Lifeline of success
Making a transition to the next generation of ownership requires a plan, optimally one devised before an owner reaches 50
By Ken Brack -- Industrial Distribution, 5/1/1999
Preparing your sons and daughters to run the family business is vital for industrial distributors if only because of the sheer volume of family-held firms. It's also crucial to customers and suppliers, of course, who want reassurances of where the distributorship is headed and who will lead the way in the future.It remains true that only one-third of family businesses nationwide survive a second generation of leadership, and there are many reasons for this.
Only 28 percent of all family-owned firms have succession plans. Typically, dad hangs on as CEO far too long after his zeal and ideas for growth have run dry. Most of the time too much of the owner's net worth is tied up in the business. And there's a host of other hurdles.
Yet more family business owners appear to be plotting the transition to next-generation ownership. At the very least, more distributors and their suppliers are turning to outside advisors for help facing the difficult issues surrounding succession.
Paul Karofsky, director of Northeastern University's Center for Family Business, says there is a noticeable increase in manufacturers' concern about the fate of their family-held distributors. "It's [more] in their best interests to have their customer survive than it is to create new customers," he says.
"From our perspective, distribution is a lifeline for us, and we don't have that strength in our business if we don't have a smooth transition," says Kurt Keller, vice president of sales and marketing at Parker Hannifin Corp.'s Seal Group. "Without it, the customer ultimately suffers."
"In our business, probably two to three percent of these distributors turn over each year -- either through attrition, retirement or someone just selling the business. In five years that's a lot. It can have a tremendous effect on us."
From a global perspective, the largest generational transfer of wealth the world has ever seen is expected during the next 10 to 15 years as entrepreneurs worldwide pass on their businesses, says Karofsky.
More locally, for distributors, "The issue is, 'How am I going to survive in this type of industry,' " says Bill Swaim, managing partner at Indian River Capital Partners, a financial planning firm.
Each form of ownership option brings complications -- from a transfer of stock to siblings, enacting employee stock ownership plans, to being bought out.
For example, Swaim cites a family-owned firm where the founder died before creating a succession plan. Two of the four children work at the company and a rift erupted over sharing profits with inactive family members. Meanwhile, senior managers have become increasingly edgy.
"There is a group of key executives who've watched this for a long time and they're saying, 'We would like to participate in the equity of this company as well.' So there are a variety of options," he says.
Clear entrance rules
Companies that make a successful transition to the next generation use different formulas -- some rigidly screen children and other relatives for eligibility, and others adopt informal selection and power sharing. Often the founder's presence continues to lurk even when he or she is retired.
Diane Martin, general manager of Niantic Seal Inc. in Lincoln, R.I., says the third-generation business that she and her brother run is successful in part because of disciplined family dialogue and familial-corporate boundaries that remain in place.
Her grandfather founded a group of companies known today as the Insco Group, of which Niantic Seal is one. Early on, Martin's grandfather decided to give the business to her father, Ed Mauro, with Mauro's sister getting "everything else."
As her generation came of age, Martin says her father set clear rules: siblings must work five years outside the business before entering it; business meetings were conducted separate from family gatherings; and the equity interest of non-participating family members would be bought out -- usually during their 30s.
Today, only Martin, 42, and her brother, Skip Mauro, who is president of Insco Group, are involved among the five siblings.
Another tradition Martin's father initiated was building a board of outside members, free from relatives who did not run the business.
She recalls attending a seminar about a dozen years ago with family members at renown expert Leon Danko's family business center in Ohio.
"People were getting up and saying, 'He won't let go, he won't let us make any decisions,'" says Martin. "We were saying, 'What are we supposed to say because we don't have any of those issues.' "
Martin, who left a career in fashion merchandising to join the business in the late 80s -- starting with spare parts sales and later handling most operational areas -- says that despite the open lines of communication within her family, dividing up control of the family business has not always been an easy process.
"I think it's a fair approach, I understand what my father's trying to do," she says. "He's trying to treat each one (sibling) fairly. It's impossible, and we've had discussions on this all the time."
In another case, brothers Gary and David Zatkoff share the leadership of the family business and followed career paths almost pre-determined by their father, founder Roger Zatkoff.
"He's still in control," cracks Gary, who is president of Zatkoff Seals & Packings of Farmington, Mich., which did $58.6 million in revenue last year and has been profitable for 40 years. While Roger Zatkoff, a former NFL player, no longer has a title or a direct financial interest, he hasn't stopped giving advice. His sons don't seem to mind.
"We have a tremendous respect for that knowledge," says David Zatkoff, who as vice president is in charge of sales. "We make decisions, but just because he doesn't own stock doesn't mean he doesn't have an opinion. If we make a bad decision against his advice, he doesn't hold it against us."
The family appears to have resolved control of the company and avoided bitter clashes by applying the siblings' skills in appropriate positions and making a gradual, almost unnoticed hand over of power. The Zatkoffs' two sisters both work there part-time -- one has a master's degree in accounting; another is an interior designer who helps plan internal expansions. Their two husbands work at the firm as well. Early on, Roger Zatkoff handpicked his sons for different leading roles.
"It was never really a choice, as in 'Would you like to go into sales, Dave?' "Gary recalls.
The two say it works well. While Gary has authority to make final decisions, both take pride in arguing their cases to each other until one prevails. They share equally in the financial rewards.
One of their next challenges is planning for third generation succession. Although the cast of eligible candidates -- including nieces and nephews -- ranges from age 22 to two, the brothers admit that they and their sisters have not decided yet how to approach it.
"We're just starting to think about who should get in, who shouldn't, how to split the stock," says David Zatkoff. "We're both now in our 40s and we should start planning because that's when my dad probably did as well."
Make succession a success
Here are tips to help make a transition to next-generation ownership:
* Hold family meetings -- Families that get together regularly have a forum to express problems and address them. Separate business gatherings from holiday events.
* Outside boards of advisors -- Bringing in outside counsel gives family members unfiltered, sometimes "global" thoughts and opinions. Those that listen are more likely to survive.
* Strategic planning -- This focuses companies on the future rather than just chasing day-to-day problems. If you don't define where the business is headed, how can you possibly know what skills and knowledge are required of the next generation to bring you there?
* Employment criteria -- Establish a clear, written criteria for employing family members and only hire them in positions that match their skills. If junior doesn't fit, hire someone else.
* Transfer some of owner's net worth -- A recent study by a major national accounting firm of privately-owned firms found 75 percent of owners' net worth is tied up in the business. Address how to transfer some of your equity into personal wealth, and minimize taxes, regardless of whether the goal is to grow or transfer ownership.
* Confront family conflicts -- For example, asking the founder to relinquish control is tough on the whole family, but avoiding conflict worsens the situation. Remember that the average tenure of CEOs is four to seven years, while the average stint of CEO-owners is 20 years.
Sources: Distribution executives; Paul Karofsky, director, Northeastern University Center for Family Business; Robert Swaim, managing partner, Indian River Capital Partners, LLP.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
