Who Will Take Over When Pop Retires?

Who Will Take Over When Pop Retires?

by Kate Beem
Staff Reporter of The Wall Street Journal

This article is reprinted by permission from StartupJournal.com.

It took a quadruple bypass for Jay Rains to get serious about handing over family-owned Rains Electrical Sales to his 36-year-old son.

The firm — an electrical-equipment wholesaler in the Kansas City suburb of Shawnee, Kan., for electrical-equipment manufacturers — has been tightly controlled by the 65-year-old father for years. Wes Rains, his son, concentrated on his work as a salesman in his 10 years at the firm, which has eight employees and has $15 million in sales. He didn’t demand, nor was he encouraged, to learn mundane necessities such as payroll or income-tax withholding or legal issues. That left him, he says, unprepared to run the firm should something happen to his father.

“I don’t even know what everybody makes,” Wes Rains says. “There’s just so much paperwork and legalese.”

His father’s successful surgery in December forced both men to confront the thicket of emotional and financial issues involved in succession in a family business. But even now, the elder Mr. Rains isn’t handing things over right away. They’re just beginning a planned four-year transition, after which Mr. Rains says he’ll pull back and concentrate solely on schmoozing customers, leaving his son as the boss.

The Rains family has a lot of company. In the next 20 years, almost every family business begun since World War II will see a turnover in ownership, a change that will reflect a transfer of more than $10 trillion in assets, according to a survey by accounting firm Andersen LLP and Mass Mutual Corp., a Springfield, Mass., insurer that has worked with family businesses. In the next five years alone, 39% of family-owned businesses will experience change at the top as their leaders retire.

An overwhelming number of business owners — 81% according to the survey — want the business to stay in the families. And yet, according to small-business experts, many of these owners are unprepared. For the older generation, deciding who’ll take over is admitting they’re replaceable, says Greg McCann, director of Stetson University’s family-business center in DeLand, Fla.

The business is “such a part of their identity,” says Andrew Keyt, CQ executive director of the family-business center at Loyola University-Chicago. At the same time, some middle-age sons and daughters feel that to broach the subject is disrespectful, Mr. Keyt says. Consequently, “nobody’s making the move.”

But planning is crucial to keeping the business in the family. Only about a third of family firms make it to the second generation, according to the Andersen/Mass Mutual survey. About 12% survive to the third. And just 3% make it to the fourth and succeeding generations.

Need-to-Know Basis

Tim and Prudence Ross’s youngest child, Victoria, 24, wanted to know what she’ll be getting into when she takes over Ross’ Teal Lake Lodge, a third-generation family-owned resort in Hayward, Wis. So she enrolled in a family-business course at St. Thomas University in St. Paul, Minn., and made her parents agree to attend the class, too.

Through the class, her 61-year-old father and 59-year-old mother came to appreciate how many details they’d never thought to discuss with their daughter. Innkeepers are on call all the time during their season, and it’s easier to get the job done yourself than explain how it’s done, Prudence Ross says.

The course helped the parents realize that wasn’t the best thinking. And the three of them ended up working long hours crafting charts that detailed every aspect of the resort, from the financial to the emotional. “How many of the last generation are truly honest on all the finances and can explain it?” Mrs. Ross says.

Passing along a business to a son or daughter can be just as painful as watching it fall into a stranger’s hands. John Jinks Jr., 72, visits his office at Southern General Financial Group in Marietta, Ga., daily four years after he turned over the company to his daughter, Jill, who is 43.

After 37 years, he can’t imagine doing much else.

The company he started with two partners has grown to 160 employees and annual sales of $55 million. Mr. Jinks has watched as his daughter has taken the company, which offers insurance products to independent agents, into the technology age and beyond Georgia’s borders. But he’s also been a sounding board for the many disgruntled employees who helped make the firm what it is but feel shoved aside by Ms. Jinks’s managerial style.

Because she was the oldest in the family and has business experience, “she was the most obvious choice. Not everybody liked that,” Mr. Jinks says. “Jill has cut a wide swath, making lots of changes, and nobody likes change.”

The cool reception she received at her dad’s company and the fact that employees went to her dad to complain didn’t surprise her, Ms. Jinks says. She had worked there for 10 years before taking over, but is still viewed as a newcomer compared to employees who had been there since the early 1960s. Those longtime employees began leaving. The hardest part, she says, was feeling that her father was angry at her because his friends didn’t want to work for her.

“There wasn’t much I could do about it other than weather the storm,” Ms. Jinks says. The departures helped with her downsizing plans, though. One of her changes, switching from pensions and profit-sharing to a 401(k) retirement plan, helped spur resignations when people realized they had access to their retirement money. She felt those quitting were hoping to lure Mr. Jinks back to the helm, but he didn’t try to step back in and supported her changes. Some customers followed those leaving the company. It was a tense time between father and daughter.

Sibling Rivalry?

It’s still a tense time between Mr. Jinks’s daughter and son. John Jinks III, 41, is vice president of Southern General’s Insurance House subsidiary. Although he supported Ms. Jinks running the company, Mr. Jinks hasn’t cared for some of the changes she has wrought. Mr. Jinks says he has been cut out of some of decisions that directly affect him.

Despite their ages, the siblings never have had much in common, John Jinks III says. They battled it out on the tennis court as youngsters, but never shared friends or much of anything else. As adults, their only contact is at work, Mr. Jinks says. And that isn’t much. When a new member joins the board of directors, Mr. Jinks finds out through a memo, he says. “And I’m on the board,” he adds.

What’s more, Ms. Jinks has named her successor, and it’s not her brother. He’s too close to her age, she says. She wanted to select someone younger, so she chose a vice president eight years her junior and not a family member. She doesn’t expect the company to stay in the family past her generation.

Meanwhile, the elder Mr. Jinks, finds himself “walking on a knife edge,” he says. He worries what will happen when he’s gone.

Family Ties

When family dynamics overshadow business issues, as with the Jinkses, sometimes an impartial third party can help. Families can enlist a family-business consultant or counselor from one of the more than 150 university-based family-business centers around the country. An impartial participant can help neutralize hurt feelings and anger, says Robert Bradford, chief executive officer of the Center for Simplified Strategic Planning, an Ann Arbor, Mich., consulting firm that works with family businesses.

Michelle Geiger Kennedy, 34, and her brother, Chris Geiger, 40, disagreed on how to run their family’s custom-cabinetry business, Superior Woodcraft in Doylestown, Pa. Mr. Geiger had more tenure, but Ms. Kennedy had the business background.

Ms. Kennedy joined the company with a degree in finance after working for several years at a large bank. Her brother had gone to work for his father straight out of high school. Superior Woodcraft, which employs 44 and has annual sales of $4.5 million, was having financial problems after an expansion. Her brother didn’t have the experience to handle the debt that had accumulated as a result of the expansion so he and his mother recruited Ms. Kennedy to help the firm get back on track.

Ms. Kennedy joined the company with the understanding that she would, at some point, have the opportunity to own part of the company, based on her performance. After her father’s death in the late 1980s, Mr. Geiger had purchased 75% of the firm, and the siblings’ mother held 25%.

When the company recovered-thanks in part to her work, Ms. Kennedy says she reminded her brother of their agreement. He refused and he didn’t like her plans for expanding the company, either, she says.

“Basically, he was happy if we were able to pay our bills,” she says.

The brother and sister sought help from the Family Business Alliance at Temple University in Philadelphia. They couldn’t agree on how to run the business and eventually stopped talking altogether. But the fight over the business would have been even more agonizing and damaging to the family without counseling from the alliance, Ms. Kennedy says. They decided that Ms. Kennedy would buy out her brother, who later moved his family to Colorado.

What the counselor “did was help us bring it all out on the table,” Ms. Kennedy says. “It’s just so hard to talk about issues. Without the counselor, forget it.”

It’s been two years since they parted ways. They talk, but conversations are tense, Ms. Kennedy says.

Mr. Geiger admits he didn’t agree with his sister’s plans for the company, and he saw no reason to become her business partner when their visions for Superior Woodcraft were so different. In hindsight, he says, his father should have had a plan in place so the family would have known his wishes when he died. As it was, Mr. Geiger says, “I was guessing and doing the best I could to carry on the business.”

Mr. Geiger now designs kitchens for a firm in Colorado Springs. He doesn’t own the company, but that’s all right with him — he spends more time with his wife and children than when he ran Superior Woodcraft. Mr. Geiger says he harbors no resentment or ill feelings toward his sister. “She’ll do a very good job running the business,” he says.

As for Ms. Kennedy, she puts in 80-hour weeks as president now. Although she’s considering bringing her husband, a portfolio manager for a trust company, into the business, she’s gun-shy, given her experience. “I know how destructive a family business can be.”

This article is reprinted by permission from StartupJournal.com, © 2002 Dow Jones & Co. Inc. All rights reserved.

 

See Also: 

Create a Business Plan at:
http://wsj.miniplan.com/
Father and Son Mix New and Old Economies at:
http://www.startupjournal.com/runbusiness/family/200006280934-aeppel.html
Family Business Struggles with Passing the Torch at:
http://www.startupjournal.com/runbusiness/family/199911300933-silverman.html