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Feature: Prevent a Family Feud

Prevent a Family Feud
Planning can eliminate in-fighting and ensure a smooth transition to preserve the family business.

By Sally Huggins

      Statistics illustrate a high attrition rate among family businesses following the death or retirement of the founding entrepreneur. Yet despite those pessimistic numbers, thousands of companies still succeed into subsequent generations.
      Many rely on simple luck. But a better plan for success is succession planning.
      Rex Newcomer, president and chief executive officer of D.H. Pace, is the second generation to lead the company, which includes Overhead Door locations in Kansas City. Newcomer, who is investing a lot of energy in planning the transition, began the process two years ago. Company leaders have attended seminars and read several books to guide their planning.
      “We just finished a weekend retreat with all adult family members to move our process forward. We are finishing off the transition from the first to the second generation and we are working on the third generation,” he said.
      D.H. Pace is atypical. More frequently, the story is one of an unexpected transition.
      “I never intended to go into the family business but my father died.”
      “I had other plans but I stepped in to help out for the short term and never left.”
      Each is an avenue traveled by a local family business as it moved from one generation to the next. What they had in common was a lack of planning for the transition, although all survived intact.

Times Have Changed
      Historically, it was expected that a father would hand the business off to the oldest son who would continue to operate the business until passing it on to his son. But as family dynamics have changed and as women have fully entered the workforce, that natural transition isn’t so natural; or sometimes—even possible.
      It is now incumbent on the company leader to develop a plan for the hand off. Failure to create a succession plan can threaten the survival of a business owner’s legacy. It often takes a tragedy or a major event before a small business owner realizes that a succession plan is a necessity.
      “Without planning, children may unwillingly, uninterestedly and certainly without the proper mentoring or training, inherit the task of running the business,” said Myron Sildon, chairman of Sildon Law Group. “Management should start planning five to 10 years in advance and put a team in place before the owner plans to retire.”
      To ensure that a company survives the transition to another generation, experts recommend creating a strategic plan that includes family members in its development, as well as open discussion about the future the current leader envisions for the company when he or she is no longer leading.
      Essential to the process is to connect the family members emotionally to the business and to educate them on how to keep it going from one generation to the next, Newcomer said. Entrepreneurs, especially the founder, shower their businesses with energy and devotion, but it is important for them to make plans for when they no longer want to or are able to lead the family business.

Guides for the Transition
      Family businesses make up a vast amount of the business world and a whole industry has sprung up to chaperone companies through the transition maze. Still, the numbers show that only a small percentage of family-owned businesses invest the time in strategic planning to make the transition smooth—and, many don’t survive the transition at all.
      For companies interested in planning, a wealth of information and resources is available to help in the process.
      To meet the demand for information, the Small Business Development Center at Johnson County Community College created a series of workshops about family business management, succession planning and strategic planning. On Jan. 29, the college is sponsoring “The Keys to Family Business,” a presentation by nationally known family business advisor Drew Mendoza, managing principal of the Family Business Consulting Group in Chicago.
      Over the 20 years he has helped family companies with transition, lack of communication is the primary issue Mendoza has found among the family members. He says communication is a crucial element in planning, and small business owners should share their wishes, hopes, expectations and intentions.

      Often business owners, especially founding entrepreneurs, know what they want to happen to their company when they retire, but have never communicated that to other family members or company executives, he said.
       “Our work is to get in and put in place the process and the structure so the family can make decisions. We teach about the roles of the family members and put in place some rules. Once they have a rulebook and everyone knows what the rules are, then it gets a lot easier. Until then, nobody knows what game they are playing,” Mendoza said.

Planning Should Be an Ongoing Process
      Planning for succession needs to be looked at as a process, not an event.
      “We try to convey the importance of thinking about it as ongoing, 24/7. In terms of leadership, you should be working every day to foster the capabilities and competencies of people—family and non-family—who will take leadership roles,” said John Simmering, president of the Legasus Group, family business advisors.
      “Entrepreneurs are wonderful planners. They just keep it all in their head. Sometimes they are bewildered: ‘Why doesn’t everyone understand the plan?’ It’s perfectly clear to them,” he said.
      Developing a strategic plan incorporates the framework for the transition of the company to the next generation.
      Often life gets in the way of planning. Entrepreneurs can get so busy running their business that they neglect to consider the future.
      Kerry Browne, owner of Browne’s Market at 33rd and Pennsylvania and the fourth generation to lead the company, stumbled into the business when her father became ill. She was in college and had no plans to join the family business after graduation.
      But when Browne’s father became ill, the family closed the store for a couple of weeks and then brought in John McClain, a friend, to help her father revamp the store and reopen. Just before it was to reopen, her father died. Browne determined that the store would reopen because it would keep her father’s legacy alive. There were no plans for succession in place.
      “If we had planned, I would have planned myself out of it. I was sure I wasn’t going into the store. Growing up from two years on, I spent every minute with it. I didn’t want to be involved,” Browne said.
      But having become involved, she is happily running the deli and Irish import gift shop with McClain, now her husband, and planning for the next generation—the fifth—to take over. Although her children are still young, she has nieces and nephews who are very involved. The planning has been informal so far, but she anticipates bringing in an outside source to help with the process.
      “A third party would keep it more neutral,” she said.
      Removing the egos and personalities from the discussion helps, said Newcomer.
      “You can’t change those. Family members have different perspectives and you have to respect that. Good communication helps create the dynamic to keep the family business together during transitions,” he said. “You have to manage expectations and put structures in place to manage the transition.”
      Missy Love, the third generation to operate Alaskan Fur, said the company had no formal plan for her to take over as president, but the succession was smooth. She hadn’t anticipated joining the family business either. Shortly before she was to take a marketing position with a local television station, Love’s father asked her to help temporarily.
      “I never planned to work in the business. I was planning to work in advertising. I stepped in to help when my father fired his marketing people. I stayed. Now I really like what I am doing,” Love said.
      Today, her brother and two cousins also work for Alaskan Fur. Her father remains as chief executive officer. Love doesn’t have a succession plan, but she anticipates they will develop one.
      “We have talked about planning for succession but haven’t formally done anything. We all know we need to plan,” she said.
      Her father acquired the company when his father passed away. It was just expected that he would step in, she said.

Involve the Next Generation Early
      Jill Long, president of FELCO Printing & Mailing in Kansas City, graduated with her MBA and started work at the company the following week. She had grown up with the business and knew it was an opportunity for her she wouldn’t find elsewhere.
      During the 13 years before she became president, she and her father worked on a transition plan so that it was seamless. There wasn’t a plan when the company moved from her grandfather to her father and that pointed out the need for advanced work, she said.
      “Communication was ongoing. We had a lot of give and take. The issues were about how to transfer the responsibility so my father could retire. While a plan is not in place for the next generation, there is a plan for a non-family member to take over the day-to-day operation in an emergency,” Long said.
      Long is the only family member involved in the business and her children are teenagers so she doesn’t know yet whether it will be passed to them or she will sell the company.
      For Sarah Scott, the idea of joining her father’s company, Sunrise Advisors, a fee-only wealth management firm in Leawood, started when she was a child and would listen to her father talk about his work.
      “He got us excited about the business by coming home and telling us stories when we were kids,” she said.
      Now she and her brother, Sam, are vital parts of the company and are preparing for years down the road when their father, David Scott, will retire. She said the family connection inspires trust from their clients who know the company will continue after David’s retirement.
      “We have a succession plan and clients like the reliability of that,” she said.

Selling as a Form of Transition
      When there are not family members available or interested in taking over the company, it is equally important to have a plan in place for selling the business outright or for providing outside management while keeping family ownership, said Chris Pickering, attorney with The Smith Law Group in Shawnee.
      If the company is not going to be operated by the family, it is important to set a value for the business that looks fair to all parties, he said.
      “The family business ought to be looked at as an asset like anything else. You can set a value for the business at the time you talk about succession and transfer. When the value looks fair going in, you don’t have fussing and litigation about it later,” he said.
      Pickering recommends involving a tax professional, insurance professional and attorney when developing the succession plan.
      The tax consequences of lack of planning can be huge, to the point that the company has to be sold to cover the taxes.
      A business can save millions in taxes by passing the company to family members without selling it, but sometimes the entrepreneur may not want to pass it to children who don’t have the financial resources or managerial skills to continue the business, said Sildon.
      The planning process should also include non-family employees if there is no family member in line but the owner wants the business to continue and not be sold. The transition can be set up to go to a family ownership group that will keep the business even though family members don’t intend to work in the company, Simmering said.

Remove the Sense of Entitlement
      The dynamics of the next generation when there are multiple siblings or cousins can be complicated by the power struggle that often occurs when the single entrepreneur is no longer involved.
      “Some people work so hard at what they are doing, they don’t think about what will happen at the end. A lot of people don’t like to choose between their children. But after they are gone, they don’t see the problem that lack of planning can create. If they were alive, they would say, ‘This is terrible. I never wanted this to happen. I just wanted to be fair to my children,’ ” Pickering said.
      “Sibling rivalry can get in the way of running a successful business. Even when siblings are already involved, once the first generation is out of the picture, problems can arise because of the personalities,” he said.
      Mendoza recommends that an entrepreneur remove the sense of entitlement the next generation frequently feels. It is important to send a message to the children that while this business could be theirs someday, they need to get their education and some work experience first, he said.
      “The kids need to understand that there are accountability issues and performance issues and you don’t want to find that out after they already are working there. If you have to fire them, it gets messy,” Mendoza said.

Outside Help
      Resources for transition planning are abundant, including books, newsletters, call-in radio shows, family business professionals, attorneys and insurance professionals. All of the professionals recommend using some outside resources to help family members develop a process for evaluating the company and the possible transition strategies. It can be as inexpensive as buying a book, as long you buy one for all of the important players so everyone is involved in the discussion, Mendoza said.
      “You can educate yourself. If all the family members are willing to do the reading, you can do it for $100,” he said. “The trick is to get multiple members there, so they are involved firsthand.”
      When Mendoza works with a company, his involvement is short-term. He teaches the company leaders how to proceed and they can move forward.
      The most important step is to start the planning. When?
      “Ideally, the day you found the company,” said Simmering. “It is something that business owners always are conscious of if they have an interest in sustaining the business over the long term. It’s a great business management practice. You should always be thinking about what’s ahead and how to foster the capabilities and competencies of who is next.”
      Planning starts today. Make the call. Buy the book. Enroll in the class. Plan for succession' and succeed.

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