About 10 years ago I received a call from a man at a Cleveland hospital who was waiting while his brother underwent open heart surgery. He said he had read an article about me and could I come down and talk. “I’ve been meaning to do this,” he said, “and I think this is the right time.”
I went to the hospital and we talked while his brother was in the operating room having a multiple bypass. This man and his two brothers had inherited a manufacturing company in Ohio with 400-500 employees that was very well known in its industry. All three were in their 60s, but they had done no succession planning. “There are three of us, and we own the business one-third, one-third, one-third,” he said. “Between us we have had five bypasses. I think we better not postpone any longer doing something about the future of our business.”
These brothers were like the guy tied to the tracks who knows there’s a locomotive somewhere headed his way: He’d better start thinking of doing something—fast. Though heart bypass patients sometimes live a long time, other business owners of my acquaintance have not been so fortunate: Suddenly informed that they have a terminal illness, they know that the locomotive is just around the bend.
When plans for the future of the business have been put off for years, and an owner receives news of his impending demise, both ownership and management succession must take place in an accelerated time frame. In football parlance, the game has reached the closing minutes. It is time for the hurry-up offense.
The affairs of the three brothers illustrate how difficult it is to resolve some family tangles on a rush basis. Between them, the brothers had eight or nine children, several of them with the life-style of “flower children” of the ’60s. Some of the cousins were bright enough, but none had shown any real interest in taking over the business. They didn’t seem to like each other very much, and their mothers couldn’t agree on how the families might collaborate to run the company when the three partners were no longer around.
With no family member motivated or qualified to take over the business, the brothers decided to recruit a professional manager as CEO. In short order, they went from being operators of the business to directors, and four outside directors were added to the board. To prevent control from becoming fractionated among so many heirs who didn’t get along or have any business savvy, a voting trust was created. Control was vested in the board, and a retirement plan was worked out for the three brothers.
It took a series of heart attacks to concentrate the minds of these three brothers, who put together their plan over a period of about eight months. Since then, two have died, but the business flourishes.
Unfortunately, some business owners refuse to face facts even after their doctors tell them point blank that the end may be near. Well-documented psychological studies inform us that most people’s first reaction to such news is usually denial. And entrepreneurs are eternal optimists who are proud of the fact that they’ve won almost every fight they’ve ever been in. Why not this one? They may have built a $5 million business but it’s never too late to achieve their lifelong dream of a $500 million business. “This doctor must be crazy, the tests must be wrong,” goes the typical reaction. “I’ve never felt better...I’ll get a second opinion.”
Face facts: Even if the doctor has made a mistake — let’s hope he has — the warning can be just the kick in the butt needed to get the business owner to do the planning that should have started a decade or two ago.
The first thing that has to to happen is that secrecy must come to an end. This is an emergency. The well-being of a lot of people — family members, employees, partners, even long-standing customers — depend on the family’s ability to thrash out a satisfactory plan. It is time to forget false pride and start serious talks.
The first person to talk to is the spouse, who has usually been the owner’s closest partner. Are the kids really ready and really willing to take over the company? Will the surviving spouse serve in an interim role if none of them yet can? The parents must then get together with the kids to find out if there any takers. If they all say, “Hey Pop, run it out — it makes no difference to us,” the owner might want to talk to employees about a leveraged buyout or ESOP.
Of course, some owners simply choose to get what they can for the business and close up shop. But let’s say the owner who has spent a lifetime building up a business doesn’t want to see it die with him. Let’s also assume there are able, motivated heirs who want to continue it.
If the company has a functioning, capable board, the family is blessed. The board will rally ’round; three or four experienced minds besides the owner’s will go to work on the problem of how to bring the successors along quickly and what kind of interim or long-term structure will be needed to make the transition. If the company lacks such a board, perhaps there is time to create one.
Next, the company’s advisors have to be brought in on it. There are critical legal and business matters that need attending to; lawyers, accountants, bankers, insurance counselors are trained to do what must be done. If the company is a construction firm, for example, the bonding agent should be made aware of the succession plan. If the owner has signed the loan that put up the office building, the note will have to be transferred to the successors. If the plan calls for a buyout of minority shareholders, the company may have to sell some assets to get the cash.
The faster a plan can be put in place, the sooner employees, customers, suppliers, and other key business associates can be informed of the details. There is no suppressing the news of a terminal illness. It will inevitably leak out.
The crucial decision, of course, is: Who will replace the chief executive? For this, owners, board members, advisors, and God just have to make a judgment of who in the next generation appears most qualified and motivated at that moment. It is too late for seasoning and crash educational courses. However, sometimes eager, talented heirs who do not appear to be quite ready can, if responsibilities are thrust on them, grow in the job. Young Henry Ford II, the grandson of the founder, was a good example.
There are other, equally important questions that the owner and spouse must address: Are we going to divide up this business among every living descendant we’ve got? Or are we going to concentrate the ownership? And if the surviving spouse needs an income from the business, how will he or she be provided for? The owner who has done at least some planning is clearly in a better position to decide these matters than one who has done none.
What the owner can’t say at this point is: “I’ll think about it.” He no longer has that luxury.
Léon Danco is the founder of the Center for Family Business in Cleveland and the author of four books on family business.