With Good Sense, Dollars Will Follow

by Ira Bryck

A family business member recently remarked to me “Family business is no different than any business …just because Uncle Ned doesn’t speak to Uncle Chet.”

Indeed, family business is much the same as any other. They are hardly exempt from their need for profit, customer satisfaction, quality product or service, and motivating the individuals, family or not, that comprise the organization.They are like any business in another important way: the oft quoted statistic, that 2/3 of all family businesses fail to make the jump to the second generation (90 % fail into the third), actually applies to all companies. The average life span of any business is 24 years.

But family business is different, in the obvious characteristic of lifetime family membership. When a family business fails, it wreaks havoc on the family. It is like the death of a loved one, replete with mourning and dislocation. When a non-family business folds, true, there is unemployment, but employees get new work, they get on with their lives, they get over it.

The media and public are fascinated by family business breakups. The latest tale is of an heir apparent to the nation’s largest commercial insurance underwriter, who resigned suddenly when his younger brother was promoted three times in 16 months, now to his same corporate level. This might happen every day to non-relatives, but without the family devastation.

Americans change jobs (including new careers) an average of seven times. Today’s workers are wise to see themselves as consultants more than loyal employees. Recently I witnessed a group of bankers chronicling their work history at a variety of banking institutions. They had each worked with one another at some point. It would be odd to imagine them as relatives: “Oh, Uncle Ned, I we worked together before our fathers stopped speaking. Now only our attorneys are speaking.”

Family business experts concur on strategies to improve the odds against family business continuity. These include preemptive measures as regular family meetings, family councils, codes of conduct, mission/vision statements, outside time spent together, separate areas of responsibility, written succession plans, outside boards of advisors. Do them all, there might be no time left for making widgets.

But these structures need to be understood as an art, not a science. It is that family members are voting rather than being commandeered, creating a shared vision for the business and family, and financial security for the retiring generation, that spells success and continuity for the family firm.

One example of a successful transition is American Saw and Manufacturing Company of East Longmeadow, MA, one of the region’s largest businesses, with annual volume over $100mm. The company was founded in 1915 by three non- relatives, and 2 years later George Davis joined the company as a salesman. In the early 1960’s George Davis bought the company. George’s son James joined the company and ran it until his death in 1990. The company is now headed by third generation siblings John and Steve Davis.

John Davis, 46, began work at American Saw at 14, after school and summers. Knowing he wanted to enter the business, John studied finance. Graduating college on a Sunday, he began work Monday, with a sales territory of Western Massachusetts and Connecticut for three years. He considered it an excellent training ground. “Nothing like getting the door slammed in your face” to teach you about your business”, says John. The Davis’s did not follow any formal succession plan. They are a good example of what family usiness consultants Craig Aronoff and John Ward refer to as “the well planned family business succession that is neither random nor choreographed.

“Their open communication style, business sense, and growth opportunities blended together, and they intuitively followed several helpful strategies:

  • Their jobs were clearly structured with specific accountabilities: All sales figures were published, family or not: they competed against the benchmark of the best salespeople.
  • They reported not to other family members, but to a non family v.p. and sales manager.
  • They spend time outside the business together (“Do we discuss business at family affairs? Ask our wives.”)
  • They view transition as a process, not an event: “When it came to communicating the succession decision to the employees, they already knew and were comfortable, “John recalls.
  • They participated in peer discussion groups with successors of other companies.
  • Their father took mentoring role in final years of business involvement (“He was involved till the day he died, but he knew he was dying,” says John.

American Saw’s Corporate Principles include several precepts that explain the mindset of the Davis family :

  • Make it simple: simplicity improves understanding and communications
  • Plan ahead: The future belongs to those who prepare for it. Develop a plan, take action, measure results and reassess.
  • Communicate Effectively: It is important to inform everyone who needs to know.

“The success of our training was that my father was a good leader. He continually increased our responsibilities, so that we evolved over time. He told us ‘If you don’t feel challenged, go to Brazil or China and try to increase sales.’” John Davis explains.

Steve Davis, 37, blazed a similar trail, beginning at 21 years old with territory covering Buffalo and Rochester. He reported to the same supervisor as John did earlier. As Steve was learning sales and marketing, John was in finances as treasurer . With five years in the business, John was made a board member. John rose from treasurer to vp finance to executive vice president, and in 1989 became president; James became chairman. When James passed away five years ago the transition was obvious.

There had been much discussion between the father and his two sons. James Davis knew he had a terminal illness, and had expressed his satisfaction with the job both sons were doing. John Davis is sure of the benefits of family business. “We don’t need 15 committees to make a decision. While other companies are still waiting months later, our decision was made in one half hour, and off we went. We need not check with 5000 shareholders, either. We appreciate the ability to plan longer term, without worrying about spikes.”

Their main concern is estate taxes. Says John, “the government has made it more difficult to pass a private business from one generation to the next. We have done our planning. But it is a big question whether cash flow and insurance can take care of estate taxes for this or many other family businesses. One by one they have been picked off. You can do all the planning in the world, after a few generations, the government takes a few too many bites.”

What of the next generation? The oldest of Steve’s four children is nine years old. John’s daughter is attending college. She has worked in the business and might have an interest. She recently participated in a program of young adults that studied the Stock Exchange, economics, goal setting, wealth management, and business. Steve and John Davis are presenting their children an opportunity, and not a duty.

A corollary to “dying is easy, comedy is hard,” many family businesses would agree that, “business is easy, succession is hard.” We can learn not only from watching enthralling business disasters, but by observing those who made it look easy.