Family Matters

"Family Owned and Operated" - it paints the perfect picture of a proud, secure company that prides itself on personal attention to customer needs, primarily because the family members involved with the business have such a vested interest in seeing their business succeed. In most cases, these businesses begin with a whole lot of sweat equity and long hours put in by a key family member, usually dad or mom.

In actuality, that was the preferred premise when family-owned businesses first became a mainstay in small town, U.S.A. The benchmark for family businesses today, however, appears to be 10-15 years. If a family-owned business can successfully survive that long and show a profit, trends show that they generally tend to survive to the next generation of ownership within the family. For most, the formula works well. In fact, family-owned businesses are so prevalent today they account for more than three-quarters of all new job creation, 60 percent of the nation's employment, 50 percent of the nation's GDP, and nearly 35 percent of the nation's Fortune 500 companies are family-owned. They're not just "mom and pop shops" anymore, but an important part of our economy's foundation.

According to figures recently released by Entrepreneur Magazine, revenues from family-owned businesses are up 50 percent since 1997, to $36.5 million. The study also indicates other revealing facts. Family-owned businesses are reliable employers: Few have cut jobs in the past three tumultuous years, and more than 50 percent plan to hire more people during 2003. They are optimistic about the future, their debt levels are kept low (more than 25 percent have no debt beyond trade payables), and 39 percent of the firms polled expect to change leadership within the next five years. That means succession - bringing the next generation into ownership status.

On the other side of this discussion, however, only 30 percent survive to the second generation, and only 13 percent make it to the third. Why? Frank Galassini, director of the Family Business Center at the University of St. Francis, points to a myriad of reasons.

"In some cases, it has everything to do with the family dynamics," says Galassini. "There may be disharmony among family members, or worse yet, no succession plan in place at all. Succession within familyowned businesses has to be carefully planned if it's going to survive even the second generation, much less the third. Understandably, a lot of planning needs to take place for there to be a smooth transition, and some 'hiccups' along the way are expected. So, many businesses never make it to that point."

When succession involves, family members who are not ready to take over the helm, it suddenly becomes obvious that something is "broken," and everyone is affected. The business is heading toward serious trouble. What is the right formula for a successful transition? Some local examples of family-owned businesses that have succeeded at succession are O'Daniel Oldsmobile, Marketing Impact, Mike's Carwash and 80/20. Each has found the transition from first to second - and possibly third - generation ownership both challenging and rewarding.

"I was involved when we first started the dealership in 1979," explains Randy O'Daniel. "My two younger brothers Jeff and Greg became involved later when they finished school. In our case, it was almost a natural succession because I was the one who actually helped start the dealership. Back in 1979, we were just a single franchise, and over the last eight years or so I have been the one who worked on the expansions. I was the oldest with the most experience, so it was a natural to try to head that up. We have been involved in a gradual buyout with my dad, Maury, over the past 15 years.

"For us it has been a smooth transition. Everyone has to understand what role they play in the business and the importance of everyone getting along. That reasoning comes from the way we were raised, and I have attributed a lot of that to my parents."

While the O'Daniel family dove right into the business, the Dahm family of Mike's Carwash believes family members need to get their experience elsewhere before becoming a player in the company.

"Actually, I started working here when I was 10 years old," says Jerry Dahm. "But I worked in a lot of other different jobs as well. I worked for a civil engineer, a grocery store and in construction, and I trained in management for McDonald's. It was good experience, and when I came into the business I already had a wealth of knowledge in people skills. I believe the key to stepping into a family business is getting your feet wet somewhere else. If our kids decide they want to come on board, they will have to prove themselves first. We are not just going to turn over the reins of the company just because they are family."

John B. Wilson founded Marketing Impact in 1970. His oldest son, John D., became president of the company in 1994. "From what I am seeing, I would be surprised if the company would pass on to a third generation," says John B. "We have a succession plan and are still discussing that plan right now," John D. adds.

"We have senior management people who have been here for quite some time, so we have a generous accumulation of talent in place," John B. says. "So you can imagine the hardship of one of John's sons being a successor in the company. He would have to walk all over the guys who have tenure here, without the knowledge of how to run this company. This is a team; succession plans are not always centered around a son or daughter. They may very well involve loyal employees."

How important is it that the company remains family owned? To some it's imperative; for others, only as long as it makes sense. Some look beyond the family and at the bigger picture of survival.

"Do we absolutely need it to be family owned? No," John D. Wilson says. "It would be cool, but I have to ask myself if I would be willing to put the business at risk by placing it into hands that can't run it. My answer would be absolutely not."

Another business that evolves around the management of family members is 80/20, a design and manufacturing company that builds custom industrial "erector sets." "Our circumstances are different, because my four children came into the business when they were in their middle to late 30s," says Don Wood, president of 80/20. "They had their own careers and spent upwards of 20 years in their own fields. They didn't come in as children, but once they did, it was absolutely what they wanted to do."

What's interesting about 80/20 is that none of Don's four children has important-sounding titles like senior vice president, or vice president of operations, or vice-president of personnel. Instead, the oldest son Dave is marketing manager, second son Doug is operations manager, third son John is manager of technical services and daughter Susan is regional sales manager for the West Coast. Two of the four (Doug and John) are co-founders of the company with their father.

"We are currently moving into a succession plan," says Wood. "When you get into my stage of life (70 years old) you get painfully aware that you are on the shortend of life. Secondly, we probably have 15,000 stakeholders involved, including our suppliers, our attorneys, our employees and their families, our distributors and our customers. There has to be a succession plan so there is continuity. My children in the business have children already in college. There will likely be a third generation entering 80/20. That is important to me simply because of the objectivity opposed to the subjectivity, and it can foster a great sense of loyalty because of the ownership relationship."

Fortunately, these family businesses already have succession plans in place. However, thousands upon thousands of business owners tend to avoid the subject entirely. Most look at succession as something that just happens upon the founder's death or retirement.

"People tend to think in terms of the wealth they have sunk into the family business, and they are exclusively thinking in the realm of estate planning and creating a will or a trust," says Daniel B. Starr, attorney and partner with Barnes and Thornburg. "It's usually the people in the family business arena who encourage the senior generation to think in broader terms of succession planning. That is a much longer transition period and it should not begin with their death."

Starr says the key to a smooth transition is timeliness and insightfulness. "The moment they have an inkling that their children are going to be involved in the business is the time when they need to give the situation some serious consideration," he explains. "Most people who sit in the leadership position are already making strategic plans for the future. They are thinking 10-15 years down the road and strategically organizing in their mind where they want the business to go. But, part of the leadership role is communicating their vision, and that includes how the business is going to grow and evolve. Many times when they get in between the second and third generation there is a struggle ... the concerns are whether or not the family business is going to retain the characteristics of a small family-oriented business, or is it going to become a business independent of family concerns. The other issue is how they may incorporate people already tenured within the company in the future who are non-family."

Sooner or later every family-owned business will face, or should face, the issue of succession. While there is no crystal ball, there is a wealth of advice and information available for business owners who want to plan the future growth and ownership of the company.

The keys are to plan ahead, don't hesitate to ask other business owners who have experienced similar successions, and involve professionals who can document and provide direction from factual experience. "You need to assemble a team, not just an attorney, but a good accountant, and those two individuals need to be talking to each other and the principle owner of the business," Starr says. "They need to work as a team keeping in mind the best interest of the business owner."