Passing the Torch can be a Messy Affair

Passing the Torch can be a Messy Affair

by Terence B. Foley
Staff Reporter of The Wall Street Journal

This article is reprinted by permission from StartupJournal.com.

King Lear was probably the guy best known for messing up lives when he divided his kingdom among his children.

These days, he’s got plenty of company.

Even the most successful family business can founder when it comes time to turn over the tiller. Family jealousies or sibling rivalries can flame up. Professional managers long accustomed to reporting to the patriarch may bristle at being subordinate to the son. A well-qualified daughter may be pitted against her less-qualified brother. Adult children may see their family’s business as an inheritance they deserve, rather than an obligation to undertake.

Few family businesses make it reliably through generations. According to studies by consulting firm Arthur Andersen LP, only one-third of family businesses make the transition from founder to second generation, and only a third of those make it from second generation to third generation.

“The attrition rate among family businesses is like war. They don’t survive,” says Victor Preisser, director of the Family Business Institute at the University of the Pacific’s business school, in Stockton, Calif.

One of the worst strategies? Trying to be evenhanded, says management consultant Dennis Jaffee, author of “You Can’t Fire Me, I’m Your Father!” Instead, alternatives work far better. For instance, he says, maybe the child who makes a commitment to the business should get the lion’s share, another child who needs start-up cash to launch his own business should get cash, and other children should get real estate or other assets rather than ownership.

King Lear gave his kingdom to the daughters who said they loved him best. Family-business owners have come up with a variety of more sophisticated strategies for passing on their empires.

Here are a few.

The Rotation

Dick Kleeberg has given each child six months to prove him- or herself.

The 62-year-old president of Kleeberg Sheet Metal Inc., Ludlow, Mass., started the business with his father in 1958. The family now owns three plants — the main one in Ludlow and two in Connecticut. Mr. Kleeberg intends to retire from the 260-employee business in three years.

Mr. Kleeberg has three children, all working in the company — son Kenny, 33, a sheet-metal worker and project manager; son Danny, 31, a graduate accountant; and daughter Lynn, 35, a sheet-metal mechanic and manager. “They’re all very active, very competent, very hard-working,” says Mr. Kleeberg. “I’ve given each one a shot at running things for six months.” At the end, the three would vote their own president and Mr. Kleeberg would decide who would become major stockholder.

The three siblings picked their chief executive tenure dates out of a hat. Danny got to go first. Although the key people always made group decisions, there were times when people wanted to take the company in different directions and the temporary CEO had to decide which direction to take. “It went smoothly,” he says, “but it is hard to accomplish much in six months. I’d recommend the six-months’ method but I’d extend it a little longer. Also, it’s tough on employees to have a new CEO every six months.”

Lynn Kleeberg, who became CEO No. 2, says spending six months as CEO was a challenge. “I felt like a CEO,” she says. “Everyone in the company was told what was happening. They gave me the chance to make major decisions.” Another thing that she noticed: “When you’re put in a CEO position you always wonder how employees are going to accept you. You see the good and the bad. Some respected you and some didn’t.”

Ken says being CEO wasn’t much of a change as each of the children manage one of the three plants on a day-to-day basis.

It didn’t feel particularly different, but he found it interesting to see how his siblings handled their tenures as CEO. “I’m a hands-on guy, but they’re more financial people,” he says.

The result: On July 1, Ken was elected president. Mr. Kleeberg will decide who will become major stockholder after he retires.

The Test

Bill Bassett, 55 years old, is the second-generation president of Bassett Mechanical Inc., a metal engineering and fabricating corporation in Kaukauna, Wis. He contemplated retirement and wanted to keep the company in the family. “We have family values we practice — putting money back into the company, taking care of people. Some of our people have been here 25 to 30 years, and we’re proud of that,” he says.

His only sibling, a brother, has no children. Of his own two daughters, one expressed no interest in becoming president. The other daughter, Kimberly, 32, did, but she worked in a hospital as a speech therapist.

Nevertheless, says Mr. Bassett, “I thought she had the drive and the ability to run the company.”

To make sure, Mr. Bassett had Kimberly tested for the position by a professional career-development firm who put her through exams, profiles and interviews. Her test scores favorable, Mr. Bassett sent Kimberly back to college where she got a masters degree in business technology. Then he again tested her by putting her in a midlevel position in the 250-person company to watch her performance.

“She doesn’t report to me; she reports four or five levels removed from me,” says Mr. Bassett. Kimberly is now doing project design and project management, working with her hands on a construction job in the field.

The aim is that she take over the business within the next five years. Mr. Bassett plans to become chairman of the board when he reaches 60, and Kimberly will become CEO. “I talked it over with my brother and with all my management people and decided on it as a long-term goal. I asked the managers to support me.”

The Challenge

Gene Biggi, president of 85-employee Beaverton Foods Inc., Beaverton, Ore., a family business that makes mustards, horseradishes and sauces, has five children. He determined that only one should succeed him as head of the business.

“You have to choose,” he says.

Mr. Biggi began issuing a challenge to his children before they were in their teens. “The one who shows up, the one who gets a college education, the one with the drive — you get the company,” he told them.

“It’s a real dogfight to be in business and to compete,” says Mr. Biggi. “You have to dedicate your life to it — Saturdays and Sundays included. Otherwise you’ll get eaten alive.”

Only one of his children, Dominic, showed strong interest. At 17, he was the one who came to Mr. Biggi and said he would make it his career. Moreover, Dominic was the one who went to college. He returned to work in the company and is now its national sales manager.

Mr. Biggi has backed off to semi-retirement at a California resort. “I’ve stayed away four or five months to give Dominic a chance to run it, and he’s handled it well. He’s there early and late. He’s got good ideas. I tell him, ‘When I die it’s yours.’ The rest of the kids I’ll give other assets to.”

The Consigliere

John Pereira, 53, headed A. John Pereira & Associates Co., an insurance agency in The Dalles, Ore., for 27 years.

Then he brought in a young man he had known for 10 years, John Coats, 26, to be his successor in the two-employee, three-agent business. Afterward, his twin sons John W. and Anthony, 24, finished college and asked to be his successors.

So, what did Mr. Pereira do?

He brought them into the family business, too. Mr. Pereira is having a limited liability company set up to accommodate his three successors. Each will be a 33% shareholder.

His son John will do the administrative backup — computers, paperwork and oversee the clerical staff. John Coats and Anthony will handle the outside sales and management of financial services.

Mr. Pereira feels that it’s a good arrangement because a nonfamily member of the team can keep a brake on sibling rivalry. “I work with local ranchers, orchardists, wheat farmers — all family businesses, and I watch succession from father to sons,” Mr. Pereira says. “I’ve seen too many ranches and businesses break up over disagreements between the children.”

“The other man I brought in I treat like my third son,” says Mr. Pereira. “By bringing in an outsider I intended to have a stabilizing effect. I want the three of them to replace me.”

The Vote

Jack Woolf, 81, faced a succession problem.

He had founded Woolf’s Farming Co., Fresno City, Calif., in 1974, and built the agribusiness company into a 125-employee farm and food-processing concern that produces bulk-grade commodities like tomato paste, cotton, nuts and grain.

But there were six children in the next generation and, recalls his eldest son Stuart, “We six knew that only one of us should end up running the business.”

The children didn’t want to have bias or emotions in choosing, so they picked an outsider to help make the choice — Neil Koenig, a management consultant and psychologist.

Dr. Koenig took the siblings on a weekend retreat where he met with each and asked questions about their expectations for the business, their personal goals and desires.

“We talked about the dynamics in our family,” says Mr. Woolf. “We asked each other what was fair, and tried to arrive at a consensus.

Stuart Woolf was chosen. “It was a collective decision,” he says. “I knew that I had the desire. I wrote a letter telling our parents we’d decided on a board membership and dividend policy and voted me president-CEO. We all signed the letter and gave it to our parents.”

The senior Mr. Woolf was relieved when he didn’t have to choose among his children. “It may sound strange, but, fortunately, my six children enjoy each other’s company,” says the senior Mr. Woolf. The younger generation “recognized that Stuart had the necessary talents, and he should be in charge. There wasn’t the sort of sibling rivalry you’d anticipate.”

For his part, Stuart vows to fulfill the dream of many business owners: “We’ll survive as a family business.”

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

 

See Also: Take Your Business to the Next Level at:
http://www.startupjournal.com/howto/soundadvice/20020426-connolly.html
Chocolatier’s Lack of Heir Tempers his Resolve at:
http://www.startupjournal.com/runbusiness/family/200004060845-raghavan.html
Family Businesses Thrive with Succession Plans at:
http://www.startupjournal.com/runbusiness/family/200006011038-ho.html