HOT TOPIC A new look at old problems
Succession PLANNING
Getting your business set for the future can make the difference between long-term and short-term success. EB's planning guide provides a starting point for family-owned businesses
By Amy Spiezio
Photography by Peter Baker
| KEEPING IT IN THE FAMILY |
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| Family businesses face daunting odds—only 15% make it to the third generation. But tough doesn't mean impossible, and for those who have made the transition successfully, living a legacy is a family treasure. Making frames since 1923, Zyloware Eyewear in Long Island City, N.Y., has passed through the Shyer family, starting with Joseph Shyer and moving to his two sons, Henry and Robert. Today, Henry and Robert are still involved in the company but they leave the driving to their sons, James and Christopher, respectively. "When it's one set of parents and a child, it's usually the drive of the parents to pass it on. But when you get to the third generation, it's kind of remarkable there hasn't been warfare," says president Christopher Shyer. "The fortunate genetic situation is that each family member has different skills." Another example of a three-generation success story is Schroeder Optical. The independent lab opened in 1972, but the first of the Schroeders in the optical business, Bill, started out in 1912 working at a number of labs and optical firms including Bausch and Lomb, Blue Ridge Optical, and Professional Ophthalmic Laboratories (POL). His son Bob joined him and the two started Schroeder Optical. The third generation, Tom Schroeder, joined the lab in 1991 and has succeeded his father as president of the company. Making a smooth transition involved varying degrees of complexity for each firm. Although there are two Schroeder children, only one wanted to come into the family business, which simplified things a bit. When the second generation retired in 1997, the family worked with a CPA to valuate the business, and stock was gifted from generation to generation over time. For Zyloware, things haven't been quite so cut-and-dry as a result of divorce and remarriage in the second generation, resulting in new children in the third generation. Over the years, the family has had two major planning sessions to chart their course and determine their succession plans. These involved several sets of attorneys who specialize in the complex issues of inter-generational relationships and corporate policy. "The clarity around the succession became clouded and deeply complicated. Something that should have taken six months of negotiations is not quite wrapped up today. But, now we're split evenly with the decedents of Joe Shyer," Christopher Shyer notes. "We had to take into account the needs of each partner and then negotiate so that everyone was treated fairly." In the end, the family members all agreed that they wanted to settle the details and get back to business and away from succession deliberations. "Whether it's the business' money or our money, ultimately, it is our money and the only winners are the attorneys. Family still comes first." Once the paperwork is set, transitioning the previous generation out can be a slow-moving process. Although Schroeder retired, he did a lot of the bookkeeping until about two years ago. At Zyloware, "the second generation still serves as mentors and educators, double-checking, giving feedback, and occasional harassment. Ultimately, they're just driving to make the company successful," Shyer says. And what about the future? It's hard to say, notes Schroeder. With the changing lab environment, keeping a small independent operation going can be a challenge. The firm is building its technical base and has installed a new AR system. It is also determining backup plans when it comes to support as a result of the disbanding of the Lightbenders group. "Lightbenders has been defunct for almost a year and that's a void for me now," he says. Although he's not sure if his two children will step into the business when grown, Schroeder says the business is a family. "The culture here is a tight-knit group, the people who work with us are family. Over half the people here have been here since I was five or 15. We stick together." The next step for Zyloware is still a mystery as the fourth generation is still growing up, Shyer says. "They're so young that it's best that we're focused on the business. We love that we've succeeded and celebrated our 85th anniversary, and it would be no surprise if there was a fourth generation involved, but we don't have a specific plan." |
Shirtsleeves to shirtsleeves in three generations is more than a cliché…it's a reality for many who own family businesses.
As more of the aging baby boomer population prepares to retire, this sentiment can keep them up at night—and make them take a good hard look at the state of, or lack of, their business succession plans.
Ensuring your children or other family members will be able to keep business flowing smoothly depends on creating a transition plan for the next generation of ownership.
HARD NUMBERS
If you think it's hard to get a business started, try keeping it going into future generations.
According to professor John Ward from the University of Massachusetts Family Business Center, the numbers are pretty intimidating. When it comes to transitioning a family business:
■ About one in three family businesses disintegrates because of generational conflict.
■ A third of family businesses transition to a single second owner.
■ The remaining third are controlled by sibling teams, with only half of those teams finding success as co-managers.
■ Only about eight percent of them ever reach the third generation or "cousin" stage.
The University of Tulsa's Family-Owned Business Institute's statistics show that less than 30 percent of family businesses successfully transfer to the second generation.
The transfer to the third generation is even more daunting, with viable results for only 15 out of 100 firms.
PLANNING FOR SUCCESS(ION)
Too often, planning succession for a family business is a subject that isn't broached until something dramatic happens. A parent and child in business together may never address a handover until the parent faces some infirmity and needs to quickly leave the business.
According to Fred T. Mackenzie, PhD, president of Mackenzie and Associates, a business training consulting firm, a strong plan for the future requires serious work on plans today. "You're up to your ears trying to make money, but every once in a while—at least once a year—you have to suspend business and talk about planning," Mackenzie says.
It's important to bring in an outside consultant periodically, but first, create a plan. "Don't pass this off to an outsider; it has to be done internally. The outside consultant is a reviewer," he says. "The plan doesn't have to be elaborate with tables and charts, it can be very simple." As a starting point, Mackenzie suggests the following:
SUCCESSION DON'TS:
1. Don't assume the boss will be there forever. The boss has been the boss and he or she has been there forever…so far. But they won't ALWAYS be there.
2. Don't assume that another member will want to run the business. "My experience is that owners will think: ‘My son will want to take it over’ and maybe the son won't want to take it over after all," Mackenzie says.
3. Don't assume that another family member has the capacity to run the business. Interest and ability are not the same thing.
4. Don't assume another family member will run the business the same way. They may change the company structure or buy more from China. Once it's their company, it's their choice.
SUCCESSION DO'S
1. Identify key jobs in the organization. Make a list of positions such as CFO and head of sales.
2. Have a contingency plan to fill your top jobs. If you get hit by a bus, be sure business can go on.
3. Review the key skills of employees for potential filling of future jobs. Consider: Mental capability, skill, knowledge, and experience. Will the candidate value the role? Do they have temperament problems? Make your preliminary decisions based on the judgement of your top people, then an outside consultant can help you review your results.
4. Establish a development plan for the selected employees. This is not a development plan in terms of training or schooling. A development plan is the path your future owners and managers should take to become prepared for their upcoming roles.
5. Review their progress. Plans may change as people change and the business changes. Look at those in line for the top spots to ensure they are still on track. EB
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