Ownership: General

Dueling Perspectives: Private company share structures

Business families have a variety of options for structuring shares in their company to meet the needs of the family and the business. We asked George Quarles, a third-generation owner of Quarles Petroleum Inc., a Fredricksburg, Va.-based fuel company, and Carolyn Brown, a fourth-generation shareholder, director and family council chairperson of Mannington Mills Inc., a Salem, N.J.-based flooring manufacturer, to explain their companies’ share structures.

George Quarles, Quarles Petroleum:

My father was an only child who had five children. He wanted to give ownership equally to the children, but he wanted to avoid letting the stock go out of the blood family. So the [shareholder] agreement allows for transfer of stock to trusts for the benefit of bloodline kids but does not allow transfer of stock to non-bloodline.

“Up until 2014, there were four of us in the business, three brothers and one brother-in-law. The brother-in-law was in that situation where he owned stock in trust for the benefit of his kids. That brother-in-law, who was not an owner, was the best-educated and smartest of the group, and we chose him to be the CEO.

“When your stock ownership starts to get widely distributed, I think you have to naturally move toward a structure that might be more like a public company. I don’t feel like we’re there yet. I think one of the advantages of keeping stock in trust is that it limits the speed at which you distribute.

“I have a sister who has a sole daughter who’s inheriting all of her stock. If we voted share for share, that daughter would have a very large say in what happens to the company because of how concentrated her stock is. The other fourth-genners have siblings. You can see where the power would lie.

“Because we have the structure where each family votes based on a 20% share, that daughter doesn’t have an overly large ability to control events.

“If you take a family that’s got three kids and they’re going to each get a third of 20%, as long as those three can agree as a family, the power of their cousin with the full 20% share has been controlled.”

Carolyn Brown, Mannington MIlls:

“Stock formation and stock handling evolves. It depends a lot on the family’s needs. You may develop, at different times in company history, needs for various classes of stock. You can always declassify a stock and move on to something different.

“It’s been important to us to have various classes of stock, some that are dividend-earning stock and others that can be used for other functions.

“Up through the ’50s and ’60s, there were preferred shares and common shares. We have in our company bylaws a policy on paying dividend on the common.

“We bought out our preferred shares in the early ’80s or late ’70s, and came up with just a voting class of stock.
“We have four classes of stock. One’s voting. One pays a dividend that must be paid first. And the other classes have been put in trust or been set up as gifting mechanisms. That has helped the family with gifting and setting up trusts.

“Our voting stock is not owned by all shareholders, because some of the shareholders redeemed their voting shares voluntarily. They’d rather have the money. So not every shareholder is a voting shareholder, but two-thirds are. We have approximately 35 shareholders. It will double in time as our next generations come into being.

“In the shareholder agreement, who owns stock in the family and how it is passed on is very detailed: how it is gifted, how it is sold, how it is redeemed. The shareholder agreement is signed by every shareholder in the company, regardless of class of stock.

“We have a class of dividend-paying stock that has to be paid prior to other classes of stock, and it has a minimum payout requirement. The board can decide to not pay dividends at all. But if they pay a dividend, one class of our common stock has to be paid first. I would say most own that stock. Some own a lot more than others because some of the family members have redeemed over the years, or they’re younger and they just haven’t been gifted or inherited that much to date.

“We have another set of common stock that was a byproduct of a common share split done in the ’80s. That pays a dividend as well. It’s been set up more in trusts and been part of a gifting program.

“And then we have a final set of stock that is non-dividend-paying. That was set up also as part of a split, maybe 20 years ago.

“We have also evolved in in how we pay out stock. It used to be annually, and now it is on a quarterly basis.

“If you looked at the shares of stock, you would see that some bloodlines are less involved than others. But that’s by choice. It was all, to my understanding, a pretty even game across the bloodlines at the beginning.”

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.    

Redefining ownership as shareholder stewardship

Thirty years ago, I was faced with a typical family business crisis. My father, the founder of our family-owned industrial fabrics company, Seaman Corporation, had passed away prematurely at the age of 55. The management team and I ran the company out of our headquarters in Ohio, while my mother and siblings worked in one of the company’s divisions in Florida. For several years following my father’s death, I had the support of my family. But then differences started to arise, and it was not long before my family actively disagreed about how to manage the company.

My parents had the best intentions in encouraging us to work in the family business, which was founded in 1949. From their viewpoint, they were providing us with lifelong job security, the most meaningful gift someone who came of age during the Great Depression could give. The common narrative in American family business at that time, and continuing on to today, was that if you want to have anything to do with the family business, your career must be in the business.

Breaking tradition
When I graduated from Bowling Green State University, my father discouraged my attempts to interview elsewhere. He had supported my education so that I could bring my new skillset back to the company. When my siblings began to have difficulty with their college studies, he simply provided them work opportunities in the business, rationalizing that they could learn as much working in the business as they could struggling with college classes. Future ownership of the family business by all the children was a given, and therefore few or no other career options were seriously considered.

Linking ownership in the family business with a lifelong personal career is a paradigm that can create one of two scenarios. The first is that the owners of the family business put pressure on their children to join the business, regardless of aptitude or interest. The children’s careers become focused in the business, often preventing them from exploring other opportunities that might better match their skillset and interest.

The second outcome of this kind of parental pressure is that the children rebel, refusing to join the business and choosing to build their career elsewhere. The downside of this situation is that the children might miss real career opportunities within the family business that, long-term, could be more fulfilling to them. A lack of interest and/or career on the part of the next generation results in failure to cultivate the business as a family treasure. The business more often than not gets sold, increasing the risk of its early demise.

This cultural narrative seems to create a sense of entitlement in the next generation, who then fail to understand the immense effort and sacrifice required of the founding generation in the early years of the company’s life cycle. More tragically, this paradigm fails to recognize the true value of ownership of this family business treasure.

The disharmony that evolved in my family business resulted in my buying out all of my mother’s and siblings’ interest in 1994. Ownership succession became an entirely different scenario. I wanted to avoid the classic “shirtsleeves to shirtsleeves in three generations” outcome. My wife and I would have to reframe how we thought about ownership and family career participation if we wanted our children to someday inherit the business. This was further complicated by the fact that our three children, perhaps after witnessing the stress created by our family conflict, had no interest in careers in the business. We would need a new model to accommodate this reality.

About this time, at a family business conference, I reconnected with John Ward, a family business consultant I had met 20 years prior. John was an expert in generational family business transitions and had developed the concept of “active shareholder.” With his help, we began reframing our thinking from ownership to stewardship. Our family business was not meant to fund the next generation’s lifestyle; we saw it as a treasure to be nurtured with the intent of passing it on to future generations. We did not ask our children to commit their careers to the family business, but we did offer them an opportunity as owners to preserve the family business’s original values and culture, while giving executive leadership the freedom to manage the business for survival and growth in a dynamic economic environment. Owner was redefined as shareholder steward.

Redefining ownership
We committed to implementing this model with the help of Ward and his team. One of our first tasks was to codify our family values in a family mission statement. Our mission statement has evolved over the years, but its primary function has stayed the same: It is a mutually agreed-upon set of principles to guide our family. It represents our commitment to our potential, our respect of each other, our creativity and innovation, and our desire to pass these values on to future generations. Although we wrote this as a family, independent of our business, we surprisingly found it to be in very close alignment with our family business mission statement.

On a more tactical level, we also created a family business manual, a handbook for establishing policies that address the role of family shareholders. This manual is extensive. Among its contents are guidelines for active ownership and the details of our shareholder policies. This document continues to evolve as our family’s business interests diversify and broaden into a larger family enterprise, including an investment fund and a philanthropic foundation. With the help of the Family Business Consulting Group, we are in the process now of updating our manual into an even more robust family constitution.

Our three children now have children of their own who are even further removed from Seaman Corporation’s daily operations. Early shareholder education is the key to successfully developing a new generation of shareholder stewards. Beyond using the mission statement and manual as educational tools, we are formalizing a curriculum for our grandchildren. Our first publication was a history book of Seaman Corporation, The First Fifty Years, and we plan to write picture books for our grandchildren exploring basic business concepts (i.e., What is money? What are the principles of entrepreneurship? What is philanthropy?). It is important that new generations understand not only the founding story of the company, but also the strategic challenges the business faces.

To fully understand the role of responsible ownership, we clarified the distinction among ownership, governance and management. Sustainable family business ownership can suffer when all three of these functions are carried out by the same family members. Owners have the responsibility of electing the governing board, which should be primarily composed of independent, non-family, non-management directors. The board has the responsibility of electing the officers of the company who will lead and manage the business in our challenging economic environment while still preserving the values, culture and legacy of the founders. A clear understanding of these roles helps clarify how a family member can play an important role as a shareholder steward even though their career is outside the business.

The role of family stewards
An example of integrated, hands-on shareholder education occurred at one of our multiday offsite board meetings. Our grandchildren were asked to craft products using the fabrics created by our business, then present their crafts to Seaman Corporation’s board of directors. Another example is an event we scheduled at our facility in Bristol, Tenn. All our children and grandchildren (ages 1 to 16) were taken on a tour of the facility, showcasing our weaving and coating capabilities. Afterward, we held a barbecue luncheon with our associates.

This interaction of our children and grandchildren with the employees of the company instills the understanding that our family business is also important to the many families we employ. Beyond exposure for our family, these kinds of events provide value in demonstrating to both employees and customers the interest and preparedness of the next generation of family owners.

Shareholder stewards also recognize that the family business is a powerful platform for opportunities beyond personal careers. Because the business is a key entity within the community, a shareholder steward can make significant contributions to the local community as well as the community at large. For example, one of our daughters has been instrumental in a continuing effort to donate our outdated inventory to humanitarian NGOs that use the fabric for emergency shelters. She is able to effectively leverage her philanthropic interests in conjunction with the business operations of Seaman Corporation.

But this would not be possible without the continued success of Seaman Corporation, which has grown to nearly $200 million in sales today. During the COVID-19 pandemic, Seaman Corporation has been designated an essential business because of its supply to transportation, construction and defense industries. As such, we have been able to keep operating. Nonetheless, we have experienced a significant disruption in revenue in the short run, and have been using the federal government programs to keep our associates employed during this timeframe.

Staying focused on the growth and financial health of the company is critical for shareholder stewards. Although family shareholders as owners are not responsible for running the day-to-day operations of the business, they have a responsibility to understand its strategic challenges. Sustainability requires adjusting to the ever-changing economy. If they do not understand the strategic competitive challenges facing the enterprise, family shareholders will not be able to develop realistic shareholder expectations with which the board can hold management accountable.

Successfully passing a family business on to future generations as an economic asset requires early education and an evolved ownership model that accounts for each shareholder’s interests and strengths. Within this context, it is both possible and significantly important for family shareholders to play an active role in owning their business regardless of their career direction, thus ensuring the successive stewardship of a true treasure.             

Richard Seaman, author of A Vibrant Vision: The Entrepreneurship of Multigenerational Family Business, is the chairman of Seaman Corporation, where he served as CEO from 1976 to 2015. Under his leadership, Seaman Corporation, a Wooster, Ohio-based manufacturer of industrial coated fabrics, grew from $10 million in annual sales to nearly $200 million in sales today. 

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.    

Amping up structures to prepare for the future

In the late 1980s, Charles A. Collat Sr. asked his four children if they knew what it meant to run a family business.

“Being young and naive, we said, ‘Absolutely, we know what it means to run a family business and to be effective owners,’ ” recalls Charlie Collat, 53, his son.

The children didn’t really know — but they wanted to learn. So the family engaged a family business consultant to help Charlie and his three sisters learn to become good owners of Mayer Electric Supply Company.

“Of the many things that we have learned over the years, one of the most important lessons was and is how to communicate with each other,” says Charlie, who today is president of Bay Pine Holdings (the family office) and executive vice president of Mayer. “My mother’s mantra was that she didn’t want the family business to break up Thanksgiving dinner.”

At the time, Charles, now 88, was chairman, CEO and president of Mayer, which has grown to be one of the nation’s largest wholesale distributors of elec

trical products and equipment, connected solutions, digital lighting and digital tools.

Founded in 1930 and based in Birmingham, Ala., the company had three locations in two states when Charles took over in 1979. As of this writing, the company has 1,500 associates at 81 locations across 14 states and generates $1.1 billion in annual revenues.

“My dad and his management team put principles in place that we still have today,” says Charlie. “We strive to have the best associates, to have a financially strong balance sheet, to invest in technology to run our business and to have inventory close to our customers.”

Mayer was founded as The Electric Supply Co. by Ben S. Weil, the father of Charles Collat’s late wife, Patsy. During the Depression, the business went bankrupt as customers stopped paying their bills.

“Max Mayer, a man in his 70s who liked my grandfather and his business, bought the business off the auction block and saved it,” says Charlie. He changed the name to Mayer Electric Supply Co. — and Weil kept the name when, a few years later, he bought the business back from Mayer. While Mayer Electric Supply Company Inc. is the official company name, the company publicly rebranded as Mayer in 2018. 

Today, the name doesn’t just honor Mayer — it also provides a quick way to screen callers: “People will call up and ask to speak to Mr. Mayer, saying, ‘I know him,’” says Nancy C. Goedecke, 61, the oldest of the four children and Mayer’s chairman and CEO. “I say, ‘No, you didn’t do your homework.’ ”

Weil’s son, Leonard, entered the business in the 1940s. His daughter married Charles Collat, who then joined the business in the 1950s. In 1979, Weil did not see a bright future in the electrical business, while Charles wanted to expand and grow. The Weil family sold their shares to the Collat family in what is now called a leveraged buyout.

A family that is close to the business
Family involvement in the business started early. “It was very much a part of all our lives,” says Nancy. “We worked there summers and holidays. Charlie swept the floor in the warehouse, I did a lot of filing and one of my sisters answered the switchboard.”

They absorbed their father’s vision and values. “His vision for the company was to be the first choice of our customers, our associates and our suppliers,” Nancy says. “His vision for the company and family has brought us to the point where we are today.”

In order to begin the succession process, Charles turned over the president’s role to a non-family member in the mid-1990s, remaining chairman and CEO. In in mid-2000s, the advisory board members urged him to make room for a successor and to move his office away from the corporate office.

“The board basically told me to move my shadow, to make sure that the person who was running the company was not me,” says Charles, who today is chairman emeritus. He found an office nearby and moved.

“My dad literally moved out of our building — a monumental decision,” says Charlie. “My father called it ‘being put out to pasture,’ but it allowed our president to be president and my oldest sister to begin to be groomed to be chair.”

In the mid-2000s, a nationwide retailer asked Charles if he was interested in selling the business. He knew he didn’t want to sell, but he asked his children what they thought. “I figured it would be a good test to see what they wanted to do,” he says.

The children gathered with Craig E. Aronoff of The Family Business Consulting Group to talk through the pros and cons.

“We left that afternoon saying, ‘No, we really want to keep it a family business’ – realizing there was a lot of responsibility that goes with that,” says Caki Mendel, 60, director of community outreach and one of the four Collat siblings. 

“We passed the test without knowing we were being tested,” Nancy says.

As the third generation became more involved in the business, Charles’s three daughters — who were not working in the company — wanted to form a clearer connection with Mayer’s associates. Over the course of about a year in the mid-1990s, Nancy, Caki and their sister Susie Collat, now 56, visited all of Mayer’s locations — about 65 at the time.

“It was a remarkable commitment — that’s the kind of intense involvement they have,” Aronoff says.

The tradition continues today with members of the company’s leadership team visiting each branch annually.
Members of the fourth generation, who range in age from 19 to 32, are becoming more involved. As a unit, they have been meeting for about the past 10 years with their own family business consultant. Two G4s currently work in the business.

Scott D. Goedecke, 30, joined Mayer in 2016 after working in the banking industry for almost four years and has worked in internal audit, accounting and operations. He currently works in corporate finance. David Goedecke, 32, worked after college for one of Mayer’s suppliers, then joined Mayer to start and lead the customer integration team. Today he influences the company’s digital strategy and innovation as a solution architect.

“I have always had a passion for the company, the family, the legacy,” David says.

Evolution of governance
As the company and family have grown, the ownership and governance have evolved.

Today, Mayer is owned by the four members of the third generation, though they have started transferring some of the ownership to their children. The family’s real estate and other investments are also owned primarily by these four.

The family consists of Charles Collat and his second wife, Joanna; his four children and their spouses; and 10 members of the fourth generation plus two of their spouses. There are also two very young members of G5.

When the members of G3 started meeting with Aronoff, they agreed on three goals: They wanted Mayer to remain a family business. They wanted the best person to run the day-to-day operations of the business, even if that was not a family member. And ideally, they wanted a blood member of the Collat family to be chair of the board.

“We learned that family businesses often fail, not because of the business or the economy, but because of the family,” says Nancy.

Now both corporate and family governance are becoming better defined.

The unofficial advisory board Charles Collat formed when he took over the business in 1979 now consists of five outside members, plus one representative from each branch of the family.

A family assembly, which includes all members of Generations 2, 3 and 4, meets once or twice a year. The family is setting up a family council with Susie as chair, Scott as vice chair, and three other family members serving as committee chairs focused on governance, education and unity.

“We’re setting up the family council for the future,” says Scott. “As G4 grows, we can’t have all of G4 involved all the time. This council is being set up hopefully well ahead of when we will actually need it to slowly transition ourselves from an ownership group of four to an ownership group of 10.”

Technology changes the business
The business is also changing. 

“When I was growing up, we moved brown boxes,” says David. ““Over the years, we have evolved into a solutions and technology business.”

Lighting, for example, has gotten more complex.

“We have sold lights for years,” David says. “Now we sell computers which capture data and just happen to emit light. Through data analytics, we are able to help our customers gain insight into their business.”

The business now provides “smart, connected products and solutions that are integrated to enable our customers to meet their unique business needs,” says Wes Smith, the company president. “We will continue to provide traditional products, logistics, job site services, etc., but the business is evolving rapidly, and we are leading the way. In the future, we must do more things exceptionally well: traditional products and services and new smart products, systems, solutions and services that enable all of the things to work together cohesively in a system.”

A Women’s Business Enterprise
One factor in Mayer’s recent growth has been its status as a Woman-Owned Business Enterprise, or WBE. This certification, given by the Women’s Business Enterprise National Council, can give companies a boost when competing for direct government and government-funded contracts, as well as private contracts where social responsibility and diversity is a core value. WBE status is granted to companies that can show they are at least 51% owned and run by one woman or several women. Although the family didn’t set out to be a WBE, certification has been helpful to the company’s growth.

“It has sometimes pushed us over the edge when we’re equal to a competitor in pricing,” Nancy says.

The company became certified in 2005. Patsy owned 51% of the business and Nancy, though officially vice chair of the board, had taken over the leadership from her father. As the ownership moved to the next generation, the percentage owned by women increased to 75%. Nancy took on broader board and executive management responsibilities over the next few years, and she was officially named chair and CEO in 2008.

“Nancy was selected by her siblings and the board to run the company because she’s a very outstanding individual — she has led every organization she has ever been involved with, and it’s always been better when she left than when she joined it,” says Charles. “This is no exception.”

A caring family
Smith describes the Collat family as an “extraordinary family who is extraordinarily close.” This has driven the family’s community engagement, philanthropic work and responsibility to their associates and families.

“Apples do not fall far from trees, and the third generation continues the legacy of values given to them by the parents,” Smith says. “Generation 4 shares these same values.”

In the wake of the economic crisis in 2009, Mayer’s leadership took salary cuts and everyone in the company took four weeks off without pay. At the end of the year, when the company’s financial results were better than expected, the family decided to pay the employees the money they had lost because of the furlough — even though, as Smith notes, the company’s financial results were not public, so no one would have known there was enough money to do this.

The company encourages community involvement.

“One of our core values is to be a good citizen where we live and work,” says Caki. She coordinates associates throughout the company to give back in the communities in which they live and work. The company holds an annual school supply drive, for example, and a weeklong event in September where associates at each branch are encouraged to volunteer — on company time — for civic, education or health-related charities.

Charles and Patsy for decades supported numerous philanthropic and educational organizations. The Collats made the largest single gift to the business school at the University of Alabama at Birmingham, establishing the Collat School of Business. They also established Collat Jewish Family Services (now called CJFS) in Birmingham.

Looking to the future
With Charles Collat’s four children fully engaged as owners, the focus is turning to the next generation. 

“We all seem to have a sense of pride — even our children who are not in the business,” says Caki.

The business may head in new directions while staying true to its roots.

“We’re trying to keep competitive in the new information environment in which we live, and we are getting more information than we ever have,” says Charles. “But it’s no different than it was 50 years ago: If I can help you become more profitable, then you’re going to be a happy customer.”                                            '

Margaret Steen, a frequent contributor to Family Business Magazine, last wrote about the J.M. Huber Corporation.

The Evolution of a Family Office

About two years ago, Charlie Collat was working as Mayer’s chief operating officer while also working with the company’s chief financial officer to manage real estate and other investments owned by the family.

“We looked at the amount of assets under management, and we said, ‘We need to have somebody who wakes up every day and is focused on these assets,’” Charlie says.

A family office, Bay Pine Holdings, was established, and Charlie became its president. He also remains an executive vice president of Mayer, though he’s no longer COO.

The Collat family owns the real estate for half of Mayer’s locations. (The others are leased.)

“Right now, the real estate side is directly tied to the business,” Charlie says. A longer-term goal is to grow the company’s real estate holdings outside of the Mayer locations and to potentially leverage some of those holdings in order to invest in other real estate.

In addition, the family has been building an investment portfolio so that it will have some liquid assets as a safety net.

In addition to managing the investments, Charlie is working with family members to be sure their estate plans are up to date.

He is also working on the Mayer Foundation, which has been funded primarily over the last 30 years from some of the Mayer’s profits. The family assembly has formed a committee that is creating a structure for the foundation’s future, including what types of causes to fund.

“The family is in the process of creating a formal process for the third and fourth generation of the family to decide the mission and purpose of the Mayer Foundation,” Charlie says. “Currently, the foundation focuses on education, civic and medical needs, as this has been the desire of the second generation.”

The structure of the family office is still evolving. It started, says Craig Aronoff, a family business adviser who has worked with the Collat family, as “an emerging embedded family office,” unofficially dealing with a lot of the issues a typical family office would handle. Now, it is more formal, though still in some ways not as distinct an entity as many family offices are.

“As the family grows, the family assembly and family office are going to be even more important to the next generation than to us,” says Susie Collat, marketing program manager and vice chair of the Mayer board. “I think it will change with time and future generations.”—Margaret Steen

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.     

Getting a grip on holding companies

Philip Clemens, retired chairman of the 125-year old Clemens Family Corporation pork-processing company in Hatfield, Pa., knows firsthand that a holding company structure can play a pivotal role in the life of a family enterprise.

Yet, Clemens observes, few family businesses consider this option. A holding company has a controlling interest in various subsidiaries and acts as a parent entity.

That’s because holding companies remain a mystery to most business owners. “They don’t know a lot about them, and they also think they are just for big public companies,” says Clemens, who works with other business-owning families as an adviser or board director. “However, when they understand both the advantages and the reason for a holding company, many are both willing and anxious to move in that direction.” 

A holding company, which is often a corporation or limited liability company, becomes a useful corporate structure as family enterprises grow and age, adding numerous business segments and family members, says Otis Baskin, senior consultant with the Family Business Consulting Group.

“It becomes very difficult to have a corporate structure for multiple enterprises,” Baskin explains. “A holding company-type structure can be very helpful as an efficient way to govern multiple businesses with the same ownership group. I think the efficiency of the organizational structure is the primary reason family businesses are attracted to a holding company model.”

Clemens says forming a holding company was “one of the crucial steps in our reorganization from a family business to a business family” — one that puts the needs of the business ahead of family members’ personal interests.
Twenty years ago, the Clemens family enterprise, known for its Hatfield and Farm Promise brands, faced a precarious financial situation that appeared to threaten the company’s future existence. An action plan was developed that included the formation of the holding company.

Clemens, who was a key architect of the turnaround, says the restructuring played a critical role in the repositioning of the business. The move opened the door to diversification of the enterprise to better handle business-cycle issues, according to John Ward, clinical professor emeritus of family enterprise at Northwestern University’s Kellogg School of Management. The name of the holding company, The Clemens Family Corporation, inspired all family members to feel a greater connection to the firm, Ward wrote in a case study on the Clemens business.

“I have worked with other family businesses that are diversified or have multiple holdings within the business. I strongly recommend a holding company as a way of both holding the business and the family owners together,” Clemens says.

Risk mitigation
A family business could evolve to hold a broad set of assets, including manufacturing and service businesses, buildings and land, patents and small investments in other businesses. In a holding company structure, these various businesses are organized as subsidiaries under one umbrella. The subsidiaries that make products, sell goods or services, or conduct other business are known as operating companies, notes attorney Sandra Feldman of Wolters Kluwer’s CT Corp., a provider of registered agent services, incorporation services and legal compliance.

Some subsidiaries might hold intellectual property, real estate, equipment vehicles or anything of value the operating company uses, according to Feldman. The holding company could own all the stock of a subsidiary or a controlling percentage.

The subsidiaries have their own boards and management.

“The holding company’s management is responsible for overseeing how the subsidiaries are run. They can elect and remove corporate directors or LLC managers, and can make major policy decisions like deciding to merge or dissolve,” Feldman says.

In a family business, people on the board of the parent company may sit on the boards of one or more subsidiary companies.

A parent company can provide human resources and other back-office functions for its subsidiaries, Feldman says.

The parent company’s management decides where to invest its money, Feldman says. It can raise funds by borrowing or selling equity interests in the holding company or subsidiaries.  Holding companies can also earn money from payments made by subsidiaries, such as dividends, rents and payments for back-office functions, she says.

Rich history
This seemingly modern and sophisticated structure has a rich history in American capitalism. Indeed, legislation that would provide the basis for a holding company organization has been dated to as early as the mid-1800s, Fred Freeland wrote in a 1955 article in Fordham Law Review.

According to Freeland, it’s generally believed that New Jersey was the first state to pass legislation as the basis for a holding company in 1888-1889. In essence, it allowed  one corporation to own the stock of another.

Before long, holding companies acquired a reputation for creating monopolies. Railroads and utilities became associated with taking clever advantage of holding company legislation. The Northern Securities Company, a railroad holding company formed in 1901, led to a landmark federal lawsuit alleging restraint of trade and resulted in the company being broken up.

In the early 20th century, the consolidation of gas and electric utilities under highly leveraged holding company pyramids led to some collapsing when the stock market crashed in 1929. The Public Utilities Holding Company Act of 1935 was enacted to curb abuses.

Some predicted in the 1930s that the holding company structure would die a natural death.

Yet holding companies survived and thrived. Today, they are accepted as beneficial legal structures for some businesses, says F. Douglas Raymond, a partner at Faegre Drinker Biddle & Reath law firm in Philadelphia.

Growth and change
For many family businesses, generations of growth, diversification and an expanding asset and shareholder base begin to highlight the need for a new structure.

“As family businesses pass down through generations, their core business must evolve to keep pace with changes in the marketplace. This often means selling off some portion or all of the core and reinvesting in new businesses,” explains Jennifer Pendergast, a professor of family enterprise and executive director of the Center for Family Enterprises at Kellogg School of Management.

“The result of this evolution is that the family business turns into a family enterprise, with a broad set of assets that often include real estate, passive investments [such as the stock market] and minority investments in operations.”

A holding company structure allows a family to pull all the disparate assets under a common governance structure with one group or board providing oversight across the portfolio on asset allocation and strategy, Pendergast says.

“The holding company has one very important role — especially if you are a diversified family business,” Clemens says. “It has been my experience that when you are diversified, some owners tend to like one side of the business more than others (where they were employed, the original businesses, etc.). Having a holding company allows — forces — you to own all of the parts of the business, not just one.”

A holding company is also an efficient mechanism for estate planning and asset transition across generations, Pendergast says.

According to Jonathan Flack, leader of the U.S. family business services practice at PwC, a high percentage of older companies that have been in business for several generations have holding company structures.
“It simplifies governance. It simplifies estate transfer. It simplifies the ability to raise capital,” says Flack.

Clear signals
Take the case of the Cowles family business in Spokane, Wash., a fourth-generation family enterprise encompassing paper, timber, real estate, media, insurance and venture capital businesses. For the Cowles family, the need to move to a new structure became apparent 14 years ago as the business empire evolved, says William “Stacey” Cowles, president of the Cowles Company.

The business started corporate life as the dominant morning newspaper in the Spokane region when Cowles’ great-grandfather, William H. Cowles, merged The Spokesman and The Review newspapers in 1894. As the Spokane region burgeoned at the turn of the 20th century, the business grew and W.H. Cowles seized new opportunities.

“W.H. Cowles reinvested earnings from his newspapers in downtown retail real estate and, as the majority bond holder, ended up owning his local newsprint supplier when it went bankrupt during the Great Depression,” Cowles says. “He bought 1,300 acres of land in the Spokane Valley as a long-term value play. His sons and grandsons led efforts to expand vertically and horizontally into farm magazines, insurance sales to farmers, radio, television and timberland. His great-grandchildren who now run the company expanded the television franchise, doubled paper production and launched the region’s most significant growth capital fund and are actively developing the land holdings.”

By 2006, the family began getting “clear signals that the heyday of newspapers was over” — and the timberland and real estate were eclipsing the value of its operating businesses, Cowles says. Up until that point, the newspaper company was the parent and the corporate name was Cowles Publishing Company.

“As part of our annual exercise of reviewing our long-term corporate strategy, we woke up to several facts that led us to change our corporate name and structure,” Cowles says. For example, most of the employees work in the family’s television and print media businesses, but the enterprise is primarily a forest products and real estate company in terms of value. 

With the restructuring, the parent was renamed Cowles Company. The Cowles Company, which is a C corporation held by a series of trusts, owns 100% of the stock of each of its many entities. The newspaper and other print media were combined into a subsidiary called Cowles Publishing Company, Cowles says.

“We also had in mind a shared services model for our smaller companies that should operate independently of the newspaper,” Cowles says. “The shared services idea was that by consolidating accounting, payroll, human resources, benefits, building services and, to some extent, information technology, we could reduce costs or improve effectiveness for the companies involved.”

Now, nearly all real estate and building services are consolidated under the real estate division. Payroll, insurance, benefits and human resources are centralized for the operating companies, except for a few holdings.

“Creating Cowles as a holding company helped get us organized so that we could think strategically about our assets because we could more easily compare results with peers and potentially package them for sale,” Cowles says. “We could implement borrowing strategies tied to specific industry practices and more easily convey to our shareholders where value is being generated in the company.”

“The new name gave us a better banner to market the whole company behind as we engage in community development and investment. It gave the parent some independence from the newspaper and television, whose reporters and audiences like to see separation between corporate management and journalism.”

Keeping the family together
Family business owners and advisers say a holding company model can be a key to keeping the family and business together for future generations.

“Often in family business, they tend to continue with structure that has always been there, even though the enterprise has outgrown the old structure. When the business reaches a certain size, when you have more owners that work in the business, you need to give more attention to governance,” Baskin says.

Good oversight leads to greater family harmony, Baskin adds.

“The biggest advantage of the holding company is it provides better transparency into our operating entities for managers, lenders, community members and shareholders,” Cowles says.

What’s more, the structure can promote the consistency of family values and policies across the holdings. For example, a holding company’s staff could enforce common policies, such as performance reviews, Pendergast says.
“Since all but one employee handbook are produced by our centralized human resources department, this definitely helps with consistency of policies across the company,” Cowles explains.

Still, Will Lyles, senior director of California-based Lyles Diversified Inc., cautions that moving to a holding company structure is a complex journey. Lyles Diversified is a family enterprise that includes construction, real estate development and rentals, agriculture and investment partnerships.

The change requires “significant consideration of legal, tax and organizational issues,” Lyles explains.

Lyles should know. Lyles Diversified has been at it for more that 30 years. 

For the Lyles family, the journey began in the 1980s when the original C corporation, W.M. Lyles Co., was converted to the holding company Lyles Diversified Inc. (LDI). Under that, a new W.M. Lyles Company was created to continue the legacy construction business.

“A driving purpose was the recognition that our growing real estate and legacy construction operations were separate businesses, and should be approached as such,” Lyles says.

In 1999, the family created two holding companies that are S corporations. One held the construction business, real estate partnerships and other investments. The other held the agriculture and manufacturing businesses. Once the manufacturing business was sold in 2007, the proceeds were retained by a new LLC, which was split into two LLCs five years later because of differing accounting practices, Lyles says. Lyles Diversified now acts as the operating manager for both LLCs.

Now, Lyles Diversified is in the process of “ReOrg 2020,” which could result in additional changes to the organization’s structure and processes.

There could be a new framework involving a holding company.

“Once started, it is never done,” Lyles says.    

Maureen Milford is a frequent contributor to Family Business Magazine.

Is Your Family Ready for a Holding Company?

Here are some indicators that your family business might benefit from a holding company, according to Carrie G. Hall, EY Americas family enterprise leader:

• The desire to operate multiple business lines and/or types of entities under one umbrella.

• The wish to consolidate family investments while allowing the business to grow through acquisition of incubator companies as well as expand the core business operations.

• An interest in facilitating cash movement among foreign operations (via a foreign holding company).

• The desire for tax planning to maximize the rate differential between the corporate and individual rates.

Holding Company Pros and Cons

Advisers and family enterprise leaders note the advantages and disadvantages of a holding company structure.

Carrie G. Hall, EY Americas family enterprise leader, says a chief benefit of a holding company is the ability to centralize management and corporate functions, such as the C-suite, treasury and finance. Holding companies can provide better access to capital markets and economies of scale for the total enterprise, she says.

Transparency and family cohesion
Stacey Cowles, president of the Cowles Company in Spokane, Wash., a fourth-generation family business structured as a holding company, says the biggest advantage is clarity.

“It provides better transparency into our operating entities for managers, lenders, community members and shareholders,” he says.

Liability protection
Debts of a subsidiary belong to that company, not the holding company or another subsidiary. If a subsidiary is sued and is faced with a significant financial penalty, or if it is facing bankruptcy, creditors can’t go after the holding company.

“A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary,” writes attorney Sandra Feldman of CT Corp., a provider of registered agent services, incorporation services and legal compliance.

Lower debt costs
Holding companies often have the financial strength to get loans at lower interest rates than their operating business. A holding company could obtain the loan and then distribute the funds to the subsidiary, Feldman writes.

Estate planning
Jennifer Pendergast, a professor of family enterprise and executive director of the Center for Family Enterprises at Northwestern University’s Kellogg School of Management, says holding companies allow for an “efficient mechanism for estate planning and asset transition across generations.”

Opportunity for innovation
If a family member has ideas for new or emerging business opportunities, a holding company can act as venture capital. “Because operating companies are separate entities, there is less risk in investing in startups or other ventures that seem risky,” Feldman says.

Formation pains
Cowles says the move to a holding company “did create significant administrative headaches in the establishment of a new company and the sorting out of transfer costs for shared services.”

Moving to a holding company can add legal, treasury, reporting and tax compliance costs for establishing the entity structure, Hall says.

Greater oversight
A holding company creates many more companies for which oversight is needed. Feldman says. “It is important to keep the records, assets, liabilities and properties of each company separate from each other. Failure to do so can increase the risk of a court piercing the corporate veil and allowing a creditor to reach assets beyond the debtor ­subsidiary.”

A holding company is a more complex legal entity structure to explain to family members, Hall says.

“Optics can create additional complexities with shareholders,” she adds.

The mix of businesses can require more complicated structures if not all family members want to participate to the same extent economically in each business, Hall says.

Tax issues
Each company also is likely to have its own compliance and tax obligations. That can create additional administrative burden, says Shari Forman, U.S. Private Company Services tax leader at PwC.

“If you look at it entirely from a tax perspective, it adds some complexity,” Forman says.

Hall explains: “Depending on the tax classification of the legal entities, cash movement and liquidity events could require additional complications or create tax leakage.”— Maureen Milford

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.     

Looking back and ahead

This 30th anniversary issue of Family Business has been a delight to put together. Our editorial team, led by Barbara Spector, has done an excellent job of highlighting how the field of family business expertise has advanced over the past 30 years and has masterfully spotlighted 30 families who have made exceptional progress in governance. Our team could have easily included hundreds more families, and choosing only 30 proved challenging. Perhaps when we celebrate our 100th anniversary — as many of the companies we have profiled over the years in our Celebration Corner section have — the job of our editorial team will be easier.

While reading our timeline of key events in family business history on page 40, I was particularly struck by both how nascent the field was 30 years ago and how rapidly the industry has professionalized in recent decades. It made me think about what the future for family businesses might look like and how they might be viewed 30 years from now.

Family businesses are the backbone of the American economy. Family firms have been estimated to account for more than 60% of U.S. GDP, and they employ tens of millions of people. However, despite their importance to our nation, they are sometimes viewed as conflict-driven, risk-averse and ripe for disruption. But on the fundamental issue of what a company’s purpose is, I find that family businesses’ attitudes, outlook and values are at the forefront of a national discussion on good governance.

Over the last year, we’ve heard Fortune 500 CEOs, politicians and academics denigrate many public companies for their short-term, shareholder-centric focus. In response, they outline ideal characteristics for all companies, including a long-term focus, support of multiple stakeholders — employees, customers and their communities, in addition to shareholders — the creation of a values-driven culture, the recognition and acceptance of ESG responsibilities and a close relationship with investors. When I hear these traits, I am quickly reminded that this view is one that many family businesses have held for generations. 

If my young daughters decide to join our family business one day, and are qualified to do so, when they sit down and write a column for our 60th anniversary, I think they will reflect on how over the last 30 years business in general has embraced many of the views espoused by family firms. I think they will spotlight how family businesses have effectively built and leveraged the “family” aspect of their brand as a competitive differentiator to drive client engagement, attract and retain talent, and be viewed as a trusted partner. I think they will highlight how family offices and enterprises have become a global force in deploying private capital. I think they will identify 60 family businesses that underscore how good governance can both benefit the business and lead to better family relationships. And I think they will joke that their grandmother still shows baby pictures of their dad at board meetings. 

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

Heeding early warning signs can transform business risk into success

The decline of a family business can be heartbreaking. Often the extended family loses much of its fortune and the financial security of future generations is at risk. Why does this happen, and, if you are a family member who is not running the business, how do you prevent the decline? Minority family shareholders as well as controlling owners can learn to identify early warning signs and take steps to implement solutions that will transform risk of decline into success.

Powerlessness and fear
A family business is subject to the same fluctuations as any other business. Today, especially, the pressures are intense because change happens faster. But an additional element is found in many family businesses: A single dominant figure often exercises effective control. Business problems are exacerbated when the controlling figure is an aging patriarch/matriarch or a successor who struggles to meet current challenges. Other family members, even if they have an economic stake, often lack visibility into the family business and feel powerless to do anything but worry.

Recognize hints of business decline
Fortunately, you can prevent the decline of the family business even if you do not control it. Here is the key: Your ability to sway the controlling family member improves considerably if you understand the dangers that are facing the business. To do this, you must watch for hints of business decline. These hints occur well before business distress.

While the onset of distress results in significant loss of value, there are earlier hints of business downturn. Unlike signs of distress, these hints are apparent at first only to business owners, who tend to ignore them. Some owners do not realize the implications. Others delude themselves that external factors will come to the rescue. On the other hand, if the company acts quickly, you can avoid a loss of value.

Among these earlier hints are financial warning signs:
• Appearance of new competitors
• Shift in buying or sale trends
• Increased importance of payment timing
• Deferral of capital expenditures
• Lack of innovation in products or methodologies
• Overreliance on an officer, supplier, customer, channel or trend

You may think you are too far removed from the business to be aware of such hints. Do not despair: You are not powerless. There are non-financial hints that you can discern, such as:
• No new blood in management
• Family or health demands prevent the controlling family member from focusing on the business
• No enthusiasm for finding new deals or strategies
• Lack of desire or resources to take the company to the next level

Persuade the controlling family member
After you have identified warning signs, how do you persuade the controlling family member to act? It is not easy to convince anyone to change course. To persuade a person in control is even harder. Hardest still is to convince a person in control who may have overcome obstacles that would have deterred others.

The heads of family businesses are often lone — in some ways heroic — figures. They are responsible for their families’ key asset. Their stubbornness and determination are their strength, but these qualities can also be a weakness if they fail to recognize and respond to business problems. The Romans understood that heroes should be honored but also cautioned. A slave would whisper to a Roman conqueror, “memento homo” — remember you are mortal (only a man). Somehow you need to caution the leader: “Every business is mortal. There are warning signs. You are not alone. We need to respond.”

So how do you do this? The etymology of “persuade” is instructive. The Latin word “suadare” means to “advise,” while “per” means “through, to completion.” To persuade, you need to advise — knowledgeably explain the danger signs and then offer a solution.

You have a great advantage: If the family business responds soon enough, there are a myriad of solutions in today’s economy. The options include:
• Addition or substitution of fresh management
• Introduction of new technology
• Adoption of a new pricing model
• Divestiture of a division
• Sale of the company
• Acquisition of a competitor
• Entry into new markets
• Vertical integration
• Modification of debt structure

To demonstrate the wide range of solutions, let us consider two of these options more closely. You could choose to advocate sale of the company as the ultimate way out. This is a valid solution if, for example, the family wants to monetize its assets or if a buyer has the resources to take the business to the next level. Owners who sell before business downturn becomes apparent to third parties reap the benefits of responding to the aforementioned early hints.

At the other extreme was an operationally profitable business with an unwieldy debt structure (a warning sign). I served as chief restructuring officer at this company. Management was motivated but was confronted with a debt burden that was too onerous for the fundamentally sound business. Instead of allowing the company to slide eventually into a bankruptcy, we engaged the lenders in rigorous negotiations. The separate liquidation analyses prepared by the lenders’ adviser and my team accorded and conclusively demonstrated that it was more advantageous for the banks to take a “haircut” than to drive the borrower into a liquidation. Heeding the warning signs led us to a solution — we renegotiated the debt structure and today the company is thriving. In these types of situations, you can transform risk into success by advocating for a balance sheet fix.

I want to stress a key point. The solutions I have provided are efficacious because they provide positive options to the controlling person. Author and physician Jerome Groopman writes in The Anatomy of Hope that “hope is one of our central emotions.” You can change the controlling person’s mindset by offering hope predicated on concrete ideas.

Based on the lives of his patients, Groopman distinguishes between optimism and hope:

“Many of us confuse hope with optimism, a prevailing attitude that ‘things turn out for the best.’ But hope differs from optimism. Hope does not arise from being told to ‘think positively,’ or from hearing an overly rosy forecast. . . .

"Hope is the elevating feeling we experience when we see — in the mind’s eye — a path to a better future. Hope acknowledges the significant obstacles and deep pitfalls along that path. True hope has no room for delusion.”

To persuade the controlling person, provide hope by offering compelling options grounded in reality.
Now that you have identified the hints of decline and found a solution, you need a procedure to bring about the desired result. Consider whether you are more likely to be successful in one-on-one discussion or if you need a formal mechanism to achieve your goal.

If you opt for a formal mechanism, the best vehicles for conflict resolution are those set up in advance of any problem. You can approach the board of directors. An established family council might provide a non-threatening forum for you to raise your concerns and seek resolution. A shareholder agreement could afford protections for minority or non-controlling shareholders. You may be able to force the issue if there is a buy-sell agreement in place. If there are no mechanisms in place, you can convene a formal family meeting or set up a family council. The last resort should be litigation. Litigation is always expensive and protracted — it is even worse in the context of family conflict.

Build family alliances
If you use the family council, family meeting or board of directors mechanisms, you will probably need support from other family members. You can build alliances by finding a financial solution that addresses the goals of the various family interest groups. This is not easy. You will have to approach the problem both methodically and creatively. First, determine what each person (or family interest group) really wants. Then try to develop scenarios that would satisfy these goals.

This may sound theoretical, so let me provide a “real life” example from which you can extract principles. A family inherited from its founder a real estate empire. Most of the children were in favor of selling the business because they wanted immediate distribution of funds. Opposing them were family members who were concerned about losing their employment in the family business. The next generation, the grandchildren, wanted a steady future income stream.

In a certain respect, the solution was complex. We designed a model that provided for a staged sale of the real estate holdings structured to ensure the following critical goals: Current employment continued for family members, the children received funds in the short term, and the youngest family members had a trust that provided for income over a long period. The sale cadence was extremely sophisticated: Properties could be sold only if they did not cannibalize revenues from locations retained for a longer period, positive cash flow had to be maintained throughout, and distributions were timed to meet the interests of the various parties. However, in another respect, the solution was simple. We identified and addressed the desires of each family interest group.

Transform risk into success
The good news is that, even if you do not have a control position, you can save the day. Recognize the warning signs, caution the controlling family member in an effective manner, offer hope by providing a business solution, implement (if necessary) conflict resolution mechanisms, and, if you seek family support, develop financial solutions that address the needs of each family interest group. Controlling and non-controlling family members alike can convert danger of decline into transgenerational growth and renewal.      

Sheon Karol is a managing director and management committee member of The DAK Group, an investment bank serving the middle market (www.dakgroup.com).

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.                                                            

Craft a strong buy-sell agreement to keep the business in the family

It’s a dream for most families: build a successful business and eventually pass ownership of the company to the next generation and, hopefully, many generations after them.

But too many business owners fail to take important steps to ensure their business is handed down according to their wishes. Many have relied on good faith or on agreements based on a clause commonly referred to as “last man standing,” meaning whoever is next in line will inherit and continue the family business. Today, however, because of the changing American family, a proper buy-sell agreement is essential.

Over the years, it’s become more challenging to sustain family business ownership. One challenge involves the increased prevalence of blended business families. The stepchildren may not necessarily share the values of the business founder or the founder’s direct descendants.

In addition, the globalization of modern society means more family members are moving away from the family firm’s hometown. This is most likely to be a factor in later-generation companies that are owned by a consortium of cousins spread over the country or even the globe. Generally, the older the company, the smaller the percentage of family owners who work in the business. The “insiders” and “outsiders” often have different liquidity needs.

There are different means to overcome these challenges, and families can choose from a variety of options. For example, a buy-sell agreement can specify which family members are eligible to own stock (such as bloodline descendants only) and can prohibit the sale of stock outside the family. It’s critical to communicate clearly with your estate planner to ensure there is no uncertainty or confusion about your intentions.

Limitations of ‘last man standing’ agreements
“Last man standing” buy-sell agreements can be fraught with problems. Here’s an illustration of what could go wrong:

Three brothers own and operate a family business. One of the brothers has sons who are involved in the day-to-day management and operation of the business. The other two don’t have children in the company. Years ago, the brothers drew up a “last man standing” buy-sell agreement.

The brother with sons in the business dies and the company buys out his stock, transferring it to the two surviving brothers. His sons are left with no ownership in the business they helped build. They want to challenge the terms of the agreement, but they have no legal basis for a challenge.

Assuming that the current “last man standing” agreement remains in force, eventually one brother will own 100% of the stock. Without a good succession plan in place, the company could be sold outside the family upon his death. There’s no guarantee that the interests of the nephews working in the business would be the main consideration. What if the uncle’s heirs think they could get more money from selling to a third party? They have the option of keeping the business in the family, but it’s not ensured that the family business legacy will be continued.

This happened to a real-life family I know. That family had put a “last man standing” agreement into effect before the second generation joined the business. While it might have made sense then, it should have been reviewed when circumstances changed — a simple solution that unfortunately never was implemented. This example illustrates why it’s essential to conduct regular reviews of your buy-sell agreement (and other key family business documents).

Restricting ownership transfer outside the family
If you plan to pass your business to the next generation, you should consider a buy-sell agreement that restricts family members from transferring ownership outside the family. The agreement could be drafted in a way that enables the family to transfer ownership to parties such as private equity partners or key non-family executives (with the proviso that the executives sell the stock back to the company when they leave). It also would spell out how the stock would be bought back.

A buy-sell agreement could also stipulate that a shareholder sell his or her stock back to the company in the case of a triggering event, such as joining a competitor, dismissal from the company or disability. In some cases, this might involve a reduction in the price paid for the stock (“haircut”).

Parents who plan to transfer stock ownership to their children should discuss their intentions, including the importance of ensuring that control of the business remains in the family — before they sell or gift the shares (or their interests in an LLC or partnership).

Business families should also encourage the next generation to execute premarital (also known as prenuptial) agreements to ensure the business stays within the family. A family policy that requires premarital agreements can protect the business in the event of a divorce. It’s often best to establish such a policy well before any engagements appear imminent and to make sure everyone understands why the policy was developed. A good rule of thumb is “no surprises.”

Key planning considerations
• Talk with your family business legal counsel, but also with your estate attorney. It is important for both the professional and the personal attorneys to be on the same page. Having each of these attorneys review relevant documents, such as your buy-sell agreement, helps ensure your plans for the family business are clearly understood and all parties are working toward the same goals.

• Plan now for retirement. “It’s important to have a thoughtful plan that allows you to retire on your own terms and transfer stock to your family,” says Joel Guth, CEO and founder of Gryphon Financial Partners. In addition to helping to prevent issues down the road, “advance planning can make a significant difference in reducing unnecessary financial exposure or tax liability,” Guth says.

• Create an advisory board to help you plan for the future. Form a panel of advisers from outside your business to get a wide range of perspectives on transferring stock, developing next-generation leaders, retiring on your own terms and more. Their objective opinions can help remove the emotional aspects of tough decisions, both personal and professional.

“I formed an advisory board for the specific reason of selling my stock,” says Ken Heiberger, president of Heiberger Paving Inc. in Columbus, Ohio. “I thought about it a decade ago and wish I had done this back then. I had presented a 10-year plan to retire at age 75 to my four key people, who all raised their eyebrows. I realized I had to move my retirement target up. It takes a lot more time and a lot longer to do this than a business owner thinks.”

• Talk candidly with your next-generation members. Ask your NextGens what they really want. Are they interested in running the business? Are they hoping to retire early? Frank conversations help manage expectations and can prevent surprises or disappointments down the road.

• Make sure your buy-sell agreement reflects the goals of the owner(s). Is it your intention to keep ownership of the family business in the bloodline? Are you willing to split stock into voting and non-voting shares? Having two classes of stock could enable disengaged family members to retain ownership without a say in the direction of the company.

• Develop policies for shareholder distributions and stock redemption. Providing liquidity opportunities for shareholders who don’t work in the business reduces family conflict. Clear, written policies are essential, so there are no unrealistic expectations.

• Include non-compete clauses into your buy-sell or shareholder agreement. If a family member joins a competitor or starts a competing business, stock should be forfeited or repurchased over time, depending on the situation. Typically, instead of fair market value, the stock would be repurchased at a much lower share price.

Expect the unexpected
“It’s essential to work through these options, even though you may think some scenarios are unlikely to happen,” says J. Richard Emens, executive director of the Conway Center for Family Business and co-founder of the Emens & Wolper Law Firm. “Once you decide how you want to structure an agreement, revisit it at least every other year to ensure it reflects what’s best for you as seller and the potential stock purchasers. Family dynamics can change significantly in a relatively short period of time.”

A well-crafted buy-sell agreement can facilitate the transfer of stock ownership to the next generation without fear that the company could one day fall into the hands of an outsider. If sufficient thought has not been put into the document, there will be little protection for everything the founder worked to build.                    

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

The rocky road to transition

For more than 145 years, Graeter's Manufacturing Co. has built its success on steadfast adherence to its process: making ice cream by hand, one batch at a time, in 2.5-gallon French pot freezers, regardless of the technological innovations adopted by competitors.

The company has withstood the challenge from mass-produced ice cream. What almost destroyed it was a rocky generational transition.

"When I was a little kid at the plant my great-grandmother started, we had four freezers," says Richard Graeter, 52, president and CEO. Today, the company's new plant has 36 freezers. "We grew by multiplying the number of small-batch machines. Without that small-batch process, you can't make Graeter's ice cream."

The company owns 43 neighborhood stores in cities including Cincinnati, Columbus, Chicago, Cleveland and Pittsburgh. Graeter's ice cream is also sold at 10 franchisee-operated stores and three other venues. All the stores sell Graeter's candy, and some also have bakeries, which help to keep sales up during the winter months.

Today, Graeter's, headquartered in Cincinnati, makes more than 1 million gallons of ice cream per year and supplies more than 6,000 grocery stores nationwide.

The company's annual revenues have climbed from about $5 million when Richard started in 1989 to more than $50 million now. About 1,000 people work at Graeter's in the peak summer season.

To get the company to where it is today, the family had to confront thorny issues of inheritance and control. The Graeters are now working to ensure that future generations experience smoother transitions.

Humble beginnings

The company was founded around 1870 by Louis Charles Graeter, who arrived in Cincinnati when ice cream was a novelty.

After operating stores in various downtown Cincinnati locations, Louis and his wife, Regina, moved to the new upscale neighborhood of Walnut Hills. They made ice cream in the back of their home and sold it in the front parlor; the living quarters were upstairs.

When Louis was fatally struck by a streetcar in 1919, Regina took over the business. She built it over the next several decades, through the Great Depression and two world wars, into a chain of ice cream stores.

"Back in my great-grandmother's day, you made it and you ate it," since there were no freezers, Richard says. "My grandfather used to drive a horse-drawn wagon delivering ice cream to people's homes in a metal pail nested into a wooden bucket packed with salt and ice. They would eat it for dinner, and he would pick up the empty pail the next day."

Around the same time as Louis's death, the business faced another challenge: Commercial ice cream was now easy and cheap to make, owing to modern refrigeration and machinery.

"My great-grandmother refused to adopt these new processes and stuck with artisanal ice cream," Richard says. "Mechanized, mass-produced ice cream companies pushed the little guys out of business—except for Graeter's. As neighborhoods lost their ice cream parlors, Regina went in and opened a new Graeter's."

In the depths of the Great Depression, Regina bought a defunct printing plant, where she continued making small-batch, hand-swirled ice cream in French pots.

After Regina died in 1955, her son Wilmer bought out the shares of his younger brother, Paul. Wilmer's three sons, Richard (Dick), Louis and Jon, joined the business and later ran it together. Their sister Kathy also worked in the business; another sister, Carole Palmer, never did.

When Wilmer's sons wanted to retire, though, painful questions arose.

The fourth generation

"The family culture was that if you wanted anything in life, you had to work," says Robert Graeter, 61, vice president of quality assurance and sourcing. "If you wanted the benefits that were provided, you had to work in the family business. That was the expectation set for me very early on."

Richard (son of Dick) and Robert and Chip (sons of Louis) grew up helping with the business. Although they started out on different paths, they all ended up working for Graeter's.

"By high school, I knew that this was my destiny," Richard says. He was mentored by his uncle Jon, who did the finances and other office work. Richard majored in accounting and finance in college and worked for his uncle during the summers. Later he went to law school. As he was finishing, in 1989, his uncle was injured in an accident and was not able to return to work.

"Nobody had a clue about what he did or how he did it but me," Richard says. He finished law school while doing his uncle's job in the evenings. When he graduated, he turned down a job offer from a law firm and returned to Graeter's, though in 1992 he briefly took a job at a different law firm.

In 1994, Richard returned to Graeter's to help with expanding the plant and running the accounting, finance and legal functions of the business.

Robert did not plan to join the family business full-time, though he did help out in the factory every summer starting in eighth grade. After college, he worked in retail in California for a time, then returned to manage the remodeling and opening of a new Graeter's store. Later, he went to Michigan to get an MBA, returning after graduation to Cincinnati for a job with Procter & Gamble. In 1990, after his uncle had retired, the company needed his help, so he returned to take over management of the nascent wholesale business.

Robert's brother Chip Graeter, 53, says he always considered business and family to be connected.

"My earliest memories are just the incredible amount of effort and hard work that the third generation put into the business. They worked seven days per week, 10 to 12 hours per day, every day," says Chip, chief of retail operations. He would help at the plant when he was young, putting lids on ice cream or stamping flavor names on the tops of the pints. Later he worked in the retail stores, where his aunt Kathy mentored him.

Chip also worked elsewhere after college, including for Delta Airlines, but in 1989, his aunt and uncle took him to lunch and convinced him that the business needed him—and that it was time to start his Graeter's career.

A difficult transition

The arrival of Robert, Chip and Richard at around the same time "created some friction," since there was no clear plan for transferring ownership to the next generation, Robert says.

The key difficulty in the transition was that while the members of the third generation had been equal partners in the business, one partner had one child in the business, another had two, and the third had none. (A related issue was who would be CEO.)

The family considered many options. "Do we split the business up and everybody goes their separate ways? Do we have different levels of ownership? Or do we go forward as equal partners?" Robert says.

If ownership were passed down according to bloodlines, Richard would own half the company; Chip and Robert would split their father's share and each own one-quarter. (The company would redeem the shares of Kathy, who had no children.) The idea of unequal ownership caused tensions. These were finally resolved when the three fourth-generation members met with a psychologist—without their parents present.

The key question addressed at that meeting was "What did the business need to survive?," Robert says. "We all had very different skill sets. Our business psychologist consultant helped us realize that, and that if we worked together we would be better and stronger than if we split up the business."

Working as a trio, however, would require "commitment from everybody involved—and the way we could get commitment from everybody was to be partners," Robert says.

They realized that "the only way we could really build the business to its potential was if the three of us worked together and trusted each other implicitly," Richard says. "We decided that we were stronger together."

They discussed ways to partially offset the financial sacrifice Richard would make if they each were granted a one-third share. And Richard began to realize that one-third of the company they could build together might well be larger than one-half of a company that was stagnating because the owners didn't work well together.

Another key to the successful transition, Richard says, was that the members of the third generation "did not demand to maximize their value out of the company," even though they could have gotten more money by selling to an outside party. "Keeping greed in check and living well, but within due bounds, has been the single most important key to the Graeter family's success through four generations," Richard says.

By 2004, Richard, Robert and Chip were equal partners and owners of the business. They divided responsibilities based on their interests and skills: Richard is the CEO. Robert focuses on product, sourcing, product development and manufacturing. Chip oversees the retail stores.

Richard's father, Dick, retired from the business shortly after the transition in 2004. He passed away in 2014. Louis kept coming in to work after the transition, doing odd jobs and helping make candy, until a fall made it impossible for him to continue. Kathy still works every day in the retail stores.

Professionalizing the operations

Although Richard is the CEO, "we are very much a consensus-managed company," he says. The company's leadership team includes a number of non-family members, and an annual bonus is divided equally among all team members. The three owners meet separately only to discuss issues like the transfer to the next generation.

Those discussions are only in the initial stages, however.

The three current owners agree that any of their children who want to join the company should work elsewhere first and prepare themselves to contribute to the business, though they have not created formal plans or rules.

The fifth generation is not actively involved in the business yet; only a few of them are old enough. Richard says his son Will, who is in high school, plans to study food science and food business management to prepare for a career in the business. In the future others may be interested as well.

Although they have not changed the governance much since taking over the company, Richard says they have put in place a buy-sell agreement that governs what happens if one of the owners dies, leaves the company or retires. A goal for the near future is to look again at governance and succession planning now that the business has grown.

The business does not have a formal family council or board of directors, though Richard says setting up a board of advisers or directors would likely be part of the process of moving to the fifth generation.

With the help of consultants, the company has also formalized systems and processes. For example, Graeter's created a training program for the retail store employees, since the customer experience is such an important part of the business.

Customers anticipate the introduction of new flavors each summer. Graeter's stores also host special events such as Dogs' Night Out, featuring special frozen dog treats and vendors selling wares geared toward dogs and their owners.

Graeter's "Guest Service 101" training for new employees—many of whom are high school students in their first job—emphasizes that ice cream is a non-essential, discretionary purchase, Chip says. "What we need employees to do is match the quality of the product with the same level of guest service—make sure they leave with a smile on their face," Chip says.

Paul Porcino, a consultant with TransformaTech Consulting, started working with Graeter's in 2007, after the transition had been made to the three fourth-generation partners.

"They didn't have clarity on how to move forward, where to go next and how to build the business in a way that met their true goals for the brand," Porcino says.

Ultimately, they concluded that letting franchisees manufacture as well as sell the ice cream was too much of a risk, since the core of the Graeter's brand is the quality of the product. They bought back some of the franchises and required the others to stop making their own ice cream.

The company also worked to standardize the manufacturing equipment and processes and started to predict demand further in advance. This predictability enabled the company to expand to new markets, including other grocery stores.

Looking to the future

The new systems and the new plant have laid the foundation for a stable business, which the current generation hopes to turn over to the next.

In the next decade or so, Robert says, the family will have to decide whether to pass the business to one or more family members who are committed to running it, to find a way for the family to own the business without running it, or to sell (which he says is not the family's goal).

For the future, they are banking not only on the management team and systems they have developed, but also on the allure of ice cream.

"I think people are always going to want something cold and sweet and a place to bring their family together and share an experience," Robert says.

Margaret Steen is a freelance writer based in Los Altos, Calif.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Preparing for a generational shift

When he was in fifth grade, Will Lyles wrote a paper outlining his future career path in his family's business. Although he didn't end up taking time off to get an MBA, as he had predicted at age 10, his career has largely followed his childhood vision.

Today Will Lyles, 57, is senior vice president of Lyles Diversified Inc., an S corporation that oversees the Lyles family's construction businesses and provides management and administrative services to the family's other holding companies. The broader Lyles Family Enterprise consists of various California businesses and ventures in construction, real estate and agriculture, as well as investment partnerships.

The family is working to establish a family governance system that will see the business and family through a tricky generational transition.

"We're in the early stages of the journey," Will says.

Will's grandfather, Bill Lyles Sr., and grandmother, Elizabeth Lyles, founded a pipeline-building business, originally called W.M. Lyles Co., in the oil fields of Avenal, Calif., in 1945. Today, Lyles Construction Group, now headquartered in Fresno, is California's second-largest contractor specializing in environmental and water treatment plant work.

Construction remains a key part of the business: In 2015, the companies generated construction revenues of $267 million. The construction division has about 150 salaried employees, plus about 500 unionized workers who work on specific projects.

Two members of the second generation work in the business. Gerald Lyles, 74, is senior vice president of Lyles Diversified and president of two LLCs through which the family makes investments, Lyles United and Lyles Investments. Gerald's brother, Bill Lyles, is chairman of the joint company advisory board that oversees all of the family's business enterprises and president of Lyles Diversified.

Along with Will Lyles, two other third-generation members are active in the business: Will's wife, Tami, 53, runs one of the family's construction companies, and Kathy Porter, 51, the daughter of Gerald and Bill Lyles' sister, Marybeth, is shareholder services manager.

Although the ownership structure varies slightly among the three companies, more than 90% of the business is owned by members of the second and third generations. No single person has a majority stake. The companies' salaried employees are also owners through an employee stock ownership plan.

A storied history

Gerald Lyles was 2 when his father founded the company. "By the freshman year of high school, we were working in the fields in the summers with the crews and also doing office work, breaking down the costs of each element of the work," he recalls. He joined one of the company's subsidiaries full-time in 1966, after college and a stint in the Navy. After a few years, he returned to school to get an MBA, then worked in finance for a number of different manufacturing companies outside of the family business.

In 1973, Gerald's brother Bill, who had been working at the company since their father's death in 1965, asked him to return to the family business to help it expand.

"That was a big turning point," Gerald says. When he returned, the company started investing in multifamily housing and development. In the 1980s, Lyles bought its first manufacturing company. In 1987, Lyles became a 50% partner in Pelco, a security camera maker that 20 years later would provide a large cash boost when it was sold. The family has invested the proceeds from the sale primarily in apartment buildings and agriculture.

Now the family is looking to the future, making the transition from the second generation to the third. Family members are also laying a foundation that will allow the fourth generation, and those that follow, to continue steering the family enterprise.

"They are facing some of the classic issues that most family businesses encounter: how to support their ownership goals, how to position themselves as an ownership group to grow the company and add value, and the ever-present challenge of generational transition," says Joshua Nacht, Ph.D., a consultant with The Family Business Consulting Group who has been working with the family.

Will Lyles prepared himself to meet those challenges by following three generations of his family to Purdue University. During the summers, he worked at the family business, laboring on construction crews. He majored in civil engineering with an emphasis on construction—all steps designed to prepare him for a career with the family business.

"I have always loved the construction business," Will says. "To have been born into a family that does something you really enjoy—it's given me opportunities to do things at an earlier age than I would have otherwise."

During summers in high school, Will worked for the company in a variety of capacities, from accounting to pulling up tumbleweeds from the field outside the office. He joined full-time after college as an engineer in training, moving up to project manager, then to division manager and eventually to company president.

Family council formation

The most recent family member to join the business came on board partly to help with the generational transition.

Kathy Porter knew about the business growing up, but her parents pursued their own careers outside the family business, so she did not have the same up-close look at the company as her cousins did. She spent 25 years working in commercial real estate in Los Angeles. In March 2014, she joined the company to provide enhanced shareholder support and communication.

"For a transition to happen 10 years from now, you have to be contemplating it now," Porter says.

It has been a long, slow process.

The Lyles family first realized in the early 1990s that as the family grew with successive generations, they would need a more structured way to keep everyone involved. They formed a nascent family council at that time, but because generational transition was not an immediate concern, its activity gradually tapered off.

About five years ago, Will Lyles realized that the family had both grown and changed—and that it would take some effort to make sure the business transitions were smooth.

"My cousins and I had grown up knowing each other," Will says. "My sisters and cousins have been extremely supportive of my efforts at the company. But they're spread out all over the country, and our kids don't know each other the way we knew each other. If we really wanted to keep what's been created together as a family, we needed to work on it."

The family council was reborn, and this time was stronger.

"As the family and businesses grew, and when we had fourth-generation teenagers, we realized it was time to get more serious about coordinating, educating and engaging the family," says Annarie Lyles, 55, the family council president.

Today the council includes representatives of seven of the 10 third-generation families. The extended Lyles family gathers once a year. "We have started reaching out to Generation 4 to be involved in the family council also," Will says. The council's early goals are to focus on family events and education.

A weeklong event for fourth-generation teenagers was updated. Instead of staying in Fresno, as they had done in the past, they toured various sites in Northern California. This gave the next generation a clearer picture of all the industries the company is involved in, not just construction. They saw one of the company's apartment buildings in San Jose, for example, and visited a tech startup that the company has invested in.

In the summer of 2016, the entire family gathered at Tumbling River Ranch in central Colorado for a week of meetings and family bonding. Activities included whitewater rafting and horseback riding, as well as a video presenting the second generation's hopes for the future of the business and the family. A session on cyber security was presented. The family also broke into generational groups to discuss some governance issues.

"We were introducing [the younger generation] to all the things we do and trying to create excitement about opportunities with the family enterprise," Will says.

The family has developed a family employment policy, recommending though not requiring that family members work outside the business before joining it.

"One of the challenges we have today is, if someone in the family is interested in construction, how do you create a leadership path in a reasonable time?" Will says. "Construction requires a lot of experience. The company's size has grown, as has the complexity of our jobs and our market—as well as the diversity of our company beyond construction."

The family council is looking at potential career paths within the company. Historically, there has been only one path, through construction. "We're recognizing that we have lots of other paths, potentially, but they need to be developed," Will says.

Improving communication

As the family looked for ways to coordinate, it found that communication was a challenge. The third generation is spread out all over the country, and only a few third-generation members work for the company.

Steve Titus, 47, a married-in member of the third generation, researched the use of an intranet portal that would function as the family's communication hub. Titus—whose wife, Jennifer, is Gerald Lyles' daughter—recommended the online platform offered by Trusted Family, a technology firm; the family council accepted Titus's proposal. (Titus also joined the family council around this time.) The Lyles family has been using the Trusted Family platform as a centralized system for family communications for about two years.

The site serves as a secure repository for financial and other documents. The family is also building an education module that explores the history of the business and its accomplishments.

"It has completely changed the way we communicate," Titus says. In the past, family members might leave a meeting of the family council or family assembly full of plans and good intentions, but it was complicated to keep work going. The intranet site makes it easier for family members to keep collaborating on the documents they have started.

Titus, who formerly owned a display design/manufacturing business, saw strategic value in developing a family brand to engage family members and inspire family loyalty.

Titus says one key change was expanding the extended family's view of the business beyond construction. "We're not just talking about the family business—we're talking about the family enterprise," Titus says. "It's social, it's philanthropy, it's the businesses."

The Lyles Family Enterprise brand centers on the family's core values, the key benefits of being a Lyles family member and the family development plan. The family development plan focuses on five main areas: governance, education, family/social activities, philanthropy and entrepreneurship. Core values and benefits are currently under discussion as part of the family development plan process.

The family worked with Nacht to create the family development plan, which includes building their capabilities as a group of owners as well as the transition to the fourth generation. They recognized that each of the five areas is important for their long-term sustainability and for the development of the family as an ownership group, Nacht says.

Nacht calls the Lyles family "a very friendly and open group" that communicates well. "This is a family that genuinely likes to be around each other," he says.

Nacht notes that family members, including those who have pursued careers outside the family business, bring an impressive breadth of education and experience to the ownership group and the family council.

"Most of them have other jobs, but they recognize that they're part of a remarkable business," Nacht says. "They are really willing to put in the time to do the work of the family council."

Will Lyles says the family's short-term plans are to keep working to enact the plans they have made for family governance.

"Five years ago, I felt that I was carrying a lot of the load just by myself," says Will. "Now it is spread across a broad spectrum of the family. It's allowing me to focus a little more on the business as opposed to both the family and the business."

Margaret Steen is a freelance writer based in Los Altos, Calif.

A family retreat at a family-owned ranch

When the Lyles family needed a place for a fun but productive multigenerational retreat to focus on the future of their family business, they turned to another family-owned business: Tumbling River Ranch in central Colorado, 62 miles southwest of Denver.

The ranch has room for 50 to 55 guests per week. Guests stay in individual cabins or in one of two historic lodges, including one that was built in the 1930s by the Coors family.

The Lyles family booked all the rooms in the ranch for their weeklong retreat. The ranch's owners, Megan Dugan, 43, and her husband, Scott Dugan, 45, worked with the Lyles family to accommodate the technology they needed to run their meetings, find a service project for the kids to do and consider the accommodations that would work best for the second-generation family members.

Megan and Scott Dugan are buying the ranch gradually from Megan's parents, Jim and Mary Dale Gordon, who decided in 2000 to retire after having owned the ranch since 1975. Megan and Scott are expected to complete the purchase in 2018.

Megan and her three brothers were raised on the ranch.

"My earliest memories are of being with my dad all the time," Megan says. "We would go on jeep trips with my dad, to the horse pasture with my dad. My parents absolutely stressed that this is a family effort. At 9 years old, we were expected to work like other staff members."

Megan started out helping clean cabins, and by high school she was taking on more leadership roles as a wrangler and a waitress.

"I get the question every week: How did the youngest daughter end up with the ranch?" Megan says. "It was timing—and marrying someone who was so passionate and excited about it."

Megan and her brothers all went to college "ready to find our own identities," she says. She studied speech communications in college with a minor in general business. "My dad made sure I did some accounting courses, which have proven to be very beneficial," Megan says.

Scott Dugan was born and raised in Atlanta. He came to Tumbling Ranch one summer to work because a friend from college was working there. He discovered that "he loves the Western lifestyle," Megan says, and he stayed in Colorado.

Taking over the ranch was intimidating at first, according to Megan.

"We were very young, and we were buying into a business that had year-round employees that were much older than us and had worked for my parents," Megan says. "Our strategy was to just keep it going."

Still, the Dugans had ideas for expanding the ranch's programs. They added a nanny program, guided hikes and shooting sports.

Just as Megan's parents did, she and Scott are raising their three children, ages 14, 12 and 7, on the ranch. "People constantly ask me, 'Will your kids take over?' " Megan says. "We just go season to season." — M.S.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Multigenerational firms should avoid culture and business 'conflation'

As the fourth-generation lead family member of a family-owned Midwestern business, I witnessed firsthand the complications that stem from "culture and business conflation"—the melding of a family-owned business's cultural and values requirements on the one hand, and the objectives of the business on the other. These complications are even more apparent as a result of my experience as lead director of several family- and founder-owned private companies. Cultural stewardship and business stewardship are distinct business imperatives, and each must be attended to carefully, particularly so as the leadership mantle passes through successive generations.

When a private company shareholder group proliferates from one founder to three shareholder children to nine adult grandchildren to 25+ great-grandchildren (plus spouses), the voices that matter proliferate in turn. Without the deliberate preservation of, and articulation of, a cultural point of view by that shareholder group, there is no way for a leader on the business side—whether a family member or not—to develop sorting criteria against which to evaluate a company's strategic options. These could include decisions about growth, customer interaction, employee reward systems, quality standards and risk management. The result is often a muddying of cultural and strategic goals that can lead to a degradation of a corporate value system and morale, and costly indecision by company management.

With size comes complexity

Predictable patterns emerge as family businesses evolve to materially greater size and scale. Generational leaders discuss with more frequency what happens to "cultural perpetuation" once their business has grown to what is clearly a "next phase," e.g., from $50 million in revenues to $200 million, or from $250 million to $500 million—but those conversations are often subordinated to broader business challenges. Increased size often adds new complexity and competitive intensity; it places a company in a more sophisticated and often global war for talent and for market share. In addition, if the company has taken on third-party debt, its lenders likely have inflexible expectations of consistent operating performance.

Such companies can continue for some time preoccupied with these business and growth matters, and often successfully so. There are times when business growth requires owners to make choices about incurring more debt, forgoing dividends to fund growth, slowing vs. speeding investments in innovation, making an acquisition or opening offices far from the company's headquarters—all of which expand management's oversight requirements. In short, such choices add material risk that may accompany opportunity. When such catalysts arise, owners can find themselves grappling with how to evaluate them. Such questions asked at such times rightfully include:

• How important is growth?

• How much debt is the right amount?

• How do we decide between reinvesting in the business and providing periodic liquidity?

• Who is going to run this larger business?

• If family members aren't the optimal choice(s) for executive roles, how does the family make sure growth parallels its values?

• Do we truly want to own the business forever, and if so, how do we accommodate individuals with different callings, liquidity appetites, or risk tolerances?

The 'prescription'

What I have learned as a family business owner, a board member and an investor is informed by my own disappointing personal experience. My maternal great-grandfather founded our retail business in 1879 and passed on leadership to my grandfather, who in turn passed it on to my father (my grandfather's son-in-law) and my uncle (my grandfather's son). As the business leader of "Gen 4," I served on our company's board, alongside one independent director, my father and our non-family CEO, also a material shareholder. I was in effect speaking for my six inactive shareholder siblings and cousins.

My grandfather—"Gen 2"—wanted my father and my uncle to run the business in tandem, but that proved impossible. The two spent 20 years fighting to the detriment of the business's growth, to say nothing of the mood at Thanksgiving dinner. Eventually, owing largely to the absence of shared and articulable aspirations and values among its owners, the company missed its window for real growth and sustainable scale, and we made the sad but proper decision to sell the business in pieces after 125 years of continued operations. This quite real, costly and unfortunate outcome of a dysfunctional family dynamic is all too common, and I've used the lessons of leadership and cultural collapse in many other family business settings.

The most salient lesson has been that the operating leader(s) of a family-owned business are likely not those best suited to drive the family's values into corporate priorities. Rather, one or more family members, often without business acumen as traditionally defined, are generally better choices to carry forward the cultural torch. As such, our advice to ownership groups is to avoid culture and business "conflation" by separating the roles of cultural stewardship and business stewardship. The best formula is bicameral: One governing body addresses the family's values and preferences and distills those into a coherent set of shareholder priorities; and another body, a traditional board of directors, is charged with overseeing the strategy and operation of the company consistent with the shareholders' guidelines. Put simply, a family council ranks and elucidates owners' cultural priorities, while a board of directors provides oversight in the context of those mandates, with one or more family council members serving on the board of directors for coordination.

To avoid the dangers of culture and business conflation, families must be prescriptive. Companies that don't work their hardest to sustain clear cultural priorities do their shareholders—and their competitive position—a disservice. Owners should:

• Understand their company's growth opportunities and related execution risks.

• Articulate and codify their approach to strategic boldness.

• Know how much business risk they are prepared to take—e.g., geographic expansion, acquisitions and outsourcing of key functions.

• Define success (intermediate and long-term) in measurable terms, both financial and non-financial—spanning competitiveness, quality and other matters.

• Ensure an appropriate capital structure—e.g., the right balance sheet, the right debt level and terms, and alignment of aspirations among equity owners.

• Make sure the balance sheet is appropriate both to owners' values and to company opportunity. This could involve seeking to diversify the family's estate—or the estates of individual family members—before reaching critical junctures of business expansion so shareholders can properly encourage business boldness while having sufficient diversification to feel financially safe.

• Communicate the resultant shareholder values and objectives clearly to those responsible for management of the business.

Take a deliberate approach

Family business stewardship in the face of ownership group proliferation and generational succession is complex and riddled with pitfalls. It's even trickier when shareholders fail to recognize the importance of a common set of values and cultural mores that should drive the behavior of the business leaders. Asking CEOs and other executives to act in a manner fully responsive to a set of vague and evolving shareholder priorities leads to uncertainty, and uncertainty is often devastating for business value.

A deliberate approach to defining cultural guidelines, governance structure and leadership roles can pave the way to stability and resolve, enhancing the chances for long-term business sustainability and success, and ultimately sparing businesses the fate of my own family's enterprise.

Rodney L. Goldstein is managing partner of Windhorse Capital Management, an independent investment advisory firm serving a select group of family and institutional clients, with offices in Boston, Charlottesville and Chicago (www.windhorsegroup.com). He has served as a director or lead director of many companies, including his own family's business.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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