A Model Program for Family Run Dealerships

By Howard Muson

In a Family Business interview, Gerald Shaheen of Caterpillar talks about a five-year-oldseminar that’s breaking new ground in relations between dealers and corporate headquarters.

The spectrum of family businesses includes countless small dealers, franchisees, anddistributors who depend for their livelihoods on contractual arrangements with a large manufacturer.Fast-food outlets, soda bottlers, automobile dealerships, furniture distributors — these are just a fewof the industries in which small, independent firms, many of them operated by families, benefit fromformal ties with big corporations.

These businesses are seldom encouraged to plan for succession or receive assistance in the process.Typically, the big corporate partner will remain noncommital on whether or not a dealer or franchiseewill be allowed to pass on the business in his family. Any promise in this regard will usually becouched in vague, guarded language.

Ivan Lansberg, a leading family business consultant in New Haven, Connecticut, writes: "At best, largefirms deal with succession of dealer principals by specifying in their contract that a ‘suitablesuccessor' (suitable is usually left undefined) must be found in order for the franchiseagreement to be renewed beyond the tenure of the dealer principal. It is evident in many cases thatthe head office does not have much understanding of how the complex interaction of family and businessaffects the dealers' ability to cope with succession."

Some corporate executives look upon family businesses as messy businesses, and want to avoid anyinvolvement in their internal affairs. Nor would many families welcome what may appear to them to besnooping or interference in their private lives. These sensitivities, combined with tensions inherentin the relationship between corporate parent and local dealer, usually lead to a pattern ofnon-assistance.

John Davis, president of the Owner Managed Business Institute (OMBI) in Santa Barbara, California,says parent companies tend to feel that "If we can help [dealers] to do business well, that's all wecan do — and that's all they need." Davis argues that a hands-off policy is short-sighted in many cases:Lack of continuity in local dealerships can cause painful business disruptions for the corporateparent. "The corporations are often too late in thinking about ownership transitions," Davis says."They neither provide much in the way of resources to help their distributors plan these transitionsnor help to prepare the successors for top management."

An outstanding exception is Caterpillar Inc., the worldwide manufacturer of earth-moving andconstruction equipment, based in Peoria, Illinois. Since 1986, Caterpillar has offered its 75 dealersin North America (8 of them in Canada) a three-and-a-half day seminar on continuity planning calledthe Owner Managed Business Program (OMBP), which is given by Davis, Lansberg, and two colleagues,Kelin Gersick and Mary McCollom. About 65 dealers and their families have already been through thecourse. A follow-on phase is now underway to teach dealers how to put in place at their companiestechniques they've learned, such as the establishment of a family council.

Along with its engineering and manufacturing prowess, Caterpillar draws strength from its system ofindependent dealerships, many of which have been in families for two and sometimes three generations.(All but two of the 75 North American dealerships are family owned and operated.) An extensive reviewof Cat operations in the 1980s — undertaken in response to the rise of powerful foreign competitors suchas Japan's Komatsu — confirmed the strategic advantages of Cat's dealership system and renewed thecompany's commitment to it.

Caterpillar's dealerships are sizable businesses in their own right, typically grossing $100 millionto $120 million annually and employing 300-350 people at three or four stores in a given serviceterritory. Worldwide, roughly half of Caterpillar's total capital is provided by thedealer-entrepreneurs. Corporate management thus has a large stake in seeing that this capital remainsin the business for generations.

In an interview with Family Business, Gerald L. Shaheen, Eastern/Canadian Region Manager andone of the architects of OMBP, talked about the program's importance to Caterpillar and how it hasbeen received.


Family Business: What are the advantages toCaterpillar of having independently owned dealerships?


Gerry Shaheen: The best businessman, particularly in a retailbusiness, is a man who lives, eats, and breathes in the territory that he's servicing. A corporatelyowned operation will never develop the camaraderie, the understanding, the commitment, therisk-taking mode that the enterpreneur operating in his own backyard does. This has been confirmedover and over again.

FB: What are the benefits to Caterpillar of having family owned and operated dealerships?

Shaheen: If a dealer principal has done a good job servicing histerritory, he has, first of all, satisfied a customer base, and second, he has made money. It's calledcapital. The best way to keep capital employed productively from generation to generation is in thehands of another entrepreneur who doesn't have to go through the rigors of capital accumulation andleverage himself or herself.

That, in a nutshell, is why we turn to independent dealers and why we have an interest in theirfamilies. That is why we encourage the entrepreneur-dealer principal to pass the mantle to hisheirs.

FB: Why did you decide to re-examine the structure ofyour distribution network in the last decade?

Shaheen: The earlyto mid-1980s was, as you know, a period of business re-evaluation in this country. We re-examined ourmanufacturing processes, our financing, our competitive position. It was only appropriate that, sinceour dealer network is one of our most significant assets, we re-evaluate that as well.

FB: And the result?

Shaheen: The studyreconfirmed the importance, role, and significance of the independent dealership to our past, andfuture success. I use the word "revalidation" — it revalidated our commitment to that type ofstructure.

But we also decided we had to be more proactive in the development of those organizations. Not justfrom the business side, because we've been proactive on the business side from Day One. But we had tobe more proactive on the family side; we wanted to offer some assistance in the family dynamics, whichare unique to each dealership. That meant investing money in their education.

FB: So you asked John Davis and his associates to talk tosome dealers about the kind of program they wanted.

Shaheen: We had aconcept of holding a condensed, week-long "mini-MBA" program for managers that would include a moduleon the family nature of the business. The dealers on the steering committee felt that one day wouldnot be enough to cover the family dynamics. So we asked John Davis to organize a three-dayprogram.

FB: What kind of feedback did you get from the early sessions?

Shaheen: Initially, we were a bit apprehensive. We wondered howour getting involved in family dynamics would be perceived. But the reaction was very positive. Thedealers tended to say: "You've caused us not to take the family dynamics for granted and to thinkabout how they can be managed better."

FB: What exactly is Caterpillar's policy on lettingdealer principals pass on the business to family members?

Shaheen: A key wordin our vocabulary is continuity. We are very open with dealers on what they have to do to pass thebusiness to the next generation. Number one, they have to convince us the successor is ready to takeover, that he or she has been prepared academically and has the right experience. Number two, theyhave to convince us that their management team has been conditioned and trained to accept thesuccessor. And, number three, they have to convince us that they've done the financial part ofcontinuity planning.

FB: How do the dealers go about convincing you they aredoing the necessary planning and that the successor is ready?

Shaheen: They keepus up to date on the person they have identified as the heir-apparent. They tell us what those youngpeople are doing to prepare themselves academically and what experience they are getting. Along theway, we have a lot of input on the grooming of the successor. So it's a kind of dialogue — we become,in effect, part of the family. We try to have a continuity plan in place 10 years prior to theexpected retirement of the dealer principal.

FB: Is there a formal dealership agreement? Would itspecify the requirements for continuity?

Shaheen: In anindirect way. I should point out, by the way, that our agreement is not a franchise arrangement. Ouragreement is a sales and service agreement. It is not very long, and it is written in very simplelanguage. The agreement requires the dealer principal to be an active manager in his business — he can'tbe a passive owner. The agreement also names the key managers who will be involved in the organizationand mentions their specific assignments.

That is how the heir-apparent will start to surface. Either we or the dealer principal can add him orher to the list of names.

FB: What is the administrative structure for overseeingthe dealerships? Who is their primary corporate contact?

Shaheen: There is a vice-president of our North AmericanCommercial Division. Under him are three regional managers, of which I am one. I have six districtmanagers who live in the field and are the primary contacts with the dealers. On the subject ofcontinuity and administration, they are the point men.

FB: Have you ever had to veto a dealer's choice ofsuccessor?

Shaheen: Let mejust say that a confrontation of this sort doesn't surface suddenly. We see it develop over a longenough period so that we have time to identify other alternatives. It isn't as if a dealer comes to usone day with his heir-apparent and we say: "We haven't seen you for three years. Now you're offeringyour son as your successor. We don't want him." If a dealer's desired successor is not acceptable tous, we work through it with him and try not to let it end in a confrontation.

What if the dealer's one and only choice is not acceptable to us? In that case, the dealership wouldhave to change hands. But it doesn't happen all that often.

FB: How would you assess the overall benefits of the OMBPprogram?

Shaheen: Theseminars — the "first phase" — created awareness of the issues involved in maintaining continuity. Thesecond phase — the "action phase" — is one during which the dealers will start putting in place some ofthe tools necessary for planning, such as a family council.

The seminars have also caused some dealers to get more expertise on estate planning, to make sure thatthe financial side of their continuity plan will work. As you know, the Tax Reform Act of 1986 made alot of tradional estate planning obsolete.

Finally, the program has brought communication between the dealerships and Caterpillar to a higherlevel. Now when we want to work with dealers on developing a written continuity plan, they know why;they can no longer push it aside. That's a big benefit to us.

FB: Does a Caterpillar representative attend theseminars?

Shaheen: Corporateexecutives do not have a role until just before adjournment. On the very last day a representativesuch as myself will meet with the group and answer questions.

FB: What sorts of question do they ask?

Shaheen: Well, you know, many of the participants are like newconverts. For two or three days they've been hearing for the first time about the role thatCaterpillar plays in their family life. They've never realized that when Dad comes home grumpy fromwork, the reason may be that a Caterpillar district manager is in town who is putting pressure on thedealer to decide which of his three children is going to take over the dealership.

The family may have heard about continuity while they were growing up. Now, all of a sudden, theyunderstand that Dad is faced with having to make that decision, and they will be part of the process.Once the family tunes into that, there's a million questions. As you might imagine, there are also alot of myths.

FB: Can you give me an example of one of those"myths?"

Shaheen: One of thebiggest myths is that the first-born son automatically moves up to become the dealer principal.

Usually, the dealer has more than one offspring. Sometimes three or four siblings have come up withthe concept of operating the business as equal partners, and they might ask: "Can't the three or fourof us run this business together after Dad leaves?"

FB: How do you feel about that?

Shaheen: Let me putit this way: We want to look into only one pair of eyes. One pair of eyes that we can counsel, onepair that can make the decisions. Because we feel that in the retail marketplace, you can't operate bycommittee.

You can imagine the effect of this concept as it ricochets across the table to a family that hasgotten the notion over the years that the three kids will eventually run the business. It's like a bigbucket of cold water.

FB: Do you know of other major companies that haveCaterpillar's commitment to family run dealerships and invest in programs such as OMBP?

Shaheen: I don'tknow of any other major company that has committed itself, as we have, to independentdealer-entrepreneurs. McDonald's did when they started, and it served them very well. Now, forwhatever reason, they have a mix of franchisees and corporate-owned stores. It would be interesting toknow which are better operated.

The automobile industry used to have many independent distributors, but in recent years, the carcompanies have gone more and more to corporate dealerships. They may have had good reasons. Somedealers may have taken capital out of the business — to reduce their risk exposure. The companiescouldn't afford to let them do that.

However, I sometimes wonder whether the automobile industry, in leaving the local entrepreneur, didn'tlose touch with local communities. When you do that, you give up local ingenuity. And you no longerhave entrepreneurs putting pressure on you to keep up quality in your product lines.

We get a lot of benefit from having independent dealers. They are committed, vocal, knowledgeable, andkeep us aggressive. In general, I think we in the United States have underestimated the strength ofthe entrepreneurial family. We've lost something as a result.


The Owner Managed Business Program


Four or five Caterpillar families, chosen from territories far enough apart so they are notcompetitive, usually attend each seminar. The OMBP curriculum combines lectures on family businessissues with counseling sessions for the individual families. Much of what the participants learn,however, is from each other, from discussing common family and business concerns. The participants areable to discuss such issues as the retirement of the senior owner-managers and career development forpotential successors, not only with other families but in breakout sessions with members of their owngeneration.

The first phase of the program, which ran from 1986 to 1990, was largely designed tocreate awareness of succession issues.

The second phase, initiated at the request of the dealersthemselves, is devoted to planning specific action steps to carry out succession. In this phase, thefaculty members work with families on organizing boards and family councils, laying out careerdevelopment plans for the next generation and dealing with stock and estate issues.

For thesesessions, the families are grouped according to their stage of development, that is, according towhether the owner-managers have relatively young families or are older and close to retirement. TheOMBP seminar uses a succession model describing four developmental stages in a family businesses.There are even four versions of the Rockman Tractor Co. saga, the fictional case that kicks off thesessions, so that families at similar developmental stages have a common basis for discussion.



The Rockman Tractor Co.: a case that hits home


Wyatt Rockman, head of a Caterpillardealership in the town of Knowland, is facing a bunch of critical challenges all at once. Netincome athis operation — Rockman Tractor Co. — is down significantly. Corporate managment at Caterpillar, inPeoria, is pressing Wyatt to make a major new investment in order to dramatically improve thedealership's results.

At the same time, Wyatt's two sisters, who together own 50 percent of the business, are asking Wyattto buy them out. Wyatt, who is 56 years old, is himself thinking of buying a half-interest in theKendrick Yacht Co. The investment would enable him to indulge a lifelong love for power boating, andgive his youngest son, Dave, who shares this passion, a great opportunity to develop a career init.

Wyatt, who took over the Caterpillar dealership 20 years ago from his father, Micah (Big Mike)Rockman, is now wondering whether it is in everyone's interest to keep the business in the family. Heknows when he retires that his oldest son, Joe, expects to take over. His daughter, Marcy, a computerwhiz, has also demonstrated that she can be an big asset to the business. But Wyatt has doubts aboutsuccession.

He is afraid that Joe will not have the time to grow into the position of president, and he worriesthat the three siblings will not find a way to run the company together. Whenever succession comes upin a discussion with John Fischmann, the district manager, he gets the impression that Cat does notfeel comfortable with Joe, although these conversations are usually guarded and vague. When he tries todiscuss this issue with his wife, Margaret, she dismisses the idea of selling the company as unfair toall the children, especially Joe. She is confident that with all of their talents, they will find away to work it all out in the future — and that they have plenty of time.


Caterpillar dealers and their families attendingthe company's Owner Managed Business Program (OMBP) become familiar with the Rockman Tractor Co.during the first day's sessions. Discussion over the fictional case invariably brings out a lot of hotissues that have been on the participants' minds for some time. It tips them off that they are in fora powerful experience.

"The case was constructed from real-life incidents in the history of Caterpillar dealerships andwritten by Kelin Gersick," says Ivan Lansberg, one of four faculty members. "When the participantsrealize the similarity of the case to their own actual situation, they almost feel as if we've beentapping their bedrooms."

— H.M.


What Caterpillar wants in a successor


Caterpillar's Owner Managed BusinessProgram has been a learning experience for Cat executives and regional and district managers as wellthe dealer principals. As Ivan Lansberg recalls: "After the sessions, many dealers come back to us andask, ‘Is Caterpillar hearing this, too?'" As a result, the faculty has developed a video of theRockman Tractor case for the headquarters and field people, and has led a discussion of the issueswith them over a closed-circuit network.

From the dealers' standpoint, in fact, one of the biggest benefits of the program has been to stressto Caterpillar's managers the importance of having clear criteria for approval of successors.

What does Caterpillar look for in a successor? Lansberg says a college education is essential and abusiness degree is looked upon favorably. The Caterpillar network enables some potential successors toget their training and initial work experience in other dealerships besides their own family's, andalso values successful work outside of the dealerships, in a line management position, for example, oras the head of a department in a similar business, or in a sales job.

But what corporate management wants, above all, is to see evidence of leadership ability and a realcommitment to the earth-moving industry. "In general, they are allergic to kids coming in who havehigh-brow approaches," Lansberg says. "They want to see people who have worked in the trenches."


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Autumn 1992


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