When it came time for Jeff Hellenbrand to take over the business his father built, the passing of the torch was pretty graceful — if somewhat unexpected.
“Back in 1991, my dad walked into my office one day and asked if I had everything prepared for our upcoming board meeting,” said Hellenbrand, president of Hellenbrand Water in Waunakee. “I handed him the agenda for review, and after a few minutes he said it looked good but we needed to add one agenda item, and that was to make me president.”
For Hellenbrand, who worked with his brother in the family business from a young age doing a variety of different jobs (“like a farm family,” he says), the transition may have seemed fairly seamless, but it was years in the making. And today, with his industry changing, the challenges awaiting future generations are even more intense than those Hellenbrand faced.
| “When a child comes out of college, it’s been many businesses’ recommendation that the child go off and get a job somewhere else so they can get experience outside the family business, so they can understand the world at large and see how other people do it.” — Julie Bogle, Smith & Gesteland |
“While I had been running the day-to-day duties for some time, there had been no previous discussions prior to that,” said Hellenbrand. “Our company now is much larger, our industry is changing at a rapid pace, we continue to grow both locally and nationally, and our next leader, along with our management, will need to have the vision and tools to build on the foundation they will be taking over.”
In many ways, the transition from one generation to the next is more difficult these days, with more complexity and keener challenges facing heirs apparent — who, to complicate matters even further, have increasingly more career options.
And those challenges are borne out in some grim statistics.
According to the Family Business Institute, approximately 30% of family businesses survive into the second generation, 12% are viable into the third generation, and just 3% last until the fourth generation.
To some degree, the general rate of attrition in the business world accounts for those lackadaisical numbers, but they’re nevertheless alarming to anyone who’s spent a lifetime building a profitable business and wants to turn the keys over to his or her children.
It would be nice, then, if family businesses had a roadmap for the future that allowed them to transition from one generation to the next without too much turmoil.
Smith & Gesteland, a Middleton-based CPA and business consultancy firm that sponsors the annual Wisconsin Family Business of the Year Awards, has stepped into that breach with a study it commissioned titled “Best Practices in Family Business Succession.”
The study surveyed 20 Wisconsin companies that were all in their second generation or beyond. The companies ranged from 11 to more than 1,200 employees and represented a variety of industries, including manufacturing, construction, retail, consulting, and wholesale distribution.
According to the study, two of the most important keys to a successful transition are communication and advanced planning. And “advanced” doesn’t mean six or 12 months out. As one of the companies surveyed noted, “It can take 10 to 12 years to land the plane and exit a business.”
“I think the most important thing to do is to make sure that ownership and succession are discussed, not at the point at which you’re going to hand over the keys but many years in advance so that everybody is on the same page as far as expectations,” said Julie Bogle, an attorney and partner with Smith & Gesteland who heads the firm’s family business niche. “Not only the people in the business who are going to take over, but also any children outside the family business that aren’t going to take the keys to the business.
“Sometimes family business owners think, ‘Well, they can duke it out when I’m gone,’ and that really is not a good recipe for the business to succeed. In order for the business to succeed, there really have to be very clear expectations about who is going to do what when [the current leader] is gone.”
Collected wisdom
While communicating effectively and getting a head start may be the two most valuable takeaways from Smith & Gesteland’s study, the businesses surveyed offered numerous other nuggets of wisdom in the course of their interviews.
According to the study’s summary, these include the following:
- “If you ask enough questions, a path will appear. There’s value in reaching out and finding out what road others before you have traveled with succession management.”
- “It’s best to set up as many structures as possible that take the family out of business decisions.”
- “Succession planning is all about putting the right people in place to manage the company and the right ownership structure to support them.”
- “The right time to sell a business (or to pass it on) is not when it’s hurting, but when it’s strong and vibrant.”
- “It’s not necessarily fair (or smart) to divide a family business equally among surviving siblings. It’s better to give (or sell) ownership to actively involved family members only and take care of all others through personal estates.”
- “Many times a poorly performing family member isn’t the problem. It’s the job. Families use personality testing and counseling to help place family members in the right positions.”
- “An intangible benefit to succession planning is the visible future and sense of stability it creates among employees who can see for themselves who the next-generation leaders are.”
- “You’ve got to be confident that the next generation is going to be more effective than you’ve been. The next generation has to earn the right to manage and own the business.”
The study’s authors point out that earning the right to run the family business doesn’t just involve working in the company for a few years. More and more, companies are putting a premium on ensuring that younger generations develop broader life skills and have the wisdom, worldliness, and above all, the desire to run the business.
“When a child comes out of college, it’s been many businesses’ recommendation that the child go off and get a job somewhere else so they can get experience outside the family business, so they can understand the world at large and see how other people do it, and then come back and bring that knowledge back to the family business,” said Bogle. “There’s always the risk that the child’s not going to want to come back. But again, if the family business is doing well and creating a lot of wealth, it’s pretty enticing.”
(Continued)
Bogle also cautions that business owners need to create a clear line of demarcation between their families and their businesses in order to protect the best interests of both. To that end, business owners should be prepared to hire the best people for a job, not just elevate an employee because he or she is a family member. Indeed, it’s important to put in place structures that “take the family out of business decisions.”
“[All family businesses] have the same conflict — the conflict between ‘I love my family and I love my business,’” said Bogle. I can’t think of a person out there who owns their business who doesn’t love both their family and their business, so when those two come into conflict, that’s kind of the test of how that business is going to do, so creative ways to get out of those situations or communicate your way through those situations make all the difference.”
In practice, however, those conflicts can often be difficult to resolve, even for businesses that have walked the transition path before.
Mark Cullen, chairman of the board of J.P. Cullen & Sons, a 121-year-old Janesville-based construction firm, said his company’s future is still a little hazy when it comes to succession.
“I’d have to say we’re fairly embryonic in that stage,” said Cullen. “Our oldest fifth-generation person has been in the business four years, the other two for just over a year. And it sounds pretty self-explanatory — business first, family second — but I think we’re still trying to figure out what that means.”
When it’s time to start the transition process, however, it’s important not only to communicate but to open a dialogue with the right people.
“They should be talking to their accountant, they should be talking to their lawyer, they should be talking to their kids, they should be talking to their spouses,” said Bogle. “Sometimes they need to talk about it with their doctors. Sometimes they need to talk about it with their older generation, with their mom or dad, about when the timing is going to be right.”
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