Maintaining a family traditionWritten by Tyler DePerro | | email@example.com
Family businesses drive the U.S. economy. Ninety percent of all businesses in the U.S. are owned and operated by families, and 94 percent of Ohio taxpayers either own or work in family businesses. Still, about 80 percent of family businesses in the U.S. do not make the transition from the first to the second generation, said Debbe Skutch, director of the University of Toledo Center for Family Business.
“Family businesses fail for a variety of reasons,” Skutch said. “These include family dynamics, poor communication, failure to plan and failure to develop good leadership.”
Conversely, Skutch said, the leaders of successful family businesses generally have a sense of family tradition balanced by a keen interest in innovation and diversity and an ability to adapt to change.
“Succession means financially turning over the company, retirement planning, leadership development, communications with employees so everyone knows continuity is happening,” she said.
For this article, members of six local families that have successful businesses — The Andersons, Inc., DiSalle Real Estate Co., Ed Schmidt Automotive Group, Gross Electric, Shrader Tire & Oil and Toledo Wire Products, Inc. — shared their views on how they manage the succession question.
The companies have some things in common when it comes to succession. Generally, there was no plan in place to move ownership from first to second generation. But as the businesses grew, they streamlined processes and consulted advisors. All became members of UT’s Center for Family Business. In all cases, business owners said they believe being a family member is not enough to qualify someone for a management position.
Often, first-generation business owners have invested so much of themselves and their finances in their companies, it is difficult for them to imagine handing the reins over to someone else, Skutch said. This was the case for Jim Schrader, Jr. chairman of the board of Shrader Tire & Oil, when his father, Jim Shrader, Sr. named him president in 1985.
“It was not smooth,” Shrader said. “At age 50, I told my father there were three choices: I’d buy one portion of the business, the tire or the oil; I’d get controlling interest of the whole business; or I would leave.” But for the 10 years before the decision was made to name him president and CEO, “Dad and I had conflicting views on what we should be doing. It was complicated,” Shrader said.
Shrader said his father’s “fist was just so tied up, it was hard (for him) to let go.” But after Shrader was named president, “I elevated my father to chairman of the board. He had no more stock interest, but I needed him for guidance. We became the best of friends, and he still had an important role in the business.”
Communication between first and second generation doesn’t have to be acrimonious to fall short of a viable succession plan.
“It is typical that the first generation just doesn’t make a plan,” Skutch said.
When George Gross, founder in 1910 of what is today Gross Electric, became ill while on vacation to Florida in 1960 “he hadn’t even signed his will,” his granddaughter Laurie Gross, president, said. “He signed it the day before he died.” It then took her father, Richard, 10 years, she said, to “move all the stock from his sisters and his mom.”
If businesses have transitioned beyond the second generation, Skutch said, chances are their management teams have learned how to adapt to change.
Though The Andersons, Inc., started in 1947, “100 percent as a family business,” today, just “four out of 11 directors are family,” said Michael Anderson, president, CEO and grandson of founder Harold Anderson. “An essential part is played by non-family, starting in 1968 when the first non-family members were brought in as partners,” Michael Anderson said.
Going public in 1996 moved the company into a wider world, albeit one that now includes seven members of the third generation.
When Harold Anderson died in 1968, there was “no question who the team would be,” said his son, Richard Anderson, former general manager (when the company was a partnership) and chairman of the board today. “All five brothers (Harold and Margaret Anderson’s sons) were actively engaged in the company. And John was the perfect one to lead at that time. He was bright, thoughtful and he knew the numbers better than anyone else,” Richard Anderson said.
When John became sick, he began to “defer to me,” Richard Anderson said. “I had a handle on the businesses, the financial results. There was a succession plan in place, though we didn’t formalize it. There was some tension, and we took some risks. Later, we put processes in place that led to the clarity we have today.”
Those processes, Richard Anderson said, were the result of “experience, reading, educational seminars, serving on outside boards,” and, added Michael Anderson, “the UT Center for Family Business, which has been a wonderful vehicle.”
The revised processes included setting up an outside board, said Richard Anderson. For example, long before Michael Anderson was named CEO in 1999, “We’d asked Rene McPherson of Dana Corp. to join the board we were forming,” Richard Anderson said. “This was in 1988. Rene asked for a list of 20 people with the highest potential. I was afraid of nepotism. And it was a tough time for the company: There was a drought, there were changes in the export grain business, our stores in Columbus drained the till. But I gave him 20 names, and he took each one out to breakfast. It was the board’s responsibility to name the right person.”
McPherson “told me he’d never before seen that much talent in one company,” Richard Anderson said. “He criticized me and my tendency not to do favors for family. He told me other people had worked their way into positions, but that they weren’t as talented as some of the family members. An outside view was very helpful, and we changed the structure of the company as a result.”
When the time came to name a new CEO, “it was a non-issue. We had prepared, the board was very involved, and there was no question of who it would be,” said Richard Anderson, who had two sons working in management at the time.
“We had put Mike in charge of retail, an area with challenging human problems,” Richard Anderson said. “We wanted to check his flexibility. It was a great opportunity to see key players in a different light.” Michael Anderson had been named vice president and general manager of the Retail Group in 1994, served as president and chief operating officer of The Andersons, Inc., from 1996-1999 and was named president and CEO in January 1999.
Along with adding a board of directors, taking the company public in 1996 was a watershed decision, Michael Anderson said.
“It’s not the same type of ownership as when Grandpa made all my generation owners. Before going public, the company was a bank for the family. When we went public, everyone got tradeable shares. It has benefitted the company tremendously,” he said.
Though the “bias is that it would be best” that the next head of the company would be a family member, Michael Anderson said, “it is not a certainty.
“Succession is the No. 1 issue. It’s all about leadership. You have to use discretion and good judgment, and you can’t make commitments too early,” Richard Anderson said. “The emotional quotient is multiplied times 10 when family is involved. But the bottom line is, you have to call the shots right regardless. Third-generation family members were raised well and are good people who can handle the consequences.”
Today, there are seven third-generation family members with positions in the company.
“The bulk of the fourth generation is under the age of 25,” Michael Anderson said. “Many of them work part-time in the grain facilities.” The fourth generation, he said, must, “Find what’s right for them. I have outside experience, but my cousin Dan has worked here his whole career. Everyone has to do what’s best for themselves.”
Ann Obertacz is the third generation of her family to head Toledo Wire Products, Inc. Her grandfather bought the business in 1932, and her father, Richard Breivik, took over from him and bought out his grandfather’s partner following the Korean War.
Obertacz said when she became president, “There was no succession plan, typical of that era. At that time, my brother, my husband, my uncle and I all worked for the company. They sold the business to my brother and me, and it was up to us to work it out. I told my brother I was taking over. I had a college degree and 13 years of experience with another company. My husband ended up buying my brother’s shares.”
But Obertacz said she does not want this scenario to play out again. She and husband, Ken, vice president, who own 51 shares and 49 shares, respectively, are discussing the future of their company with UT’s Center for Family Business and an attorney.
“If no family member expresses an interest, we’d have to sell out,” she said.
Laurie Gross, president of Gross Electric since 1994 and the third generation of her family to run the company, said she was named president because she had more experience in the business than her brother, Joe Gross. He is vice president and a 49 percent shareholder to his sister’s 51 percent.
“When Joe and I first became partners, we had a family counselor work with us to help us learn how to work together,” Laurie Gross said.
“We took over in 1994,” Joe Gross said, “but we weren’t working as a team until 1996. One difficulty came from having people who were so loyal to our father’s generation. We were young kids signing checks for the older generation. It took about 10 to 15 years to work that out.”
Today, Jim Shrader’s son Joseph is president and CEO of Shrader Tire & Oil.
“I had made up my mind to step down when I was 65. After being involved with the Center for Family Business, I found out that the smoothest transitions are the ones that are planned,” Shrader said.
For about five to seven years before Joseph took over as president in 2000, he was in a “grooming stage,” his father said. “I gave him a test. We went into the re-treading business. I got it set up and told him, ‘Show me you can run a business.’ He did a fantastic job, all while he was also working as sales manager. He exceeded my expectations,” Shrader said. “I ran the business for 15 years. Joe was ready.”
Dan DiSalle, Sr., has an advantage over some who have transitioned from first to second generation. He was the third generation in DiSalle Plating and Diecasting.
“They sold the business, and I had to do something,” he said. The “something” turned into DiSalle Realty Co., which, in 2005, did $157 million in sales. DiSalle remains president today, though he and his sons talk about succession “a lot,” he said.
His sons Dan Jr., Joseph and Chris each manage an office.
“They have their own domains, but they are part of the management team, just like everyone else,” DiSalle said. As part of that team, and because “communication is very important, we have breakfast together twice a month.” If there are family issues to discuss, “we discuss them after the meeting.”
DiSalle said it is important to make sure the business “is run like a business.” That is, “you have to set goals and expect results. There is no special treatment of DiSalles,” he said. “You have to keep everything in perspective. You have to make the right decision for the business, and that will benefit the family.”
And there was every opportunity for his sons to work in other fields, DiSalle said. “I told them about the advantages and disadvantages of the business. They considered other options. I was pleased they decided to come in.”
Tom Schmidt, president of Ed Schmidt Automotive Group, said working in the family business while young helped him when he decided to return to the business.
“It’s important in any business to be able to walk in the shoes of people who work with you,” Schmidt said.
Schmidt said he had “no intention of coming into the business, but during my senior year in college, my mom got cancer. Dad asked me to help out. I did more than I anticipated, and here I am. I worked with my father for 26 years. It was the ultimate father/son project.”
Schmidt said the discussion about succession is “ongoing.” While his father “counted on one of us to take over the business,” Schmidt said he wants his children “to decide what’s right for them.” Schmidt’s son Jim has worked for the company, and his daughters Betsy and Ellen are working for the company this summer.
Center helps out
The bottom line when it comes to succession in family business is making a move. All the business people interviewed for this article reported membership in the UT Center for Family Business has been instrumental in helping them create and carry out their plans for succession.
“Whether you like it or not, succession is inevitable. Do we let time go by or do we create action?” Michael Anderson said. “Our involvement with the Center has been very helpful, especially in terms of hearing from people who face similar issues.”
Jim Shrader echoed this sentiment. “We’re working on having a board of advisors, a must before I step out. Unless you get outside perspectives, you’re just re-circulating old ideas. The Center gives us opportunities to hear from others with the same situation,” he said.
For more information on the University of Toledo Center for Family Business, contact Debbe Skutch at (419) 530-4058 or firstname.lastname@example.org.