Family Company

FAMILY

Company MEETING THE CHALLENGES UNIQUE TO FAMILY BUSINESSES

More Inside: + Accessing external support + Hiring candidates that fit + Protecting family relationships

PASSING THE TORCH Finding the Right Succession Plan for You

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CRAIN CONTENT STUDIO C l eve l a n d

Join us!

CRAIN’S FAMILY BUSINESS FORUM Presenting Sponsor: The Ahola Corporation When: Wednesday, June 22, 8:00 a.m. - 1:30 p.m.

Where: Stillwater Place, Cleveland Metroparks Zoo Join more than 200 other Northeast Ohio family business owners at the 2016 Family Business Forum for speakers, networking and advice on the unique challenges that familyowned companies face.

We’ll kick off with keynote speaker John Kahl, CEO and second-generation leader of ShurTech Brands, the company behind the global Duck Tape brand. More than a dozen panelists in four break-out sessions will address such pressing issues as succession planning, family dynamics and building the right support team for your company.

More in-depth conversation will follow the break-out sessions during a luncheon open only to owners and leaders of family businesses. Join the family by registering for the Forum at CrainsCleveland.com/events.

Advertising director Nicole Mastrangelo, nmastrangelo@crain.com Managing editor, custom and special projects Amy Ann Stoessel astoessel@crain.com Project manager, copy editor Jennifer Keirn Graphic designer Staci Buck Photographer McKinley Wiley For more information about custom publishing opportunities, please contact Nicole Mastrangelo.

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FROM THE CEO

Time for advocacy on key family business challenges

C

leveland is the place where family business sector will have greater great minds first scrutinized success in moving these mountainous family businesses and the obstructions one stone at a time. The characteristics that set us apart from foundation will rest on the adoption of a non-family enterprises. Growing up in definition of “family business” (a feat the a business-owning family in European Union, by the way, Northeast Ohio, I was riveted accomplished back in 2009). by these differentiating facThe pioneer in that effort is tors, and I still am.

California, whose legislature Family enterprises are sigin 2014 approved a bill to nificant not only as employers, define and recognize family but also as philanthropic corbusinesses.

The governor porate citizens. Their failure vetoed the bill, but a similar can undermine the communione was introduced in ties where they operate. And 2015. The Family Business Jeff Ahola I’m concerned about the imAssociation of California, a pact increasingly complex and onerous sponsor and supporter, lists it as a “top tax regulations and operating rules can priority” for 2016. The bill is currently have on family companies. stalled, but now the definition is honed You’ve probably encountered some and ready to be inserted into legislation of them, like related-party rules, rules elsewhere. of attribution and rules of aggregation.

Meanwhile, about 15 states are helping They come into play in determining family enterprises preserve and pass taxes on transactions involving stock or down their assets through the formation property, in complying with Affordable of family trust companies. Ohio’s Care Act mandates, in ensuring employee proposed Ohio Family Trust Company benefit plans don’t favor highly Act, recently passed by the state Senate compensated employees, and more. The and House, requires relatively small government has gone overboard in its amounts of capital, making it accessible attempt to prevent families from unfairly for smaller firms and family farms. capitalizing on familial relationships in This legislation represents the commercial enterprises. incremental approach that I believe Where taxes are concerned, most fam- will provide the family business sector ily businesses are unincorporated sole a path for positive change. Consider proprietorships, general partnerships, the way in which the relatively new limited liability companies or S corpo- Benefit Corporation entity status gained rations, all classifications that base busi- traction: It began in Maryland in 2010 ness tax rates on the income of a compa- and today has been adopted by at least ny’s owners. That income faces marginal 30 states. tax rates exceeding 50% in some states, Like you, sometimes I am so absorbed according to the Tax Foundation. in running my family company that So where does that leave a family I don’t have time to check the pulse of business for which C corporation status the larger business community. But I doesn’t fit? I once proposed what seemed encourage you as stakeholders in your a sensible alternative: an elective status family business — your livelihood and (dubbed Family Corporation or F Corp) legacy — to track these developments, that would protect multigenerational and to become as educated and involved family companies from these tax and as possible. It’s in all of our best interests. regulatory burdens.

I soon realized this solution was overly Jeff Ahola, CEO ambitious, and perhaps unrealistic. The The Ahola Corporation

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Moving On Successful succession requires planning long before an exit

By BARRY GOODRICH

A

s more and more Boomer-generation entrepreneurs retire, a record number of family-held businesses are changing hands. How and when those changes occur are critical factors for firms that plan on thriving into their second, third and fourth generations.

Succession planning for family-owned businesses often entails tough choices as owners face the challenge of choosing among their own family members, often sons and daughters, to find the right person to take the helm.

“The value of your company is the value of your people,” says Keven Prather, managing partner of Cleveland’s Skylight Financial Group. “You’ve got to deal with emotion before emotion becomes an issue. We often have conversations with family members they’ve never had between themselves.”

Two generations of Gillmores spent According to The Family Firm Institute, seven years preparing for succession.

30% of family-owned businesses make it to the second generation, 12% advance family members and non-family to third-generation ownership and employees alike during succession a mere 3% survive into the fourth planning, a time when a lack of generation. While many factors are transparency can create problems. involved — including a sale of a first“You have to expect emotional volatility,” generation firm outside the family — says Stacy Feiner, an executive coach and the lack of succession planning plays a adviser for middle-market businesses. large role in those numbers.

“When discussions are happening late in “It always starts with the plan,” the game it can lead to a lot of conflict that says Prather, who quarterbacks the wouldn’t have been there earlier. But a succession process, working with family that has a business to rally around attorneys and CPAs to ensure family- has great resources to navigate those owned businesses have the proper emotional conflicts.” insurance protections, income While the outcome expectation for distribution and retirement planning. every business is unique, Feiner sees “If families don’t plan, these businesses many owners who hold onto their go away. It’s critical to get started early companies longer than they should to maximize the value of the company.” because they simply don’t know what Issues of trust are paramount for they’re going to do next.

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“Exit planning is a bit of a misnomer,” she says. “You don’t have to leave a business to exit it.”

Gillmore Security Systems is one company that started planning long before the succession occurred.

“We set up our plan seven years ago,” says COO Alan Gillmore IV, who works alongside his father and brother at the company’s Oakwood headquarters. “It’s breathable enough where we can make modifications down the line.”

For Gillmore, the plan serves two purposes — transitioning equity while continuing a legacy.

“We did have some difficult discussions but I gained a great amount of respect for my brother, who did not have the same business background as I did,” he says. “I also developed a much better appreciation for my father’s management style and his ability to get us where we are today.”

Gillmore Security’s culture of transparency has created an atmosphere in which non-family employees feel as at home as the family founders. “We’re pretty open around here when it comes to helping our associates understand our financials,” says Gillmore.

Prather urges family business owners to recruit a board of directors who can help in the succession planning process.

“You have to select the best team,” he says. “The value of any company, whether it be family-owned or nonfamily, is the value of your people.”

And while family ties can serve to both impede and implement succession planning, those honest, if sometimes uncomfortable, discussions can make all the difference in a firm’s future success.

“If you act in the best interest of the business, you serve the best interests of the family,” says Prather.

FA M I LY C O M PA N Y | 3

Lending a Hand

Outside advisers are critical to helping companies head off business problems and family problems

By VINCE GUERRIERI

T

he looming specter of enormous estate taxes used to be enough to convince the leaders of a family company to consult regularly with their lawyers, financial planners and other outside advisers, says Jim Dickinson.

But now Dickinson, an attorney specializing in estate planning, trust and probate law with Cavitch, Familo and Durkin, estimates that 99.8% of people in the United States won’t have to worry about estate taxes.

“So people start to think, ‘I don’t have to do any planning,’” he says.

But engaging a team of outside advisers — including accountants, lawyers and even psychologists — is important at any stage of a business.

“We don’t know all the answers and we never will,” says Suzanne Broadbent, director of sales and marketing for Weston Inc., a Cleveland commercial real estate company entering its third generation of family ownership. “So we have to rely on others, people who can help us better than we might be able to help ourselves.”

Dickinson said the most basic outside adviser a family business must have is a good accountant. “Accounting is the language of business, and if you’re going to try to get a loan, say, or take on new partners, the quality of your financial forms is key,” he says.

The second adviser Linda Bluso recommends family businesses recruit is an attorney, not just for liability but also to plan for succession.

“When businesses are looking at succession planning, they engage outside advisers to look at tax issues and insurance issues,” says Bluso, CEO and founder of the Adaptive Knowledge Institute, which assists family businesses in transition planning as well as development. “You have to trust the adviser. It has to be a good fit.”

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Suzanne Broadbent says her three-generation family business Weston Inc. depends on the counsel of outside advisers.

And that can be difficult to find.

Broadbent said Weston seeks at least three bids for any contract. “We want to make the best choice from a pricing standpoint and from a value standpoint,” she says. “Not just a value standpoint, a values system standpoint.”

Dickinson recommends that people mine their connections. “It’s experience,” he says. “You keep asking until you find someone who has had that experience and can refer you to someone.”

As a company matures, Dickinson and Bluso both say family companies should consider soliciting the help of a business consultant as well.

As is the case with so many things, communication is the key, Bluso says, and a consultant can work best as a mediator, “the quarterback, if you will, to bring everyone together for a holistic approach.

An adviser brings fresh perspective.”

Sometimes, a different type of adviser might be necessary. Lawyers and accountants are left-brained and analytical, Dickinson says. They might be

able to provide advice for compensation, taxes and succession, but if it’s the kind of family where Thanksgiving dinners degenerate into shouting matches, then other advisers might be needed.

“I have a list of psychologists,” he says.

“It depends on what I think the real problem is. Some aren’t legal problems or accounting problems. Sometimes, it’s family problems.”

No matter what the future of a company may hold, Dickinson says, families should also be getting it regularly appraised, which means regular dealings with an appraiser.

“It’s like getting an annual physical,” Dickinson says. “You should get it done regularly. Most business owners don’t do it because they don’t want to pay for it and I don’t think they really want to know the number. Every business owner has that number in the back of his mind where he’ll sell. The client almost doesn’t want to know that because it might not be the number he has in the back of his mind.”

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Right Fit First

Good hiring decisions should ensure that family members are square pegs in square holes

By BARRY GOODRICH

W

hen asked by Inc. magazine about the dynamics of operating a family business, billionaire entrepreneur Kevin O’Leary cut to the chase: “You have to be willing to fire your mother,” he said.

That statement may come as no surprise to viewers of the hit series Shark Tank, where the outspoken O’Leary, sarcastically referred to as Mr. Wonderful, holds court. But in reality, personnel decisions in family-held firms can be a tangled web, taking on even more importance than choices made by public companies.

“O’Leary’s comment is interesting but not often true with family businesses,” says Fran Gross, the president and cofounder of MyPeoplePlan, a workforce and business planning firm headquartered in Hudson. “Decisions cannot be that clinical when the family is involved.”

Family businesses are challenged on a pair of fronts — dealing with family members who may or may not be working in the roles best suited to them and working with non-family employees who have concerns about advancement.

Creating a culture that encourages nonfamily members to pursue leadership roles is one area where many successful multi-generational companies excel.

“In order for the business to thrive, family businesses need to consider their business goals when choosing family or non-family members for key positions,” says Gross. “Successive generations should be encouraged to get the education and experience that will fit the work that needs to be done.”

Kolbe Corp. founder Kathy Kolbe’s groundbreaking work in the science of human actions, reactions and interaction has benefited a client list that includes Honeywell, NASA, the U.S. Army and others. Despite her success, Kolbe still stings from her own early experience of working with her father, the creator of

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Second-generation PRADCO President Kristin Tull, right, helps other family companies make the best hiring choices. the Wonderlic Cognitive Test often used in hiring.

“In his generation it was the son who inherited the business,” says Kolbe from her home in Phoenix. “I was denied leadership in the company, which was a huge betrayal for me. But it gave me the freedom to go out and discover my own processes. I benefited from being unchained from the family business.”

Today, Kolbe works alongside her husband, son and daughter in a company that consults with organizations promoting “conation” — an approach to measuring instincts and problemsolving styles. She is currently teaming up with her daughter to write a book about family businesses.

“The most important rule is don’t talk about business at home,” says Kolbe.

“At work, don’t pretend your values are anything but what they are. Every business has a culture and every time you violate your own values you are destroying the belief non-family members have in you.”

While it is often difficult to separate job performance from family relationships, many family-owned firms have succeeded by integrating non-family employees into key roles.

PRADCO, a Chagrin Falls-based family-owned company specializing in employee evaluation, selection and development, implements online testing and worker satisfaction surveys that help family-held businesses identify non-family members deserving of leadership roles. “You have different leadership styles across generations,” says PRADCO President Kristin Tull.

“Older generations don’t always turn the reins over easily.”

In many cases, owners of family businesses expect their children to work their way up in the company by placing them in different jobs. Familial responsibilities often clash with a business’ bottom line.

“The first step is identifying the culture,” says Tull. “The second step is evaluating the people and the third step is helping employees adapt their skills to that culture.”

And while Kolbe maintains that ageism and sexism are “more rampant in familyowned businesses than public firms,” she is determined to see that all employees are treated fairly. “I’m trying to break down all these stereotypes and myths,” she says. “The joy for me is that so many of these mistakes are preventable.”

FA M I LY C O M PA N Y | 5

Relationship Rescue Some planning and preparation can help head off family rifts before they occur

By ANNIE ZALESKI

I

nterpersonal issues within families are difficult enough. But when disagreements occur in family companies, the impact inside and outside of work can be devastating to both relationships and business stability.

But experts agree that there are steps family businesses can take to achieve workplace success without damaging personal relationships, starting with establishing open lines of communication and finding ways to anticipate potential problems before they occur.

“Deal with the emotional issues before emotion becomes the issue,” says Lisë Stewart, the executive director of the Galliard Family Business Advisor Institute.

“When the family fails, the business fails. … Many times within families, there’s been no discussion about how to solve conflict [or what to do] when conflict arises. … Key discussions that need to happen are, ‘What do we do if we disagree? How do we learn how to communicate more effectively?’”

Stewart recommends team coaching or family counseling, or using neutral facilitators to offer unbiased guidance and support during trying times. National organizations like the Family Firm Institute produce educational articles and stage conferences for family businesses, but there are closer-to-home options too, such as executive education classes at area colleges. Coursera, a website offering free online courses from well-regarded universities, is another resource. “[Classes are] a really good way to get the family members in the business to talk to each other in a way that they can listen to each other,” observes Kathy Overbeke, a family business researcher and principal of Generation Planning Strategies for Family Business Renewal.

Overbeke recommends family business meetings to keep everyone on the same page and may also include others outside of the family, like a board of directors or

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Family business consultant Kathy Overbeke helps families protect relationships in and out of work.

a facilitator. To be effective, she says such meetings should have a clear purpose and agenda, with a goal to reaffirm and refine a shared vision statement. “[This statement defines] the purpose and hope for the future for both the family and the business … [which] serves as a framework for making decisions,” Overbeke says. “If the family has decided, for example, that they want the business to continue for several generations, and they want everybody to benefit from it, they’re going to make decisions within that framework.”

Another strategy to manage familybusiness overlap, she says, is creating a family constitution that establishes rules for employment of family members, ownership policies, liquidity policies and leadership development policies. Each individual should also formulate vision statements for their own personal goals.

Overbeke shares one experience of working with a family-owned manufacturing company experiencing in-fighting among the second generation after their father died. They were jockeying to persuade their mother to make decisions, which in turn made her angry and threaten disinheritance. After working with each to develop a personal

vision statement, Overbeke found the root of their disagreements: long-ago dinner table business conversations in which some family members felt included and others did not.

“All of them wanted to be a family,” she says. “All of them valued family. At the same time, all of them felt that their family did not value them. They felt the others didn’t care about them [and] didn’t appreciate them.”

While the outcome in that family was a positive one, there are other times when the best thing for the business and the family is to move relatives out of the day-to-day working environment.

“That doesn’t mean they can’t be owners of the company, but they don’t necessarily need to be working together in the business,” Stewart says. “Just because they’re family doesn’t mean they’re going to be best at working together.”

But Overbeke cautions that there’s no one-size-fits-all solution for dealing with the interpersonal strain and stress in a family business.

“And that is the most important realization: Every family business is different,” she says. “Their needs are different; their purpose is different. You really have to address each family individually.”

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FAMILY BUSINESSES BY THE NUMBERS

35% of Fortune 500 companies are FAMILY CONTROLLED

From PwC 2014 U.S. Family Business Survey:

The 120 top family businesses in North America:

of U.S. family businesses surveyed have been run for two or more generations

GENERATE $2.3 TRILLION in annual revenues

Employ nearly

Are on average

6.2 MILLION PEOPLE

85.6 YEARS OLD

From EY / Cox Family Enterprise Center 2014 Global Family Business Survey: 525 family businesses from 15 countries representing 12,000 employees and $3.48 billion in sales

THE NEXT GENERATION 53% of global family business leaders surveyed were in the second generation or greater 87% of respondents have clearly identified who is responsible for succession 70% are considering a woman for their next CEO

75% 18%

expect an ownership change in the next five years

HOW WILL THEY CHANGE HANDS?

48%

THE FAMILY BRAND 76% refer to themselves as a family business in their branding 68% say their family strongly identifies with the company 64% say it helps them differentiate themselves from competitors 64% say it improves the reputation of the company with customers

pass it on to the next generation and leave

26%

ACROSS THE BOARD

pass it on the next generation but stick around

90% have a board of directors One half of voting board members are family members employed in the business One fifth of voting board members are family members NOT employed in the business Six times a year: frequency of face-to-face meetings of family business boards of directors

19% 7%

HEALTHY FAMILY, HEALTHY BUSINESS

sell the business

70% have regular family meetings to discuss family issues 90% have regular family or shareholder meetings to discuss business issues 56% have a mission statement 13% have a family constitution

don’t know

Top 3 oldest American family businesses:

40% have

“sticky baton syndrome”

Molson Coors Brewing Co.

Thomson Reuters Corp.

Levi Strauss & Co.

FOUNDED 1786

FOUNDED 1799

FOUNDED 1853

hesitancy to relinquish control to the next generation

SOURCES: Ernst & Young; Cox Family Enterprise Center at Kennesaw State University; Conway Center for Family Business; PwC U.S. Family Business Survey

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FA M I LY C O M PA N Y | 7

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