Succession planning keeps it all in the family
Jennifer Marks -- Casual Living, January 1, 2010
By the time he was a teenager, John Galbreath Jr., knew ABSCO Fireplace & Patio would be his life’s work. His sister, Cathy Galbreath-Watson, was just as certain that the family business wasn’t for her, yet she also eventually developed a passion for keeping her parents’ legacy going.
Today, Cathy manages ABSCO’s three retail locations, and John manages the wholesale side of the Birmingham, Ala., company. Their father, John Galbreath Sr., has retired, but their mother Catherine Galbreath remains active overseeing the company’s financial operations.
As Catherine Galbreath describes it, the transition of leadership from one generation to the next “just kind of evolved.”
It’s a common succession story in the outdoor furniture industry, and one that has worked for the Galbreaths and others.
But the odds are against generational succession.
Only about one-third of family businesses are successfully passed to the next generation, and fewer than half of those are successfully passed to the third generation, research has shown. Getting the business into the hands of the fourth generation is even more unlikely, with only about 4% remaining in the family that long.
Many factors contribute to the low odds. Although the vast majority of U.S. businesses are family owned — whether a mom-and-pop retail store or a multi-billion dollar corporation — as anyone raised in a family business knows, working with relatives can be like working in a minefield. Things blow up on occasion.
But having a plan in place for dealing with those explosions lowers the risk of harmful and even ruinous consequences.
Succession planning is simply one more strategic plan that will help keep an organization healthy for the long term. And not only does it increase the odds that the founder’s heirs will continue to benefit from the business, it provides clarity for those heirs in their own decision making.
Ask the right questions
“Succession planning is strategic planning in the most upfront way,” said James Lea, author of Keeping It in the Family: Successful Succession of the Family Business (www.yourfamilybusiness.net) and a professor at the University of North Carolina at Chapel Hill. “It has family dimensions, and sometimes those family dimensions are horrendously complicated, but basically it is a business process. You are making a series of decisions.”
As with any business process, succession planning starts with an analysis of the current situation.
Lea recommends assessing what makes the business successful, how the family supports that success and can sustain it into the next generation.
Also consider what success looks like. What does the founder want the business to look like down the road?
“This isn’t classic research. It’s just sitting down and thinking through these things very carefully, rather than doing it on the fly and seeing what happens,” Lea said.
Despite having no formal plan, the Galbreaths have frequently had these kinds of discussions. “In fact, John Jr. is always kidding that he is going to retire before I do,” Catherine said. “If that happens, we would probably just go out of the wholesale business and keep the retail business, and Cathy will be in charge of that.”
At times, the younger generation feels more urgency about initiating planning. At Kaufman Allied in Long Island, for example, any talk of succession planning is driven by Ed Delaney Jr., and his two brothers, although their dad, Ed Delany Sr., still owns the company.
“We are not trying to push him out the door, we just want to get it taken care of just from a tax point of view,” said Ed Delaney Jr., who manages one of the company’s two retail locations.
Although an owner’s reluctance to discuss succession typically stems from being too caught in the day-to-day responsibilities of running a successful business, it can also stem from a reluctance to deal with difficult family issues.
To get to the heart of the matter, James Olan Hutcheson, founder of Re-Generation Partners (www.regeneration-partners.com), a Dallas-based family business consulting firm, recommends that family business owners ask themselves a fundamental question when considering succession planning: Do you want to do what is right for the business, or do you want to provide your children with an opportunity to run the company?
“This is a hard question to ask and even harder to answer,” Hutcheson said.
In the best of all worlds, the children have the desire and the talent to take over and do what’s right for the business. In reality, it doesn’t always work that way.
Listen to the answers
One of the biggest potential pitfalls for succession planning — as well as any other successful operation in a family business — is the lack of open communication between generations. Parents and children alike have to step out of their family roles and communicate as professionals.
And as professionals, they need to be honest in their assessments and preferences. If a parent realizes the children don’t have the skills to take over the business, or the child knows she wants to work in another field, but both are too worried about hurting the other’s feelings to tell the truth, they are setting the business up to fail.
There are options.
“Remember that family ownership of a company doesn’t necessarily require family management,” Lea said. “There is always the prospect that the next generation will produce a host of very capable and committed young folks who will carry on the company’s management as well as ownership.”
Lea stresses that if a company brings in an outsider to manage the business, it is vital that the family be clear about its long-term goals.
“Bring in someone who will work under contract with no illusions that he or she is going to be adopted, literally or figuratively,” Lea said. “Make it clear they are there to run the business for a certain amount of time and under certain terms and conditions.”
Turning to someone outside the family may also be the right solution when succession is forced on a family by a catastrophe. Identifying an interim leader such as a long-time employee who knows the business gives the family time to make thoughtful decisions rather than reacting in a time of stress. This disaster planning however should also be in place before it is needed.
Hutcheson recommends that succession planning begin when the owner is in his or her mid-50s. That provides enough time to follow succession best practices including providing outside mentoring for the next generation to broaden their base of knowledge as well as establishing governance policies to facilitate the transition.
The latter is critical. Having agreed-upon policies and procedures will go a long way toward increasing the odds of keeping the business in the family.
“One of the reasons so many businesses fail in the second generation is because the heir says, 'I’m going to run it like Dad did,’” Hutcheson said.
Siblings and even employees often won’t accept something from the heir that was acceptable coming from the owner. Clear governance provides transparency so everyone knows what to expect.
Pride and respect
Despite the odds, passing the legacy of the family business from generation to generation remains the dream of most company founders and their heirs — and for good reason. In addition to the satisfaction of running a successful business, there is the deep mutual respect that develops in sharing the trials and the successes.
“We all have a passion for this business, and I guess that that is one reason why we all work so well together,” Catherine Galbreath said. “I don’t know what I would do without either of my children. They’re my sidekicks.”