While people outside the pallet and lumber industry erroneously suspect that giant corporate conglomerates control every niche of domestic production, the reality is that the majority of these companies are entirely family owned and operated. All too frequently, though, these entrepreneurial endeavors falter after the first generation due to a lack of succession planning.
Knowing how to handle the transition and plan ahead of time can make all the difference. Business succession is like entrusting a painstakingly refurbished ’63 Stingray sport coupe to an offspring who just earned his or her driver’s license. There will eventually come a time when the founder of a family venture will have to pass the baton to the next generation, but how can companies guarantee a smooth and successful transition?
Family businesses engender a sense of trust and camaraderie that seems to be ebbing out of those giant corporate conglomerates that do exist. This usually facilitates a closely-knit network of cooperation, and while individual goals may vary, the long-term business plan should be shared by everyone involved.
“Look at your family realistically and plan accordingly,” said Susan Ward, an IT business consultant and author for Small Business Canada. “You may want your first-born son to run the business, but does he have the business skills or even the interest to do it? Perhaps there’s another family member who is more capable.” Understanding everyone’s role within the organization will help founders plan and implement succession strategies. “Examine the strengths of all possible successors as objectively as possible and think about what’s best for the business,” added Ward.
According to the 2002 American Family Business Survey, 39.4% of family owned businesses expect a leadership change within the next five years. While 84.5% of respondents who have chosen a successor, selected a family member, 42% of those CEOs expected to retire have not chosen a successor. Fifty five percent of business leaders above the age of 61 have not chosen a successor either. The survey clearly depicts a lapse in leadership, and those companies that do not incorporate comprehensive succession plans into their business strategies may leave their companies with a tumultuous and crippling transition period.
Make Junior Read the Driver’s Manual
Familybusinessstrategies.com reports that nearly 75% of family businesses fail to survive through the second generation, and even fewer make it into the third. The most proactive strategy to combat second generation mismanagement is to become aware of “competing interests and pressures that are integral to a family business,” stated the report. Not only must founders pick a successor, but they must also pass along their knowledge base to the most worthy candidate. You wouldn’t give the keys to your child without providing a few behind-the-wheel lessons, would you?
Lyle Wilson of Smith Pallets in Hatfield, Ark. was seduced by that glistening ’Vette throughout his childhood. His father, Jim, entered the pallet business in 1972 and bought the company outright in 1983. Four years later and with a degree in business, Lyle worked alongside his father fulltime. “I pretty much grew up in it,” said Lyle.
With Jim’s guidance as president, Lyle has ascended to the level of general manager and now acts as the proprietor and conducts most of the company’s dealings. “For about the last ten years, I’ve pretty much been in charge. My dad’s been around as an adviser as much as anything,” Lyle said. Fortunately for the Wilson family, they had a clear succession plan, and a “seamless transition.”
Since Lyle was raised into the business, he has a clear understanding of business sense and the expectations associated with his position. Furthermore, he is committed to the expansion and diversification of their business; they now have invested in a sawmill, timberland, and trucking services.
Sometimes destiny will fall into your lap. That’s what happened to Lee Killingsworth of Silsbee, Texas.
Lee Killingsworth never planned to enter the pallet business. “I didn’t know the pallets you move around with a forklift from the pallets you put on the floor for the kids to sleep on when you’ve got extra company,” he joked. “That’s how much I knew about this business.”
Brenda, his wife, became the part-owner of Acme Skid & Plug Division of Apache Products, Inc. after a series of unlikely events. “My father in-law called me up and asked, ‘What are you doing?’ I said, ‘Right now I’m watching TV.’ Then he said in a paternal tone, ‘No, what are you doooiiiinng?’”
Lee’s father in-law said, “If you’re not doing anything you absolutely cannot get loose from, I need some help…you need to get down here and learn how to run this place. I don’t know if I have three years or five years or 20 years to teach you what I know.” After thorough deliberation, Lee and Brenda packed their bags and headed to Silsbee, Texas. Lee spent nearly a decade learning the trade, and now manages purchasing and operations.
Who’s Driving?
“When you go to work for your father in-law, there’s a good chance you’re going to end up working for your wife eventually,” Lee chuckled. True to fact, founder Sherman Worthey bequeathed the company to Brenda’s mother, Mildred, who subsequently passed it to Brenda.
“When Sherman died, Mrs. Worthey became the sole owner,” Lee explained. “We worked for her for 6 or 7 years, and finished paying off her other partner, and then she owned the company free and clear after that. When Mrs. Worthey died, she passed the company on to her two daughters. The succession plan allowed the daughter that was involved in the business, which was my wife, to purchase some stock before the death of Mrs. Worthey. She and her sister inherited equal amounts of stock from their mother, but my wife already owned some shares, which gave her a majority.”
Two people can’t sit in the driver’s seat simultaneously. The volatility of generational transition periods necessitates clearly defined leadership.
“As long as people know what the rules are, then they can develop business strategies,” said Drew Mendoza of the Family Business Consulting Group. “Once values and expectations are made clear and communicated to management, and it has to be as a unified voice, then it becomes fairly simple for management partnering with non-family and family managers alike, to develop a strategy that fulfills owner expectation within the parameters of some core set of values.”
Brenda eventually became president and CEO, while her sister remained active in the business on the board of directors. “They did have sense enough to know you can’t leave a corporation split down the middle and expect it to survive,” said Lee. “Somebody’s got to have the last word.”
Don’t Forget to Visit the DMV
The most cumbersome facets of succession planning are estate taxes. Lee and Brenda spent nearly four years recuperating from various Federal and state taxes levied after the deaths of the founders.
Mendoza suggests that entrepreneurial owners should begin succession planning at least 5-10 years in advance. That will give them adequate time to meet with financial analysts and lawyers to create an appropriate and cost effective strategy suitable for their resources, as well as those of their beneficiaries. “Founders do not necessarily think of these enterprises as being apart from themselves,” said Mendoza. “So, planning for one’s succession is frightening, because you’re essentially planning for your own death.”
Getting the paperwork done early will spare the potential heartache of having your Stingray impounded due to bureaucratic technicalities.
Lyle has his eye on the prize. “We have a plan in motion,” he boasted. “It was on our minds four or five years ago, so we got in contact with some estate planners.” Jim already signed the company over to Lyle, with hopes of dodging estate taxes. “We have about four different businesses and they’re all in my name.”
“The business has become dad’s baby, you don’t just give your baby away to anybody,” added Mendoza. Even as founders phase themselves out of their own businesses, “they are headed towards something, instead of leaving something behind.”
Jim has quietly stepped out of the limelight to let Lyle take control of his destiny. Receding to the shadows of his garage with an oily rag in hand, he can fully appreciate the soothing crescendo of 360 fuel-injected horses galloping into the future.
