For Michael Kalinsky, founder of Empyrean Management Group, a recruiting and staffing company based in Blue Bell, Pennsylvania, it was bad enough that he was feuding with a vice president, David Kenworthy, who also happened to be his former brother-in-law. The conflicts were becoming all too frequent, mostly because Kalinsky and Kenworthy disagreed over how much autonomy Kenworthy had to make decisions involving the company's biggest client, banking behemoth Capital One (NYSE:COF).

But complicating matters even further was the fact that the father of the vice president/ex-brother-in-law--Kalinsky's former father-in-law, Bruce Kenworthy--was Empyrean's biggest investor. Regardless of family ties, Kalinsky was beginning to wonder if it was time to take radical action and confront his former brother-in-law.

The family had endured its share of turmoil since Kalinsky co-founded Empyrean with a childhood friend, Allen Jordan, in 2000. Soon after depositing a check for $100,000 from Empyrean's original investor, Kalinsky received a call from his then father-in-law, an officer at the bank, who told him that the check had bounced. The investor had changed his mind, but Bruce Kenworthy was familiar with Empyrean's business plan and offered to bankroll the fledgling company with $100,000 from his retirement account. "I saw a chance to build a business for the family that we could pass on to the next generation," Bruce says. There was a catch: Under the terms of the loan, Kalinsky would have to appoint Bruce's son, David, to the position of vice president and make him a minority shareholder.

Eager to open for business, Kalinsky readily agreed to the terms. Empyrean quickly landed business with blue-chip clients, including Sun Trust Bank and Capital One, and began building a staff of recruiters. Then the problems started. In August 2001, Kalinsky received a shocking notice from the IRS informing him that Empyrean had failed to pay its payroll taxes that year. Jordan, who, as the company's chief financial officer, was responsible for handling payroll taxes, had quit a few months earlier to become a consultant. (Jordan declined to comment for this story.) Kalinsky was devastated. He faced the prospect of enduring an IRS investigation that could sink the company, and to make matters worse, his wife, Margaret, asked him for a divorce that summer. "I couldn't believe what was happening," he says. "I was losing my wife, my best friend, and my company all at the same time."

Bruce continued to be a supportive counsel for Kalinsky after the divorce, and even invited him to live in his home for a few months. Kalinsky's relationship with his former brother-in-law, however, began to unravel after the younger Kenworthy moved to Richmond, Virginia, to manage the Capital One account at the bank's headquarters. With hundreds of miles between them, the pair worked independently and rarely saw each other, keeping in touch mainly through infrequent phone calls and e-mails. They drifted further apart during the next two years, as Kenworthy focused on the Capital One account while Kalinsky devoted most of his time to the IRS investigation. (David Kenworthy declined to comment.)

Finally, in 2003, the IRS completed its audit. It demanded $250,000 in back taxes from Empyrean and required Allen Jordan, who had retained his stake in the company, to pay off roughly 20 percent of the debt. Kalinsky and Jordan worked out repayment plans with the IRS, and with the troubles behind him, Kalinsky began to refocus his efforts on growth. By the end of 2003, the company was back on track, posting about $2.9 million in annual sales and turning a profit. But Kalinsky wanted Empyrean to tackle bigger jobs and take more risks. He pushed Kenworthy to expand the relationship with Capital One and bring in new accounts. He also asked him to spend more time in Blue Bell. Kenworthy, in turn, requested a promotion and a larger ownership stake.

Kalinsky was considering the request when he received alarming news from Capital One in early 2004. The bank, which represented 40 percent of Empyrean's revenue, had decided to give the contract to a larger firm. Kalinsky had no idea that the account was even in jeopardy. "I never saw it coming," he says. And he blamed Kenworthy for not alerting him: "I just couldn't understand how he could allow the situation to go so far without letting me know."

A few weeks later, the competitor pulled out, granting Empyrean a chance to win back the contract. Kalinsky immediately made plans to hop on a plane to Capital One's headquarters in Richmond. Then he received a call from Kenworthy, who made it clear that he resented the interference. "He claimed he had the situation well in hand," Kalinsky says. Kalinsky opted not to make the trip, but he did call several other Empyrean employees based at Capital One to find out what was happening. Some of the employees told him that Kenworthy often criticized Kalinsky's decisions and questioned his leadership in front of both them and Capital One staff. "It was clear that there wasn't a great deal of mutual respect between Mike and Dave," says Thomas Brady, a former staffing director at Empyrean who worked with Kenworthy in Richmond for seven months. "They each had their own ideas about how to run the business."

Now, instead of promoting Kenworthy, Kalinsky was thinking about firing him. It seemed like every conversation they had turned into a battle, Kalinsky says. Bruce noticed the strain as well. "It seemed like the stress of the situation really created a conflict between Mike and Dave's personalities," Bruce says. "To this day I'm not really sure why they grew to dislike each other."

One thing that would keep Kalinsky from firing Kenworthy was concern about his relationship with Bruce. In addition to being Empyrean's biggest investor, Kalinsky's former father-in-law had continued to be a trusted business adviser and confidant through the divorce and the IRS troubles. Firing Bruce's son was bound to damage that relationship. What's more, David had been integral to keeping the company afloat during the IRS investigation. Should Kalinsky try to work this out, or should he act?

The Decision

One night shortly after Kalinsky's phone call with his ex-brother-in-law, he drove to Bruce's house and laid out the facts as he saw them: David's open criticism of him and seeming inability to retain a key client were jeopardizing Empyrean's future. Bruce told Kalinsky that the decision was up to him. "I asked Mike whether this was a personal or business decision," Bruce says. "When he told me it was all about business, I said he needed to do what he thought was best."

Kalinsky put off calling Kenworthy for a few days. When he finally dialed David's number, Kalinsky was surprised by his terse tone. Bruce had alerted his son to the fact that he was about to be fired. Kalinsky was caught off guard but stood by his decision. Not surprisingly, the conversation was heated and ended badly. "It was quite obvious that Dave wasn't very happy with me," Kalinsky says. "I understand why Bruce did it, but in hindsight it would have gone better if I had talked to Dave first."

Kalinsky felt drained but relieved. He had fired Kenworthy and regained control of his company. He also received a hopeful sign from Capital One, which agreed to keep a few Empyrean recruiters on-site while the bank mulled over its next step. But the euphoria quickly deteriorated. With emotions running high and no buyout provisions in place, Kalinsky and Kenworthy disagreed on how to cash out Kenworthy's shares. That August, Kenworthy sued Kalinsky and Empyrean, seeking a cash settlement equal to his stock holdings, in addition to damages for wrongful termination. To Kalinsky's surprise, Bruce was also listed as a plaintiff and wanted to cash out his stake. "Though I didn't think about it at the time, once Mike let Dave go, I needed to leave the company as well," Bruce says. "It would have been a prickly situation any other way."

That December, Kalinsky sat down with his ex-in-laws and their lawyers for the first of many mediation sessions. Both sides hired appraisers to value the company and they reached a settlement three months later. Empyrean agreed to pay the Kenworthys for their shares of the business, in addition to the $100,000 loan from Bruce, within two years. The wrongful termination charge was dropped.

These days, Bruce is still a bank officer. His son, meanwhile, now runs his own recruiting company in Richmond. His first big client? Capital One. "I guess Dave had better connections to management than I originally thought," Kalinsky says. Some family ties remain. Kalinsky's son sees his grandfather and uncle often, and Kalinsky and Bruce check in with each other occasionally. The former brothers-in-law, however, have not spoken to each other since the mediation. "I know that Dave and Mike will never get along again, which is sad for me," Bruce says. "It would have been nice if the family and the business had been able to stay together."

Empyrean generated $3.3 million in revenue last year and ranked No. 385 on the 2005 Inc. 500. For Kalinsky, the success is bittersweet. He regrets the way things ended with his former in-laws. "The thing that makes me really sad is that if Bruce was still an investor, I would have been able to give a great return on his investment rather than just paying him back," he says.

The Experts Weigh In

Neutral party needed

Kalinsky made the best decision he could for his business, but he was crazy to assume that his father-in-law would side with him versus his own son. At the very least, Kalinsky should have taken down minutes during the meeting with Bruce to prove that he was not acting alone. Even before that, he should have brought in a neutral third party--perhaps a board member--to suggest alternatives to firing Kenworthy, like spinning off a division for him to run.

Clay Nelson
Clay Nelson Life Balance
Santa Barbara, California

The wrong move

I'm not sure Kalinsky should have fired Kenworthy. In hindsight, it seems like he acted on bad information. He should have made sure that he had the story right before he took such a drastic step. Then he should have approached his brother-in-law directly. My sister and I run a company together and we confront each other all the time. We also keep everything transparent--the fact that we sit next to each other helps.

James Ontra
Ontra Presentations
New York City

A hasty decision

Kalinsky may have acted too rashly. His big mistake was not documenting his problems with Kenworthy's insubordination and performance from the beginning. Then when he made the decision to fire his brother-in-law, there would have been no surprises. Kalinsky also should have had a partnership agreement that detailed how he and his in-laws could dissolve their partnership without having to bring attorneys into a crisis situation. It's amazing how many family businesses fall into this trap.

Patrick Keating
Haynes and Boone

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