Passing it on — or not
NEW YORK — It has been the dream of entrepreneurs throughout the ages: Start a company, build it up, and someday, pass it on to your children, grandchildren, even great-grandchildren.
The odds are it won’t happen. Many, if not most, family businesses don’t survive the passage from one generation to another — personal issues, children who don’t want to work in the firm and fights over money are often fatal blows. Yet many businesses do make it into the second and third generations and beyond, often because family members are committed to continuing the legacy of company founders.
John Gallin & Son Inc., a New York-based contractor, is now run by the fourth generation of Gallin family members. CEO Mark Varian, a great-grandson of the founder, attributes the company’s longevity in part to its shareholders agreement and the fact there are no passive investors — all the owners must work for the company.
Shareholder agreements, which among other things can dictate how stock in a company can be sold or otherwise transferred, are widely advocated as a safety net for a family firm. Such agreements can, for example, prevent family members from selling stock to outsiders, thereby preserving the family’s control of the business.
John Gallin founded the company in 1886, and it was taken over by his son, William, in 1912. William’s two sons came into the business in the 1940s, and they took it over after their father’s death. The fourth generation started coming into the firm in the 1970s, and there are currently five descendants of the founder in the business.
Some family companies fail in the second or third generation because the children or grandchildren just aren’t interested in owning and operating the business. In some of the worst scenarios, a relative of the owner feels obligated to take over the company, but ends up running it into the ground because he or she doesn’t have the heart or talent to do it. In such cases, it might be better off for everyone’s sake if the company is sold and the family moves on.
Varian said another reason his company is still alive and well is because it never was passed on to family members who weren’t suited to the business. “One of the benefits of a large family is those people get weeded out,” he said.
Ryder Steimle and his three brothers are the third generation to work in California Pools, a West Covina, Calif.-based company. Steimle, the firm’s CEO, said one reason why they ended up in the company — and ensured it would carry on — is that their family didn’t pressure them to join the business. Some business owners, desperate to see the company remain in the family, coax their offspring into the firm although that might be a big mistake.
“All of us went a separate way at first,” said Steimle, whose grandfather founded the company in 1952. “All of us, when it came time to go to work, went out in the real world, got jobs that gave us exposure to what it’s really like out there. That has really helped.”
Varian said some successful family companies founder when they reach another generation because the new managers, seized by the entrepreneurial spirit, make too many changes to try to put their own stamp on the business. He said his family “has the commitment and reverence for the tradition, not the sense that this is our business that we started from the ground up.”
But that doesn’t mean family companies shouldn’t change with the times — in fact, if they don’t, they won’t survive. Sal Scognamillo, chef and co-owner of Patsy’s, a restaurant located in New York’s theater district, said his grandfather, Pasquale, would roll over in his grave if he knew that his family’s pasta sauce was being sold in jars in grocery stores across the country. Scognamillo said he knows that’s not what the founder of the company, which is now in its third generation, would have wanted, but the strategy has brought diners from around the country to the restaurant.
“Each jar is a little advertisement,” said Scognamillo, who owns the restaurant along with his father and cousin.
Bickering or infighting can be another cause of death in family firms; relatives of companies that survive manage to stop disagreements over management or personal issues from overwhelming the business.
“It’s an ongoing management process, to manage relationships, emotions, the dynamics that are created within the family business,” Steimle said.
Steimle said his grandfather, who started the business in 1952, “instilled a certain sense of value in the company that really has been carried on year after year after year. Without that value-based foundation, I think it would be really hard to pass on from one group of leaders to another.”