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Judy Barber |
COMMENTARY How many families successfully hand the keys to the family business to the next generation? As I began to plan for this issue on family businesses, I asked a number of estate planning professionals for examples of successful transitions from one generation to the next. By "successful" I mean the family is still together—continuing to enjoy each other's company as well as running a profitable business together.
I heard of some successful outcomes. But I heard of many more tragic endings to once vital businesses, and many unfinished stories of postponed succession and estate planning. Lack of communication was a common theme. In many families involved in business together, the personal relationship between generations, siblings, and in-laws gets lost in the day-to-day operation of the business. Without that deeper connection, it's tough to deal with the issues of continuity in the business; when and how the parent(s) leave the business; financial support for the older generation during retirement; matching the skills of the next generation with the needs of the business; equitable treatment of all children, those in and out of the business; business and tax planning issues; and ultimately, who will control the business. TALKING ISN'T EASY Open discussion regarding the future of the business means going beyond the usual ways of talking to each other to reveal and work through old hurts and current frustrations. Some business owners create a plan with their advisers without consulting family members, an error that can seriously wound the family and, ultimately, irreparably damage the business. This is forcefully illustrated in a recent best selling book which dramatizes in fiction what too often happens in real life. In her Pulitzer Prize winning novel, A Thousand Acres, Jane Smiley writes about the unsuccessful — in fact, disastrous — transfer of a farm from the third to the fourth generation of a family in Iowa. In the end, the family and the farm are destroyed because the family is unable to communicate and fails to plan. By avoiding a succession plan, they deny the importance of their feelings and the impact of their emotions on their relationships and on the business. Without this planning process, unconscious motives are never examined and a tragedy of the dimensions of King Lear unfolds. With its theme of psychic violence in a pervasively rural setting, A Thousand Acres may seem an unusual model for me to choose to argue the need for preparation in a business transfer from parents to children. However, the book taps universal themes and reveals this family's transition with such chilling honesty and insight that I strongly recommend it for members and advisers of family businesses. Larry Cook is a tough, hard working, competitive farmer who prides himself on owning "the biggest farm, farmed by the biggest farmer in Zebulon County." He runs the farm as he sees fit. His daughters Ginny and Rose and their husbands Ty and Peter work the farm with him, begrudgingly doing things his way. His youngest daughter Caroline, a lawyer, lives with her husband Frank in Des Moines. AN IMPULSIVE DECISION In May 1979, Larry suddenly announces the transfer of the farm to his daughters at a pig roast given by a neighbor, Harold Clark. Harold has recently purchased "a brand new enclosed, air conditioned International Harvester tractor," an acquisition which irks Larry and may be a contributing factor in his sudden decision to transfer the farm. Not to be one-upped by his rival and old friend, Larry appears, by taking care of estate taxes rather than buying an extravagant piece of equipment, to be making the wiser choice. Youngest daughter Caroline is not so sure it's a good idea, however, and hesitates in approving his decision, an act for which she is punished by being excluded from the transfer when the documents are signed. The downward spiral has begun. The family takes out a loan on the equity of the new appraised value of the farm, its first debt. Stripped of ownership, Larry watches with frustration as Ty and Peter run the farm their way. By relinquishing his control all at once, he feels robbed of his power and sense of purpose. He hadn't understood the implications of "having nothing to do." He also reaps what he has sown with his relationships. His treatment of his sons-in-law as hired help and his daughters as servants is no longer tolerated. Although Larry continues for awhile to second guess them, Pete and Ty move ahead with their plans to modernize the farm, sidestepping rather than dealing with the realities of the changed relationship with their father-in-law. Ginny and Rose tire of their father's sullen criticism and erratic behavior, finally abandoning attempts to keep him in the fold. Alarmed by Larry's aimless wanderings through the countryside, worried that he is being mistreated, Caroline and her husband Frank side with Larry in his attempt to get the farm back, which the judge denies. From then on, both the family and the farm fall apart. There is much more to this novel than I've summarized here. A Thousand Acres is a cautionary tale with great depth and many levels at which the reader can identity. From my perspective as a family business consultant, the successful transfer of the farm is impossible long before the ink is dry on the legal document. Their failures are those of many families. Neither Larry nor his children are willing, or perhaps able, to step outside the rigid values of their family and community. They work at keeping up appearances under the ever-present eyes of a small farming community and avoid talking together as a family. There are many intrigues, arguments and discussions among various family members but never all together. Hidden feelings of frustration, anger, fear, hurt and, particularly, distrust, fester but are never expressed. As Ginny says, "The last few weeks had shown well enough for anyone to understand that the one thing our family couldn't tolerate, that maybe no one family can tolerate, was things coming out in the open." NO CAPACITY TO WORK THROUGH ISSUES Without the possibility of resolution, members of the fourth generation continue to suppress their own instincts, a habit for so long that they have little sense of themselves. Ty continues to "let things slide," to be the good farmer and helpful son-in-law, never challenging Larry or asking for more responsibility. Pete's disappointment in his own unfulfilled life and his rage at Larry for his tight control of the farm escalates, "erupting at odd times" with "wildly vicious insults" toward his family, and leads to his death. Rose and Ginny, unable to act as adults with their father and bound by the pressures of the community to take care of him, never set limits with him nor resolve their past or current relationship with their father. Caroline is neither in nor out of her family. Having left the farm, she's distrusted by her father and her attempts to act as an adviser fail. Clearly, professional help is needed. At one point, Ginny tries to transcend her family's distaste for difficult topics by calling a psychiatrist. She hopes someone can mediate a family discussion. Yet, like other families in business together, the fear of venting all the pent-up feelings and disclosing devastating secrets compels her to hang up when someone answers. As in real life, this family is as much destroyed by what is not said as by its fear of what might be said. If this family had been able to gain insight or seek help, it could have implemented a succession plan that provided for an ownership transition for which Larry himself planned the timetable. Pete and Ty would have had time to learn more about the overall operation of the farm, better understood the financial working of the busines, and been better prepared to take over. Perhaps, then, they would not have jumped so quickly at the chance to fulfill their own inidividual dreams buy might have followed a long trm vision for the continued success of the farm. Their skills could have been assessed, the best roles found for each of them in the business. Perhaps if Ginny, Rose and Caroline had come to terms with their relationships with their father, they could have moved out of the shadow of his domination and lived their own lives. They also might have had greater incluence in a healthy family business. Other articles in this issue discuss strategies to avoid the consequences of families not talking and not planning. You'll see firs hatnd how the Mitchem family of Eugene, Oregon successfully transfers the family business from father to sons. From Mary Korman, Fred Gasperson and Mary G. Murphy, you'll find some common themes, as they explore specific issues and the steps to take well in advance of retirement of the head of the business to help ensure that the family and the business will make it through th transition.
PERSONAL EXPERIENCE
Bridging the Generations: A Succession Plan that Worked Through hard work, some good luck, and above all, a commitment to family relationships as well as to the business--a family in Oregon avoided the pitfalls of the Iowa farm family in A Thousand Acres (see above). Instead of tragedy, the transition of this family's electrical contracting business from father to sons became a success story. The first step towards a successful transition plan began, out of the blue, the day son JW just happened to be listening to a business program on the radio. "I was a bachelor at the time, ironing clothes. I heard this Steve Swartz talking about family business and thought to myself, that's what I'm looking for....So I made the call." That call led to hiring what is now McGladrey & Pullen Family Business Group, who helped the family plan ownership transition. With a succession plan in place, the Mitchems were able to survive even the father's sudden heart attack and overnight retirement with healthier-than-ever family and business relationships. In making contact with the Minneapolis family business consulting firm, JW did what the Iowa farm family could not do: he stepped out of the conventions of his family and community to bring in outside help. It wasn't easy. He was candid in telling me that he doesn't usually like consultants: "I haven't been very successful with them." But he took a risk because the situation with his father had reached a stalemate. He went to his dad with the idea. "I just presented it to him...He's a pretty bright guy and I think he knew they might help." I interviewed the Mitchems in their office in Eugene, Oregon. I was introduced to them by Peter Sammond, the McGladrey consultant who, with his colleague Steve Swartz, worked with the Mitchems initially and who has stayed in touch with the family. My thanks to Peter for the introduction, and the Mitchem family for their time and their candidness in discussing the often unspoken issues that many family businesses face. From Jim Mitchem Sr., I learned a little about the evolution of the family business. He had begun working in 1946 for L.H. Morris, an electrical contracting firm. Through the years, his role in the company grew, he took the various licensing exams, and by the early sixties was thinking about leaving and setting up his own business. But in 1966 his boss and mentor Len Morris had a brain tumor which needed surgery, and asked Jim to stay. "I owed a lot to him. He's the one that taught me the ins and outs of the business. So I said yes," Jim told me. With Morris unable to return to work, Jim and two others ran the business for two years. In 1968, the three men bought the company. In 1981, Jim found himself sole owner, as one partner retired and the other died. That year Tim, Jim's younger son, joined the company and in 1983, his older son Jim (JW) began working at the firm. In 1989, Jim suffered a heart attack and retired from the day-to-day operation of the company. Since retirement is one of the most sensitive issues in transition of a family business, I wanted to know..... JB: With both sons In the company by the mid '80s, was Jim's retirement being discussed before the heart attack? Jim: Up until I had the heart problem, I didn't anticipate leaving. I thought, well, I'll take a month off, and I'd take a month off. But retire....? I think it is one of the things you have in the back of your mind, but at the same time I didn't want to retire fully. My sons were evolving: JW had the management skills and had been involved in labor relations, and Tim had the field experience and was becoming fairly proficient at the estimating, too. But I guess my main concern was that I didn't think they were ready yet. I always enjoyed the work; the tougher it was, the better I liked it. So it was selfish. If I hadn't been forced into the situation by a heart attack, they probably wouldn't have been ready yet. Tim: His retirement wasn't a particular issue to me. I was enjoying what I was doing.
JW: I think dad really wanted to retire. But he had a hard time releasing. I think it was more that he just didn't know how to do it.
Jim: My main concern was about the family. I know there aren't too many family businesses that succeed. I know a family business in town and it was a real fiasco...They hardly speak to each other anymore.
JW: It was happening all around us. It was awful. We all made the commitment that that wasn't going to happen. We may go bankrupt. JB: Tell me about the process of working with the family business consultants.
Tim: We sat down and they interviewed us, gave us psychological tests, and told us what they thought. JW: The testing was both verbal and written interviews.
Jim: What they did was teach us more about each other's personalities. JB: What issues had to be resolved? JW: The buy-sell was not a problem. It was just, 'How do you let go?'. One of the major issues was that dad had to let go of some of the responsibilities with the customers. And we had a 'we against them' attitude that was hurting our reputation in the community; if we got into a conflict with somebody we went after them. That had to change. Jim: Another issue was whether the two of them could get along. Tim and Jim are totally different personalities. JW: There are no two more opposite people. Tim's mechanical. I'm more administrative. I'm more extroverted and emotional. Tim: Yeh, he's more outgoing than I am. I can sit there for an hour and study that code book and dope out the nitty gritty things; he can't sit down for more than 15 minutes. Yet he can go on the front end; that's the stuff he needs to be doing. JW: We used to be into finger pointing. The consultants showed us, 'Hey, he's this way, and this is why', and basically told us who was best for which job. One of the major issues had been getting job descriptions, organization. Dad knew it needed doing, but it just wasn't getting done. And I didn't have the clout in the company to get it done. Tim: Then dad had his heart attack. One day he was here, the next day he wasn't. It was either sort it out, or go under. Not that I wanted him to have a heart attack. But maybe that's the best way to do it: just say, 'I'm getting on out of here.' JB: Suddenly, the two of you were running the show. What changes have you Implemented since then? JW: We're more service, customer oriented. We approach our clients in a more constructive way. If we see there's going to be a problem, we work it out diplomatically. When issues come up, we use a problem-solving approach. I think we've gotten rid of that "me against them' attitude. And there's a stronger emphasis toward growth and profit versus growth and volume, as well as customer satisfaction. Tim's probably the one most responsible for that. At one time, we were the third largest contractor in the state, including Portland, and I always liked that. I loved being big but it wasn't profitable. Tim kind of tones me down. I still push—that's our constant thing—but it's respectful. And Tim's the one that controls it. Tim: We had a different philosophy from the start. I was extreme one way, and he was extreme the other way. Now there's lots of discussion on this profitability versus volume. We're working smarter, more efficient. We've put in a new computer system. We have better equipment. And I think we give our employees a little looser rein. We give them more room to operate, turn oversome responsibilities to them thatwe didn't used to. We have better people than we've ever had, first class people. JW: We're doing more challenging things — we're doing two major projects right now — and things are clicking much better. JB: The consultants revealed two opposite personalities. Have you found ways of turning your differences Into strengths? JW: We've learned how to work around our differences and how to communicate. I handle the legal aspects, labor relations, office management, and some budget. Tim handles estimating and project management. Normally, Tim manages the industrial projects and 1 get more involved with the commercial. Tim: I pretty much do the technical end. The bridge job we're doing is basically my responsibility. But when it comes down to the negotiating end of it, that's more his. If he's got a job he's not sure about, I'll look at it. We get together on some of the financial decisions. He looks at the bank book. On occasion I'll sit in on a meeting with the bankers. He does some project managing, and he usually sits in on our major bid jobs. But there doesn't seem to be any attempt for him to try to do my job or me try to do his. We both pretty much run our own show and just come together when we need to. 1 think, overall, it's probably good that we both have separate backgrounds. It's kept us from overlapping the other one. We're able to drawa line between us. I thinkwe're both very competitive people, and if we can direct it toward the business it will be fine. If we direct it toward each other, I don't know what would get done. JB: What is Jim's role now? Jim: My function now is to reinforce their thinking. Usually, they've pretty well made their decision and they aren't going to change that much, but I back them up. Tim: He's a good sounding board.. Sometimes, if I'm kind of on the fence about something, I'll give him a call and go through it. JW: Yeh, every now and then I'll say, "come give me a hand.' We're doing a large paper machine rebuild of a warehouse and I asked for some help on budget and numbers. That took maybe three or four hours of his time. He loves that. But he doesn't like to stay here. Jim: Before, I'd manage some excuse to get over once or twice a week. In the last year and a half, I'm very seldom over there. It's got to the point now where they don't need me too much. JB: Have you really 'let go', Jim? Jim: I don't have time to do all the things I want to do. I've got a shop that I've set up and stuff to do out there. I do pruning, yard work. We were gone eightweeks lastyearon a long trip. For 15,16 years, we've been going down to Palm Desert. We're going to Pennsylvania, Idaho, and Nova Scotia. JB: How does the future look for the company? Tim: I am pretty optimistic. We still have setbacks but they're not near as nasty. JW: I think I'm more optimistic than I've been in a long time. Jim: I think they're doing just fine! The Mitchems have good reason to be optimistic about the future of L.H. Morris. Jim Sr. is content in his retirement. The business needs of the company have been matched with JW's and Tim's skills. They manage different parts of the company and come together to wrestle through the tough decisions of co-ownership. JW and Tim can talk to each other and trust each other without having to worry about the intrigues and back-stabbing that characterized the family in A Thousand Acres. They respect their different skills and share a vision about the character and future of the business.
PROFESSIONAL VIEW
An Ounce of Prevention: My grandmother said that an ounce of prevention is worth a pound of cure. Nowhere is that old homily more true than as sons and daughters make career choices and ready themselves to join the family business. Energetic and eager to seize the opportunity and perpetuate the legacy, they step forward to enter the business side of their family's life. The seeds of future success for sons, daughters and the business are sown in the beginning of their careers. All too often very little attention is paid to how they are prepared or to how their careers are nurtured. Entry into the family firm begins a process which can either bear sweet or bitter fruit for the individuals, the family, and the business. A lot depends on how well it is planned. PREPARATION Carrying the metaphor a little further, owners with the best of intentions too often cast seeds which have a predictable harvest of anguish. A little anticipation can usually save a bushel of pain. Ben and Tom, hardworking owners of a successful distribution company, had dreams of seeing their enterprise carried on by their offspring. They had a smooth functioning partnership and a strong brother relationship. Over lunch through the years, they talked of the time when their children would be involved in the company. With surprising swiftness their children became teenagers, in high school, starting to create dreams of their own. The word went out that family members were welcome, even expected, to join the business. So far, so good. The next necessary step in the process was overlooked. Ben and Tom neglected to create a shared set of expectations with each other which both could communicate to their heirs. Ben said to his daughter, 'Get a college degree with a major which gives you good tools for running a business and then we will talkabout a position.' Tom, on the other hand, said to his son, 'just graduate from high school, then I will find a spot for you.' From this one oversight, several problems grew. The two cousins got off to a poor start. That is not surprising. The differing educational standards looked unfair to Ben's daughter. Tensions between the two cousins started after they both joined the company. Tension, in the beginning of the building of a partnership, creates an unhealthy climate for future success. It is also not surprising that Tom's son felt entitled to a position and salary based on family ties, not on his qualifications and capability. Tom had neglected to plant the concept that it was performance and competence that would earn a position and future rewards. No wonder, in years to come, his son lacked the respect of the employees whom he had dreamed of leading. No wonder his attitude was one of "You owe me." Prevention requires that the senior generation, whether a partner or the sole owner of a firm, grapples with some fundamental questions whose answers need to be communicated to any and all offspring as they enter high school. First, Ben and Tom needed to define educational requirements and apply the standard uniformly. Ben and Tom did not have college educations themselves but had successfully grown the business. Beginning 40 years ago, they had grown with the company, learning the skills needed to shepherd a bigger and more complex entity as they went along. Their offspring will not have the same luxury of time. They will step on to the field faced by a different and demanding set of tests of their untried skills. Because of growth and success, they will face greater sales, more people to manage, and more dollars at risk, all in a widely different and increasingly difficult business environment. Looking forward, Tom and Ben needed to identify appropriate training which would help their offspring gain the tools needed for competency in the business. Second, Tom and Ben should have decided whether their offspring would have positions only when the company had an opening and a need, or whether they would create positions just to provide a place for family members. A business can be weakened by the latter process.
Prevention requires establishing an understanding that it is qualifications and performance that will earn and keep a position in the company. If this expectation is explicit prior to entry, there will be fewer misconceptions about what makes a successful fami
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