask two critical questions: How much will it cost? Can I afford it?

Buying cash-flow real estate properties is one such example. Real estate values in many markets today are as low as they’ve been in ten or twenty years. And mortgage rates, at 3%-5% for people with good credit, are very low. This makes sense.

It may also make sense to take on debt to finance a business. But again, you have to be very careful. You must be sure that the return you are getting on your debt is guaranteed to be considerably higher than the cost of the debt.

But I don’t want to leave you with a happy feeling about debt. Debt is unnecessary. And it is dangerous. So get rid of it as fast as you can.

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Deep Thinking

Today’s post comes from my good friend and neighbor, Bob Irish. Read his compelling argument below.

I mowed the lawn today, and after doing so I sat down and had a couple cold beers. The day was really quite beautiful, and the brew facilitated some deep thinking on various topics.

Finally I thought about an age old question: Is giving birth more painful than getting kicked in the nuts?

Women always maintain that giving birth is way more painful than a guy getting kicked in the nuts.

Well, after another beer, and some heavy deductive thinking, I have come up with the answer to that question. Getting kicked in the nuts is more painful than having a baby; and here is the reason for my conclusion.

A year or so after giving birth, a woman will often say, “It might be nice to have another child.”

On the other hand, you never hear a guy say, “You know, I think I would like another kick in the nuts.”

I rest my case.

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More on Big Ideas

A Big Idea, in the information marketing business, must be more than just catchy and suggestive. In other words, information marketers must do more than create David Ogilvy’s idea of a Big Idea.

A Big Idea for Ogilvy was a cowboy smoking a cigarette while perched on a horse. That works for selling cigarettes but it wouldn’t work for selling books and newsletters and other information products. In the world of information publishing, a Big Idea must contain within it an exciting, arresting thought – a thought that directly or indirectly promises something that the prospect desires. It must also be immediately ascertainable, intellectually stirring, and emotionally compelling.

A Big Idea instantly drives the prospect toward a foregone conclusion by evoking a useful emotion. A useful emotion is one that makes the prospect want the product. Many copywriters miss this point. They feel that their job is to arouse any strong emotion in the lead. But if that emotion is not conducive to selling the product, they’ve made their job more difficult.

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Maximum Tolerance

Is there such a thing as a maximum tolerance for taxation?
A rate above which people would stop working?
Logic suggests there is. If, say, the income tax were set at 100%, very few people would work. These would be the people who loved their work so much that they’d do it for nothing. Same goes for a tax rate of 99% or 98%. But what’s the upper limit? How high would it have to get before it would keep most people from being willing to work?
I wouldn’t mind if Obama raised my tax rate to 42% or even 45%. Once the rate hit 50%, though, it would start to rankle me. If it went up to 60%, I might stop working. And the many people I have talked to about this all seem to have that same 50% to 60% limit.
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How the “Big White Lie” of Investing Almost Cost Me My Retirement

Originally published in the October 2011 issue of “The Palm Beach Letter

I consider myself to be an expert of sorts on retirement. Not because I’ve studied the subject, but because I’ve retired three times.

Yes, I’m a three-time failure at retiring. But I’ve learned from my mistakes. Today, I’d like to tell you about the worst mistake retirees make.

It’s a very common mistake. Yet, I’ve never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books. The biggest mistake retired people make is giving up all their active income.

When I say active income, I mean the money you make through your labor or through a business you own. Passive income refers to the income you get from social security, a pension, or from a retirement account. You can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investment (ROI).

When you give up your active income, two bad things happen:

First, your connection to your active income is cut off. With every month that passes, it becomes more difficult to get it back.

Second, your ability to make smart investment decisions drops because of your dependence on passive income.

Retirement is a wonderful idea: put a portion of your income into an investment account for forty years, and then withdraw from it for the rest of your life. Once you retire, you won’t have to work anymore. Instead, you will fill your days with fun activities: traveling, golfing, going to the movies, and visiting the kids and grandkids.

It’s a great idea. But it never actually worked.

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