Varied Policies on Succession

By Jayne A. Pearl

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 aren’t doing) to help.

Large corporations vary in the legal arrangements they have withdealers and distributors as well as the extent of their interest in helping with succession planningin family owned outlets. The range of attitudes and approaches is illustrated in the followingsampling of companies from an informal FamilyBusiness 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 sellor transfer the business, however, the company reserves the right to review that transfer "to decidewhether the new owners will be able to represent Steelcase."

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

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

In a second program, the company encourages and assists its dealers in developing a business plan thatincludes 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 fewdealers are aging, he notes, "there's some urgency to this. Their needs have changed, their businesshas changed, they want to play more golf. Yet they haven't done succession planning." The company wasprompted to act by calls from dealers saying, "I'm ready to sell the business. What's next?" SaysGilbert: "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. Ayear later it started offering a seminar on succession planning for both family and non-familydealerships, with special sessions on family business issues. At the close of every seminar, theparticipants are asked to fill out an "action outline" describing steps they will take to prepare forsuccession. The outline is submitted to Steelcase, and six months to a year later, the attendees get avisit from Gilbert, who helps them implement their action plans.

To provide further assistance, Steelcase has reorganized its field force. The 300 sales reps who helpthe dealers sell to customers will be bolstered by 60 full-time "business consultants," who will helpthe 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 inorder to influence the choice of a successor? Gilbert admits that in a few cases, the company has hadits doubts about the owner's choice. However, he says: "When it comes to making a choice between doingwhat's right for the business or trying to force a succession to a son or daughter, Steelcase dealerswill 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 norestrictions on its 1,650 dealers for transferring the business. Nor does it have any formalguidelines for succession planning. When an ownership transfer is contemplated, the company takes theoccasion to review whether it wants to continue to operate a dealership in that location for the longterm. If it does, it will then work with the dealer to make sure that the successors have a qualifiedmanagement 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 thatnames the next dealer principal, asserts that funding is in place for transfer of the business to thatperson, 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 doubtsabout 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 saysthat Deere has begun to realize that "even when we have a successful dealer, there are probably somefamily issues we don't know about. We've found we need to get outside advice [for dealers] because werun into things we can't resolve."

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

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


Founded in 1955, Biolab Hydratech, a Decatur, Georgia-basedmanufacturer of chemicals for swimming pools, hasn't been around as long as companies like Steelcaseand Caterpillar. Paul Kirke, manager of the company's 2,000 or so authorized dealers, says thatsuccession isn't yet much of an issue since most of the dealers are still in the first generation. Butsome dealerships have been transferred, about half to outsiders and half to family members. Kirke saysthe transfers to outsiders have actually gone more smoothly, probably because "when the owner takesleave 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" — whichcreates 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 noparticular preference between having it's dealerships passed to the next generation or sold to anoutside buyer.

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



Hallmark, itself a third-generation family business, sells itsgreeting cards through 11,000 Hallmark shops across the country, the great majority of which areindependent and family owned (only 200 are owned by the company). Yet the company has no formalrequirements for transfer of store ownership and has offered only modest help with successionplanning.

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

Hallmark, based in Kansas City, also routinely offers store managers training in such areas ascustomer service, loss prevention, merchandising, and community involvement. The 350 field managers inits sales force help stores develop and update business plans, which in some cases may includestrategies for succession. But the company has no ongoing program for counseling store operators onsuccession. 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 andmarketing to brides. In 1989, it also paid a family business consultant to sit in a hotel suite from 8a.m. to 6 p.m. to conduct private one-hour counseling sessions with individual families. One dealerflew in seven family members to attend the consultation.

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



McKesson Corp. is known for progressive and proactive policiesthat assist its drug stores, most of which are family owned. The San Francisco pharmaceuticaldistributor provides a cooperative national marketing program for 3,900 of its 14,000 independent drugstores. 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. Consideringtransfer issues the domain of store owners, McKesson neither imposes a policy on succession nor coversthe issues at its annual management training seminars.

Under the company's Valu-Rite agreement with store owners, the company provides pharmaceuticals to thestores. But the stores also sell many other brands as well. In the unlikely event that McKessondisapproved of the way the store was being operated, it could withdraw the Valu-Rite name, itsproducts, 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'sinvolvement in ownership transfers: "If a guy wants to sell a store, he tells his McKesson rep, whoputs the word out." Cohune seems to think McKesson's market share is somewhat insulated from rockytransition problems that stores may encounter. "Store owners don't change wholesalers willy nilly," hesays, even if they sell to outsiders.




Texaco Refining & Marketing Inc./Star Enterprise has roughly840 distributors in the United States called "wholesale marketers," and some two-thirds of them arefamily owned. Yet Jim Akers, Texaco's manager of training and development for marketing, says only 30percent of them have formal succession plans. About the possibility that some may be having successiontrouble, Akers says: "I'm sure there are problems, but families aren't necessarily going to wave thered flag in front of the supplier."

Recently, Texaco decided not to wait for troubled marketers to come to the corporation. "Texacorecognized 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, andthus 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, isvoluntary 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 suchtechnical aspects of the business as oil exploration as well as marketing, wholesale and retaildistribution, and operations.

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

Clearly, though, headquarters has a more immediate concern. Akers says the distributors face so manynew environmental regulations that are expensive to comply with that many of the smaller ones can'tafford to keep the business in the family. As a result, he says, some are selling out to largermarketers. 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.

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Autumn 1992

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