Varied policies on succession

Continuity is an issue for other big companies with distributor networks, too. A rundown on what six companies, from Steelcase to Texaco, are doing (or arenŐt doing) to help.

By Jayne Pearl

Large corporations vary in the legal arrangements they have with dealers and distributors as well as the extent of their interest in helping with succession planning in family owned outlets. The range of attitudes and approaches is illustrated in the following sampling of companies from an informal Family Business poll:



The office furniture manufacturer, based in Grand Rapids, Michigan, has no written contract with its 525 dealers in North America. When a dealer plans to sell or transfer the business, however, the company reserves the right to review that transfer "to decide whether the new owners will be able to represent Steelcase."

Bill Gilbert, dealer management consultant on the Steelcase staff, says that in the last three years only about half the dealerships that tried to transfer ownership to a family member were able to do it successfully. As a result, the parent company has made an effort to help improve the dealers' chances for success.

In one new program, the company has set up an assessment center that puts prospective new owners through two days of interviews with an industrial psychologist and role-playing exercises. "We can predict whether future owners will be successful," says Gilbert. "But it's not a pass/fail thing. If someone doesn't do well, we will work with the candidate and the family to develop that person so they're ready over time."

In a second program, the company encourages and assists its dealers in developing a business plan that includes a succession plan. Though about three-quarters of the dealers have a successor in mind, Gilbert estimates, "probably no more than a third have put something on paper." Because quite a few dealers are aging, he notes, "there's some urgency to this. Their needs have changed, their business has changed, they want to play more golf. Yet they haven't done succession planning." The company was prompted to act by calls from dealers saying, "I'm ready to sell the business. What's next?" Says Gilbert: "That's not the ideal way to do it."

Steelcase began working with its top 150 dealers to develop a written plan about three years ago. A year later it started offering a seminar on succession planning for both family and non-family dealerships, with special sessions on family business issues. At the close of every seminar, the participants are asked to fill out an "action outline" describing steps they will take to prepare for succession. The outline is submitted to Steelcase, and six months to a year later, the attendees get a visit from Gilbert, who helps them implement their action plans.

To provide further assistance, Steelcase has reorganized its field force. The 300 sales reps who help the dealers sell to customers will be bolstered by 60 full-time "business consultants," who will help the dealers with succession planning along with financial, staffing, and operational issues.

Does Steelcase ever have to use its prerogative of withdrawing its name and product from a dealer in order to influence the choice of a successor? Gilbert admits that in a few cases, the company has had its doubts about the owner's choice. However, he says: "When it comes to making a choice between doing what's right for the business or trying to force a succession to a son or daughter, Steelcase dealers will do what's right for the business. We've never had to refuse to continue our line."



The farm machinery company in Moline, Illinois, imposes no restrictions on its 1,650 dealers for transferring the business. Nor does it have any formal guidelines for succession planning. When an ownership transfer is contemplated, the company takes the occasion to review whether it wants to continue to operate a dealership in that location for the long term. If it does, it will then work with the dealer to make sure that the successors have a qualified management team and the financial ability to sustain the business.

If everything is in order, Deere will help the local operator draw up a succession agreement that names the next dealer principal, asserts that funding is in place for transfer of the business to that person, and establishes that the agreement be reviewed annually to make sure the plan is on track.

What if the designated successor meets the financial requirements but corporate management has doubts about his or her competence? In that case, quips John Hubbard, Deere's manager of wholesale finance, "We'll say what Lyndon Johnson said: ‘Come now, let us reason together.'"

Hubbard boasts that the company has many second- and third-generation dealerships. However, he says that Deere has begun to realize that "even when we have a successful dealer, there are probably some family issues we don't know about. We've found we need to get outside advice [for dealers] because we run into things we can't resolve."

Several of Deere's regional offices now offer or plan to offer three-day seminars on family business issues, with advice on financial, legal, and tax aspects of an ownership transfer. The seminars are voluntary, and the dealers pay their own way. Hubbard admits that the dealers who would benefit the most are not always the ones who sign up. The company has had to "encourage" a few such dealers to attend. To make sure that dealers successfully implement their own plans, Deere is launching a pilot program in which it will split the cost of hiring a private consultant to work with the family on sticky succession issues.

Hubbard reports that the seminars have spurred a wave of succession planning, some of which has already proved its value to the families. One dramatic example: a husband and wife who put a transfer strategy in place after attending one of the seminars in Houston last year. Soon thereafter, the husband died unexpectedly during routine surgery. "The widow thanked us profusely for having had the conference," Hubbard says. "She would have had to deal with a mess if they hadn't put all their plans together."



Founded in 1955, Biolab Hydratech, a Decatur, Georgia-based manufacturer of chemicals for swimming pools, hasn't been around as long as companies like Steelcase and Caterpillar. Paul Kirke, manager of the company's 2,000 or so authorized dealers, says that succession isn't yet much of an issue since most of the dealers are still in the first generation. But some dealerships have been transferred, about half to outsiders and half to family members. Kirke says the transfers to outsiders have actually gone more smoothly, probably because "when the owner takes leave of the business, he's out of it. When it's sold within a family, there are problems. Specifically, parents tend to come back and find that things are not exactly to their liking" — which creates conflict.

Biolab Hydratech was once family owned, and it is still managed by two nephews of founder Leon Bloom. But the company, which is now owned by Great Lakes Chemical of West Lafayette, Indiana, expresses no particular preference between having it's dealerships passed to the next generation or sold to an outside buyer.

Biolab has nevertheless been willing to help dealers who want to keep the business in the family. It included a workshop on family business succession planning at its annual training conference in January 1990. However, Kirk says that the workshop was poorly received and has not been repeated. "The overall comment was that the session was boring," he adds. "It was something they didn't want to participate in or even know about. We had high-powered outside speakers, who presented very valuable information. But it was a message the dealers didn't want to hear. It's like picking a burial plot."



Hallmark, itself a third-generation family business, sells its greeting cards through 11,000 Hallmark shops across the country, the great majority of which are independent and family owned (only 200 are owned by the company). Yet the company has no formal requirements for transfer of store ownership and has offered only modest help with succession planning.

When a store begins the transfer process, Hallmark's main concern is whether the new owners qualify for credit from the company. One family manager of a Hallmark store in the Midwest explains: "We get six-digit credit from them so we can order our Christmas inventory six months in advance." This manager was not aware of other corporate criteria for the choice of successors to operate the stores.

Hallmark, based in Kansas City, also routinely offers store managers training in such areas as customer service, loss prevention, merchandising, and community involvement. The 350 field managers in its sales force help stores develop and update business plans, which in some cases may include strategies for succession. But the company has no ongoing program for counseling store operators on succession. It did offer a workshop on the subject in 1989 and 1990 at its regional training seminars, which usually cover a wide range of business-related topics such as setting up display windows and marketing to brides. In 1989, it also paid a family business consultant to sit in a hotel suite from 8 a.m. to 6 p.m. to conduct private one-hour counseling sessions with individual families. One dealer flew in seven family members to attend the consultation.

Last year, however, the succession planning sessions were not included in the training program. "We normally don't repeat sessions continually," explained Rachel Bolton, a spokeswoman. "We feel we reached the people who needed that subject."



McKesson Corp. is known for progressive and proactive policies that assist its drug stores, most of which are family owned. The San Francisco pharmaceutical distributor provides a cooperative national marketing program for 3,900 of its 14,000 independent drug stores. Through an electronic linkup, it offers store owners instant inventory and financial control, which puts even mom-and-pop stores on a competitive par with stores owned by big chains.

But McKesson has not taken the lead in helping its family operators plan for succession. Considering transfer issues the domain of store owners, McKesson neither imposes a policy on succession nor covers the issues at its annual management training seminars.

Under the company's Valu-Rite agreement with store owners, the company provides pharmaceuticals to the stores. But the stores also sell many other brands as well. In the unlikely event that McKesson disapproved of the way the store was being operated, it could withdraw the Valu-Rite name, its products, its inventory system, and other support. But since the distributors are independently owned, the company does not have any say in whether a store can be passed on in the family or to whom.

James Cohune, McKesson's director of public relations, explains the extent of the company's involvement in ownership transfers: "If a guy wants to sell a store, he tells his McKesson rep, who puts the word out." Cohune seems to think McKesson's market share is somewhat insulated from rocky transition problems that stores may encounter. "Store owners don't change wholesalers willy nilly," he says, even if they sell to outsiders.



Texaco Refining & Marketing Inc./Star Enterprise has roughly 840 distributors in the United States called "wholesale marketers," and some two-thirds of them are family owned. Yet Jim Akers, Texaco's manager of training and development for marketing, says only 30 percent of them have formal succession plans. About the possibility that some may be having succession trouble, Akers says: "I'm sure there are problems, but families aren't necessarily going to wave the red flag in front of the supplier."

Recently, Texaco decided not to wait for troubled marketers to come to the corporation. "Texaco recognized the importance of proper planning," says Akers, "but there was a lot of talk and no action [on Texaco's part] until last year, when we started a succession and estate planning course."

The company is concerned that some aging distributors will wait too long before starting to plan, and thus will have fewer options as they near retirement. "Our marketers are risk-taking entre preneurs," says Akers. "Details such as succession planning are the last thing on their minds until they turn 60. Then as they approach retirement, all they can do is have their attorney make a quick fix."

Texaco's four-day succession/estate planning seminar, one of 13 courses offered to its marketers, is voluntary and costs each participant $650. To help groom sons and daughters to manage the business, Texaco offers a three-week "Star Bright" course that gives heirs-apparent some exposure to such technical aspects of the business as oil exploration as well as marketing, wholesale and retail distribution, and operations.

The last part of the course is a competitive simulation game that pits several teams against one another. The teams run a fictional convenience store for eight quarters, making day-to-day business decisions in an attempt to pump out the highest net profit.

Clearly, though, headquarters has a more immediate concern. Akers says the distributors face so many new environmental regulations that are expensive to comply with that many of the smaller ones can't afford to keep the business in the family. As a result, he says, some are selling out to larger marketers. Others who would like to sell can't because the value of the business is depressed.

Jayne Pearl is a freelance business writer and editor in Northampton, Massachusetts.