How to hand down the family business

How to hand down the family business
A favourite succession plan is the generational route—when the reins of enterprise are passed on. It may sound simple, but family emotions can cloud judgement and the fallout can tear families apart. Dwight Whitney learns how to keep it in the family.

A favourite succession plan is the generational route—when the reins of enterprise are passed on. It may sound simple, but family emotions can cloud judgement and the fallout can tear families apart. Dwight Whitney learns how to keep it in the family.

Imagine the family feud at the breakfast table spilling into the boardroom. Then imagine the one who perceived himself as Daddy’s ‘golden boy’ not being the chosen after all—in fact, it’s his sister.

Who would want to be involved in such a rich mixture of possible factionalism when business itself is tough enough?

Many of us, of course—just look at the number of firms with ‘& Sons’ or ‘& Daughters’ in the brand name, and you’ll see that wealth and legacy creation tend to go hand in hand. While this might appear the natural order of things, the success rate of generational succession is catastrophic.

Research says that only one-third of all family businesses are successfully transferred to the next generation, and only 13 percent are transferred onto the grandchildren. Make it beyond four generations and a Nobel Peace Prize should be in the offing.

So why the carnage? One mitigating factor may be that family-based decision making produces very different results from a typical business. Even when negotiating with your own flesh and blood, the process needs to be managed as carefully as if you were selling your business ‘baby’ to a complete outsider.

Another potential deal-breaker comes from balancing fairness with fiduciary duties. When seeking the anointed one among a number of children, or even grandchildren, you’ll need to assess skill levels, compensation levels and the all-important ownership levels.

Remember the histrionics around the Christmas tree when someone thought someone else’s present was bigger or better? That same jealousy and potential infighting can wreak havoc on any business operation.

But before relegating this mode of succession planning to the ‘too hard’ basket, a little honest soul searching won’t go astray.

Ask yourself first: why did you create the business? Was it to keep the family employed for generations, or was the purpose to provide for their needs instead? Next ponder whether any of the offspring have the talent, drive or interest to take the enterprise to a higher level. If at first glance they don’t pass the recruitment test but you still dream of keeping the family name at the forefront, think about engaging outside guidance. If the business is big enough, think about some independent board members. Or talk to your key trusted advisers.

With the help of their dispassionate advice, you may decide that hiring professional management other than offspring might be better for the business. Or if you want to entertain a compromise position, you might consider selling your business with you still in charge and with provisions for family members to be employed as part of the sale agreement.

In the end, family characteristics inevitably will play a role as to whether management succession will be a process or a crisis. The more adult children (and even their children) are involved, the more complex the issues and expectations become. Human nature being what it is, those heirs not involved in the business may also expect some compensation.

More traditional, or tightly knit, families might find the undertaking easier but given the variance between Baby Boomers and Generations X and Y, expect some speed bumps along the road.

But it can be done. Here are three great stories of family succession that are working.

Play it again, John

Lewis Eady Ltd: Family-owned for four generations, acoustic music specialist Lewis Eady was bought in 2006 by John Eady from his father, also John. He’s still serving many of the same families that this grandfather did.

Succession strategy: Know your customers and keep a relationship beyond the sale.

Alan John Lewis Eady, commonly known as John, begins each day with the eyes of founder Lewis R Eady, his son Ray Eady and grandson John Eady Senior looking down on him from photographs on the showroom wall. They’re a reminder that rich traditions and relationships are in his hands.

As one of five children, John grew up with the business as part of his life. But knowing about it was one thing; he had no inkling that one day it would be his.

An avid sportsman, he also had a passion and talent for classical music. He passed his LTCL & LRSM diplomas, and was awarded a scholarship to the prestigious Royal College of Music in London where he studied performance and teaching for four years. His instrument of choice was the clarinet. In order to pay for his ‘habit’, he became a property developer and renovator and learned how businesses tick.

In 2000, a marriage breakup coincided with his father beginning to make noises about succession planning. Change seemed a good idea.

“All the family members were asked if they were interested. They were not, so it was agreed that I would come into the operation and then decide if I really did want to take over the ownership,” John says.

Though he was comfortable reading both balance and song sheets, hard data alone didn’t tell the full Lewis Eady story.

Long-term relationships were a key part of the enterprise.

“Making a $150,000 investment in a Steinway is a big step and the process never involves a quick sale. We have a number of client families who have been with us for three generations so I had to understand this aspect of the operation.”

His father remained managing director while John was given responsibilities for marketing, promotions and human resources. It wasn’t until 2006—after what he says was a rather extended due diligence process—that he formally bought the business.

“One of the hardest parts was negotiating with Dad. We both found it a challenge to step out of our traditional relationship and take a totally hard-nosed approach. It wasn’t a case of playing with a few numbers while having a beer. We both had lawyers and the process was done quite formally based on finding a fair market price for the business,” he says.

But the deal was struck in the knowledge that both were part of the family, with close ties and long traditions. By nature there would always be some give and take.

His father stayed in the business for two years but John has been flying solo ever since and has added his own touches.

“We’re traditional and conservative, but must also remain current and innovative. We have launched a Music School with the aim of getting ‘cradle to grave’ music lovers and purchasers. We have a charitable trust to support the arts. We’ve also embraced IT. When I arrived we had no website and only one computer,” he says. “We joke that we missed a century— going from the 19th straight to the 21st.”

That situation has changed. Yet, some of the lessons learned from the past haven’t gone unnoticed.

“In light of the recent recession, the durability of the operation has paid dividends. I had minute books dating back to the Great Depression to give me some insight. I found there was an increased need for servicing and repairs versus new sales. Subsequently I geared up this side of the operation.”

Much as he would probably like spectacular growth, John is realistic about the business being what he calls a “niche within a niche”.

“Six percent of the population are into their music—and being a traditional, acoustic-oriented business, we’re a niche within this. We build the business on relationships and aren’t sales driven per se.”

Though John is still young, what will happen when his time is up is already on his mind. He has three children and will steer the opportunity in their direction at a suitable time and place.

“If they aren’t interested I’ll find another means of keeping the family name alive. When you reach four generations in business, you want to make sure you’re not the one to be the author of its demise.”

All in the family

Youngman Richardson: Originally a partnership between two former colleagues and friends, the Auckland-based manufacturer and distributor now has staff from both families.

Succession strategy: Keep a professional structure, encourage outside experience and expect performance.

Bob Youngman received the expected ‘don’t come Monday’ message. The next day he was out one door and in through another.

All had been going well for Bob and his soon-to-be partner Tim Richardson when they were part of established machinery supplies company Richardson McCabe. Bob joined in 1972 and was appointed a board member the following year. Tim was manager of the construction machinery section. Over time, a strong working relationship evolved into an enduring friendship.

The venture grew, they joined forces with a similar ‘old school’ company Tappenden Holdings, and their worlds remained unruffled. That was until 1979 when they found themselves in the sights of corporate raider Brierleys. A 50 percent stake was taken and immediately on-sold to Ceramco.

A week after Bob’s departure, Tim followed suit. They were both at an age and stage where they were likely unemployable but were also well into survival mode. Creating Youngman Richardson became the best option.
Bob—nine years Tim’s senior—decided they would set up a limited liability company rather than the ‘kiss of death’ partnership option. They had equal shareholding and operated under a formal board structure and operating procedures.

With the contractual ink barely dry, the two men boarded a plane to Japan with the aim of securing a range of franchises. They returned with relationships established with Robin/Subaru Engines and Denyo Generators. Slowly and surely they acquired more dealerships and larger premises, and the business duly prospered. The move to bring family into the business came not through a bout of nepotism but rather through a search for good people. “Family essentially came on board when we needed people,” says Bob. The first off the rank was his son-in-law Tony Fairfield.

He had been general sales manager at Morgan Furniture so he’d already built his own reputation and had a track record that could be assessed.

Three generations now work in the business. Tony is managing director. His son Phil is national sales manager and Tony’s son-in-law is the current Tauranga branch representative.

Tim is chairman, after being handed this position by Bob Youngman four years ago. His son Ed is sales and marketing director. Part of the success of this succession route is that all the offspring established themselves first in other situations. If they had come straight from school without additional life experience the results may not have been so enduring.

That said, both Ed and Phil got their taste of the operation at an early age.

“Both used to come in during school holidays and work in the warehouse but then when they finished school they went off to make their own way elsewhere,” Tim said.

When Ed returned from working overseas with multinational North Sails he asked his father about the possibility of a position in the family firm. His request was referred to Bob to avoid any notion of favouritism.

“At the time we had nothing available. Six months down the track a suitable position became available—in the warehouse.” Both Phil and Ed started in this role which created a ‘sink or swim’ urgency underpinned by the instructions each received on day one: “Don’t let us—or yourself down.”

Each founder agrees there is a natural risk of over- protecting kin that anyone in the succession planning process needs to contain. There have to be clear performance measurement criteria and responsibilities expected.

The generational involvement in the business has sent positive messages to the bank, the marketplace and also key suppliers—especially the Japanese.

“The family connection is well regarded and helps maintain and build strong relationships. With one key supplier, Mikasa, we have dealt with the grandfather, father and now son. Like us, their offspring started working from the ground floor up,” says Bob.

Bob comes and goes from the business but remains on the board. Tim comes in three days a week and will remain, he says, as long as he has work to do and is not a nuisance. “You know when it is time to go home.”

Road to joy

Team McMillan: The Newmarket dealer has over 40 years’ experience selling and supporting BMW vehicles. It’s also the exclusive northern dealer for Mini.

Succession strategy: Make sure the business is performing well and your successor has time to grow into the job.

With the click of a mouse, Bob McMillan watches a new part of the empire take shape in the form of the all new MINI Advanced Retail Brand Store— MINI Garage. Built in Poland, and taking shape on a prime piece of real estate on Auckland’s Ponsonby Road, a 24/7 webcam allows him to view progress and share the joy of watching this new undertaking gain traction.

We talk briefly about the speed bump—more like a road hazard, actually—of some years back that put the brakes on his original succession plan. He sold a shareholding and left the business in the hands of someone else. with outcomes that were not to his liking. Now back in control, a successful succession remains Bob’s unwavering goal. As he puts it:

“The horses haven’t changed, only the jockeys.”

The decisions and actions made when he came back full-time into the business have helped the operation through the economic downturn. “Recession? What recession? Last year was the best we’ve had in over 27 years.”

The opportunity to start afresh with a company that he already knew intimately allowed him to take a long, hard look at the operation.

“Between August and October 2007, and long before there were any recessionary trends, I focused on restructuring costs. I also cast my eye over the calibre of the people we had in the business. I knew we had the challenge of rejigging and reinvigorating the brand and operation. I wanted to get some vitality back into the balance sheet.”

To do that, he took three initiatives. The first was to address financial issues. The second was to create smarter ways to understand what existing customers want and to solidify relationships.

In the past, as well as helping get product sold and out the showroom door, sales people were expected to also keep BMW stalwarts coming back for more. In a sense, Bob McMillan has turbocharged this function with the creation of what he calls a Customer Integration Centre.

“We now have three very experienced people who get all incoming communication. Their first responsibility is to make sure that some sort of response is handled within the hour and then, if further follow- up is required, that it takes place. They also serve as an information gathering hub that can then be channelled back into the sales process.”

A parallel process has seen the business go offshore and engage a group of women across the Tasman who, prior to maternity leave, were top sales managers of Australian dealerships. Bob McMillan reasons that they know the industry and how to turn tyre- kickers into buyers.

“Their role is to follow up people who came into one of our showrooms in the past day or so. It’s handled like a customer satisfaction call but they also have the chance to probe for more strategic, sales-oriented information. They can then feed this information back into the relationship and sales building process.”

The third leg of the transformation has been taking the ‘Joy Is ...’ concept from BMW corporate and turning it into an approach that is tailored to personal messages from the man himself. For these to have any sort of traction requires his ‘delight’ to be genuine.

He has also retained the focus of his new succession plans: his son, Andrew McMillan. He also has brought in one of his most favoured colleagues from Team McMillan Ford days, Ian Gibson, to help drive the business and to be a mentor for Andrew. Both came on board in 2007.

Now manager of the used vehicle department, Andrew dusted his tyres in service and sales roles for one of Sydney’s largest Porsche dealerships. Before returning to New Zealand, he had become the top Porsche salesman in Sydney.

“Andrew is on line to take over in due course. He is 30 now. The more he’s exposed to business the better, for I know that it does take time to develop great people. His Porsche experience set the scene. He has great natural people skills but the discipline of transferring this to sales was a great opportunity.”

Having already had the experience of stepping aside, moving away, and relinquishing all management and day-to-day responsibilities, Bob McMillan is not in a hurry to leave just yet. There’s simply too much joy to be had.

Avoiding the family feud

Hayes Knight says that before thinking about putting your offspring in the decision making seat, consider the following:

• Do your children want to run the business?

• Are your children capable of running the business right now?

• What is your business really worth?

• Are you willing to hand over control of the business and leave the children in control?

• How will the transition be financed? Are your children able to buy you out? Will you maintain an interest in the business? If you do maintain an interest, will you have a role in the business or will you be a silent partner?

• How should the transition be structured?

• What will the impact of you stepping away from the business be on your customer base?

• What are the tax implications of the succession plan? There can be some fairly hefty taxation implications for both you and your children if this issue is not managed correctly.

This story originally appeared in Succeed.