A model program for family run dealerships

In a Family Business interview, Gerald Shaheen of Caterpillar talks about a five-year-old seminar thatŐs breaking new ground in relations between dealers and corporate headquarters.

By Howard Muson

The spectrum of family businesses includes countless small dealers, franchisees, and distributors 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 few of the industries in which small, independent firms, many of them operated by families, benefit from formal 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 franchisee will be allowed to pass on the business in his family. Any promise in this regard will usually be couched in vague, guarded language.

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

Some corporate executives look upon family businesses as messy businesses, and want to avoid any involvement in their internal affairs. Nor would many families welcome what may appear to them to be snooping or interference in their private lives. These sensitivities, combined with tensions inherent in the relationship between corporate parent and local dealer, usually lead to a pattern of non-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 we can 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 corporate parent. "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 transitions nor help to prepare the successors for top management."

An outstanding exception is Caterpillar Inc., the worldwide manufacturer of earth-moving and construction equipment, based in Peoria, Illinois. Since 1986, Caterpillar has offered its 75 dealers in North America (8 of them in Canada) a three-and-a-half day seminar on continuity planning called the 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 the course. A follow-on phase is now underway to teach dealers how to put in place at their companies techniques they've learned, such as the establishment of a family council.

Along with its engineering and manufacturing prowess, Caterpillar draws strength from its system of independent 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 review of Cat operations in the 1980s — undertaken in response to the rise of powerful foreign competitors such as Japan's Komatsu — confirmed the strategic advantages of Cat's dealership system and renewed the company's commitment to it.

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

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


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

Gerry Shaheen: The best businessman, particularly in a retail business, is a man who lives, eats, and breathes in the territory that he's servicing. A corporately owned operation will never develop the camaraderie, the understanding, the commitment, the risk-taking mode that the enterpreneur operating in his own backyard does. This has been confirmed over 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 his territory, he has, first of all, satisfied a customer base, and second, he has made money. It's called capital. The best way to keep capital employed productively from generation to generation is in the hands of another entrepreneur who doesn't have to go through the rigors of capital accumulation and leverage himself or herself.

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

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

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

FB: And the result?

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

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

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

Shaheen: We had a concept of holding a condensed, week-long "mini-MBA" program for managers that would include a module on the family nature of the business. The dealers on the steering committee felt that one day would not be enough to cover the family dynamics. So we asked John Davis to organize a three-day program.

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

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

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

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

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

Shaheen: They keep us up to date on the person they have identified as the heir-apparent. They tell us what those young people are doing to prepare themselves academically and what experience they are getting. Along the way, 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 the expected retirement of the dealer principal.

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

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

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

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

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

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

Shaheen: Let me just say that a confrontation of this sort doesn't surface suddenly. We see it develop over a long enough period so that we have time to identify other alternatives. It isn't as if a dealer comes to us one day with his heir-apparent and we say: "We haven't seen you for three years. Now you're offering your son as your successor. We don't want him." If a dealer's desired successor is not acceptable to us, 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 would have to change hands. But it doesn't happen all that often.

FB: How would you assess the overall benefits of the OMBP program?

Shaheen: The seminars — the "first phase" — created awareness of the issues involved in maintaining continuity. The second phase — the "action phase" — is one during which the dealers will start putting in place some of the 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 that the financial side of their continuity plan will work. As you know, the Tax Reform Act of 1986 made a lot of tradional estate planning obsolete.

Finally, the program has brought communication between the dealerships and Caterpillar to a higher level. 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 the seminars?

Shaheen: Corporate executives do not have a role until just before adjournment. On the very last day a representative such 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 new converts. For two or three days they've been hearing for the first time about the role that Caterpillar plays in their family life. They've never realized that when Dad comes home grumpy from work, the reason may be that a Caterpillar district manager is in town who is putting pressure on the dealer 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, they understand 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 a lot of myths.

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

Shaheen: One of the biggest 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 with the concept of operating the business as equal partners, and they might ask: "Can't the three or four of us run this business together after Dad leaves?"

FB: How do you feel about that?

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

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

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

Shaheen: I don't know of any other major company that has committed itself, as we have, to independent dealer-entrepreneurs. McDonald's did when they started, and it served them very well. Now, for whatever reason, they have a mix of franchisees and corporate-owned stores. It would be interesting to know which are better operated.

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

However, I sometimes wonder whether the automobile industry, in leaving the local entrepreneur, didn't lose touch with local communities. When you do that, you give up local ingenuity. And you no longer have 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, and keep us aggressive. In general, I think we in the United States have underestimated the strength of the 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 not competitive, usually attend each seminar. The OMBP curriculum combines lectures on family business issues 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 are able to discuss such issues as the retirement of the senior owner-managers and career development for potential successors, not only with other families but in breakout sessions with members of their own generation.

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

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

For these sessions, the families are grouped according to their stage of development, that is, according to whether the owner-managers have relatively young families or are older and close to retirement. The OMBP 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 the sessions, 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 Caterpillar dealership in the town of Knowland, is facing a bunch of critical challenges all at once. Netincome at his operation — Rockman Tractor Co. — is down significantly. Corporate managment at Caterpillar, in Peoria, is pressing Wyatt to make a major new investment in order to dramatically improve the dealership's results.

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

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. He knows when he retires that his oldest son, Joe, expects to take over. His daughter, Marcy, a computer whiz, has also demonstrated that she can be an big asset to the business. But Wyatt has doubts about succession.

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


Caterpillar dealers and their families attending the 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 hot issues that have been on the participants' minds for some time. It tips them off that they are in for a powerful experience.

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

— H.M.

What Caterpillar wants in a successor

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

From the dealers' standpoint, in fact, one of the biggest benefits of the program has been to stress to 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 a business degree is looked upon favorably. The Caterpillar network enables some potential successors to get their training and initial work experience in other dealerships besides their own family's, and also values successful work outside of the dealerships, in a line management position, for example, or as 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 real commitment to the earth-moving industry. "In general, they are allergic to kids coming in who have high-brow approaches," Lansberg says. "They want to see people who have worked in the trenches."