Younger Generation Poised To Take Helm But Smooth Transition Is Rare In Family Firms

Quick. Name the largest corporate restructuring in America.

It’s happening now, will continue into the 21st century and involves businesses that employ as much as half the nation’s work force and generate an estimated 40 percent of the gross domestic product.

Last hint: Remember mom and pop. As in mom-and-pop business owners.

Millions of family-run businesses - from corner shops to conglomerates - are undergoing the largest transfer of ownership from one generation to the next. As much as $10 trillion in assets is expected to be passed on this decade alone.

Yet if past history is any indication, only a third of these companies is likely to survive the second generation, and far less, about 10 percent, the third generation. Estate planners say family businesses often lack viable succession plans, become embroiled in family squabbles that threaten operations, or become overburdened with estate or gift taxes.

“It’s very difficult because for years the family and the business have been intertwined,” said Barry Rabinovich, a planner with Mutual of New York. “It is clearly the most valuable family asset and yet the most vulnerable because people don’t view it separately from their lives.

“When a business owner retires … the owner and spouse need income for life … The child (that) is taking over the family business needs income for running the business and to live on.”

Such issues are coming into play increasingly as older entrepreneurs prepare to retire from companies started after World War II. Some have children, usually of the baby boom generation, poised to take over; others don’t. Some are closely held; others are semi-public. They span all industries.

The financial industry has been quick to respond to this giant restructuring with a proliferation of products and services. Many firms have teamed with colleges and universities in running regional family business centers.

“Twenty-five to 35 years ago, people thought I was out of my mind to be concerned,” said Leon Danco, an economist and pioneer in family business counseling who operates the Center for Family Business in Cleveland. “It’s a hot topic now.”

Danco, who also wrote the book “Beyond Survival,” says the businesses most likely to survive from one generation to the next have owners who have taken the time to carefully prepare a business and succession plan years before the leadership torch is passed - something most people are reluctant to do.

“When they’re in their 30s and 40s their main concern is in running the business. In the first generation, it’s a tremendous luck of the draw that they succeed at all,” said Danco.

Moreover, planning for a successor in the prime of life may seem for some “like planning your own funeral, acknowledging your own mortality,” he said. “When they’re 55 or 60, then they call me.”

Ross W. Nager, executive director for the Arthur Andersen Center for Family Business in Houston, agreed: “Motivating people to act is the toughest thing to do.” He said his business is hopping these days.

But being motivated is only half the battle: Family businesses still need heirs who are capable - and willing - to take over. About two-thirds of all family business owners say they will attempt to pass on their companies to relatives, according to a recent Arthur Anderson survey.

“The kids may not want to take over the business,” Danco said. “They may be resentful of all the hours mom and dad spent at the business. There may be resentment (of them) among the other employees. It’s tough being the boss’ kid.”

While children earmarked for succession should become familiar with the business, Danco suggested, they should first gain skills and work experience outside the company.

That was the strategy followed by Leo Hawk, who heads Superior Metal Products, a Lima, Ohio, maker of metal parts for appliances, started as a tool-and-dye company in 1951 by Hawk’s father, Henry.

Hawk admits he was groomed for the business. It was his father, he said, who persuaded him to study chemical engineering in college and also to pursue work experience outside the company upon graduation. After working for a Detroit chemical company for three years, he joined the family business in 1958, held several jobs within the firm and eventually helped it grow from a small shop with five employees and $50,000 in annual sales to a corporation employing 2,000 in four states and with $240 million annual sales.

Now Hawk, 63, is contemplating retirement. Only one of his four children, Jeffrey, 38, a company vice president, has any desire to follow in his footsteps. He says he has an outside board of directors to help steer the company in the future.

Getting professional help from outsiders is crucial for maintaining continuity, not to mention avoiding huge tax bills (up to 55 percent for estate taxes) down the line when it comes time to pass on the assets. In other words: Treat the family business as a business and not an extension of the family.

“If you were having a board meeting with top executives of your company, would you be having it at the dining room table? Often times family businesses are treated that way,” said Rabinovich.

Yet family harmony in and outside the boardroom can’t be ignored either.

“The aging generation has to turn over responsibility and authority to the successors and then get out of the way,” said Nager. “The heirs have to be accommodative to each other’s needs. There will be chaos if they all can’t get along.”

Brown & Cole Stores, a Ferndale, Wash.-based grocery-store chain founded in 1909, has had success on all counts. Craig Cole, the 46-year-old president and chief executive, says his parents, and now himself, treat family members who have an interest in the business as investors. (The company, co-founded by Cole’s grandfather, George, is 85 percent owned by the Cole family.)

“We do not bring family members into management roles because they’re family members,” said Cole, who remembers working at the company at age 8 sweeping floors and bagging groceries. He held a variety of jobs outside the company - legislative aide, civil rights advocate, personnel manager - before taking command in 1979.

Under his leadership, Brown & Cole has grown from a company with two grocery stores, 60 employees and $26 million in annual sales to one with 13 stores, 750 employees and $125 million in sales.

“My brothers love me, but they love me more when the returns are high,” said Cole.