By Alison Rice. Ted Bosgraaf always expected to leave his company to his children. "I told my kids over time that the year I turned 65, I would be selling the business to them," says Bosgraaf, who founded Holland, Mich.-based Bosgraaf Builders with his son Brian in 1985. "I felt it was unfair to the children, when you have them growing up in the business, not to give them a deadline when I would exit the business."
In 2000, he did just that, turning over the company to his daughter Amy and his son Mike. (Brian Bosgraaf sold his interest in the 1990s.) But Bosgraaf Builders wasn't handed to the second generation by anyone's definition. "We didn't want it to be a giveaway thing," Amy (Bosgraaf) Alderink says.
It certainly wasn't. The siblings hired their own lawyers to negotiate the detailed buy/sell agreement, employment contract, and 10-year payment plan with their father, who, primed by his own experience growing up in a family business, had some very specific requirements for his children and his company: a board of advisers, salary limitations, charitable donations. "It's always interesting negotiating with family," Mike, 34, says with a chuckle.
That it is, but the Bosgraafs were far smarter than most about the survival of their family business. According to a much-quoted 1997 study by MassMutual and the then-illustrious accounting firm Arthur Andersen, just 30 percent of family-owned companies make it to the second generation, a percentage that might be slightly higher in the housing industry. "I think builders do better because home builders let their kids get involved in the business a little earlier," says consultant Al Trellis of the Home Builders Network in Mt. Airy, Md., who's helped clients such as Thompson Homes in West Chester, Pa., ease the succession transition.
But it's still a stark statistic for anyone who's spent a life building a business. One of the main reasons for that harsh number: poor or nonexistent succession planning. More than half (55 percent) of CEOs aged 61 and older who plan to retire within five years have not yet chosen a successor, according to MassMutual and the Raymond Institute's 2002 American Family Business Survey. "If you haven't done the planning, you put what you've built at risk," says Leslie Dashew, who, as president of the Human Side of Enterprise in Scottsdale, Ariz., is an organizational development consultant who specializes in family businesses. Among her clients: production builder Colony Homes of Atlanta, where founder Tom Bradbury stepped down in 2002.
Like Ted Bosgraaf, Bradbury didn't ignore the question of who would succeed him at the family business. "I'd been thinking about it for a long time," says Bradbury, who started Colony in 1975. "If things were going to live past me--my son is a doctor, my son-in-law has his own insurance business--there would have to be a way for the business to govern itself" without a Bradbury managing it. Daughter Jan Bethea, who worked for Colony in the past, is currently a stay-at-home mom with young children, and daughter-in-law Julie Bradbury is director of finance for a Nashville medical imaging company.
The Bradburys found their answer in a family business structure that's becoming more common: the company is run by a non-family member who reports to a board of directors, comprised of insiders and outsiders. The family, who maintains ownership of the company, has its say at board meetings through family representatives, who convey the wishes of the owners as decided by a family council.
"There was an old assumption that if you didn't run the business, how could you own it," Dashew says. "That's not valid anymore."
In fact, many of the business and emotional challenges involved in family businesses stem from such assumptions. An adult son or daughter waits and waits for his or her turn at the helm; meanwhile, the parent-founder hangs on, reluctant to retire, often because he doesn't want to choose which child will run the business or because he doesn't think the leading contender can do the job. "People are just not honest [with family members in the business], because honesty has unpleasant results," says Michael O'Malley, president of Chicago-based Family Business Dynamics, which runs a family business program for the city of Chicago.
And there are other options. "Simply having the same last name doesn't make you qualified" to take over the family company, says Paul Karofsky, executive director of the Northeastern University Center for Family Business in Dedham, Mass.
Founders may want to explore an ESOP, or employee stock ownership plan, where company ownership is transferred to the workers. They may want to hire an outsider to run the company. Many people don't separate ownership of the business and the succession of leadership in their thinking, Dashew says, but it's worth considering for some families. Bringing in an outsider will require some changes, though. "The major adjustment will be one of openness," Karofsky says. "It will be necessary to reveal the family warts. Families who own businesses tend to be very private around numbers and strategy. When you bring in a key non-family member, there needs to be key disclosure."
For those facing a decision worthy of Solomon, where they must pick a new leader from a handful of interested family members, O'Malley has one word: don't. "You can't trust yourself to make this decision," he says. Turn the choice over to a succession committee instead, who will interview, evaluate, and choose the best candidate, freeing founders from an impossible task. Ideally, such a committee would be established perhaps five years before the founder's retirement. "It brings discipline to the process," says O'Malley, who advises telling the leading qualified family members that they are in the running for the top job approximately two to three years before the decision is expected to be made, which will be followed by a two-year transition period. Front runners get the chance to prove themselves, and "if they don't get the top spot, you are giving them the courtesy to look elsewhere," O'Malley says.
When should this five-year process start? Family business consultants recommend that founders begin the succession planning process by age 50 at the latest.
Before choosing a successor though, founders and others involved in a family business need to think carefully about the company and its future, using that information to devise a strategic plan--something only 37 percent of family businesses have, according to the 2002 MassMutual/Raymond Institute survey. "If we don't know where the business is headed," Karofsky asks, "how do we know what skills, knowledge, and experience of the next generation will get us there?"
Once a new leader is selected, though, the founder must accept that they're no longer in charge. "The hard part for me is the stepping away," says John Thompson of Thompson Homes, who has been in the process of turning over the company to his son Matt, who started his career at Thompson as a 26-year-old project superintendent and laborer. "If I'm truly backing away, what will be my responsibilities? How do we handle the backing away? That's where the emotional commitment comes in. The structure is easy."
For John, the answer has been a reduced work schedule, allowing him and his wife long weekends for family and travel. His duties have changed too, with a greater emphasis on land acquisition. "For me, as a younger person, I can't take 30 years of experience in buying ground [and just pick it up]," says Matt, now the company's president. "I can't read a book on that."
Finding new responsibilities is an important part of a successful transition. "People like to be respected. People like to add value," says O'Malley. "If people do this properly, they create a role that doesn't interfere [with the new leadership] but serves the company."
So is financial independence, which is why many family business consultants recommend that founders and their successors find a way to release as much money to the retiring leader as possible. "If senior family members are financially dependent on the business, and the kids are running the business differently--and they will--and the business starts not doing as well, they are set up for conflict," Karofsky says.
Even for those who are financially independent, watching new leaders find their way can be challenging. "People need to decide: Are they willing to give up control so that their business has a chance of surviving past them? To do that, you have to be willing to let people fail," says Colony Homes' Bradbury. He says he's learned to "tolerate" that by essentially allocating a certain amount of money to different people and treating it as the price of experience. "If it's not going to cost the company more than that, I let them figure it out for themselves."
That hands-off approach is particularly important for family successors. "The toughest part is that being a parent gets in the way," Trellis says. "For succession to take place properly, there has got to be a willingness to treat the child as an adult."
As for Ted Bosgraaf, he's been happy to do that with his son and daughter, even when customers haven't. When clients come to him with questions or concerns, seeking a higher authority, he sends them to the Bosgraafs in charge. "You'll have to talk to Mike and Amy," he says, "because I just work here."
Builder families and consultants share their thoughts on family business planning.
* Get your company valued annually. "That way if [a buyout provision] ever gets activated by death or default, the company's valuation is not a big battle."--Mike Bosgraaf, Bosgraaf Builders
* "Don't let wacky ideas drive the scenario ... not that [worst-case situations involving your child's ability to run the business] aren't legitimate concerns, but you have to be able to sit there and say, 'I'm not worried about that.' I'm not going to structure some succession deal on some contingencies I think are outrageous."--John Thompson, Thompson Homes
* "Separate being fair as a parent versus being smart in business. There's a misconception that in order to be fair, I have to give equal shares of the business to my heirs."--Leslie Dashew, Human Side of Enterprise
* "Make sure everyone is involved, including the in-laws. You can't keep people out, because that's when conflicts arise."--Julie Bradbury, Colony Homes
* "Keep emotion out of [the succession process]--or, the one emotion to keep in there is the love of your family."--Amy (Bosgraaf) Alderink, Bosgraaf Builders
Curious to see how your family business stacks up? According to the 2002 MassMutual Financial Group/Raymond Institute American Family Business Survey, the average revenue of a family-owned business is $36.5 million. Family companies employ a median number of 47 employees, and the most popular years for founding a family-owned company are 1946 and 1980, based on the survey.
Here's a few more of the survey's findings on family businesses:
* 60 percent do not have a strategic plan.
* 39 percent expect to change leadership within five years.
* 40 percent have named a successor.
* 14 percent have had non-family CEOs lead the business. Of those, 31 percent say the experience was "extremely successful."
* 88 percent expect their family to still control the business in the five years.
* 29 percent say ownership of the business will be divided equally; 22 percent say it will go to family members contributing most to the business.
* 14 percent say their biggest challenge is domestic competition, followed closely by management strength (13 percent).
* 61 percent are very optimistic about their company's future.