Entrepreneurs are wired to create, build and run businesses. In many cases, the company’s identity may seem inseparable from the founder, whose vision has guided the company for years, through good times and bad times.
But while they may be great at running companies, many business leaders are downright lousy at planning for the day when they’re no longer in charge. Leaders often avoid even thinking about succession planning, in part because they think that they’re bulletproof.
While family businesses may wrestle with a graceful transition to the next generation, other company owners may be looking at a sale of the company as an exit strategy. Either way, industry experts agree that few business leaders begin planning soon enough.
“Finishing well isn’t something that gets taught very well from a business ownership point of view,” says Milo Arkema, partner emeritus with the Minneapolis office of Baker Tilly, an accounting and consulting firm. Arkema divides his time between doing due diligence for private equity firms looking to acquire businesses and working with clients who are preparing to sell their companies.
Many private companies have their own in-house systems for tracking sales and other financial measures that may not be in line with standard procedures, Arkema says.
“They may not be focused on measuring all the right metrics in a way that an outside buyer can understand,” he says. “The more ready you are, the more you understand your value story, the more equipped you’re going to be to get the best value.”
When the Great Recession hit, many baby boomer owners put plans to sell their businesses on hold. But now, he notes, deals are picking up again: “A lot of owners are saying now’s the time. We’re seeing a lot of activity.” Ritch Sorenson, Opus Chair in Family Business and academic director of the Family Business Center at the University of St. Thomas, suggests that family business owners start planning 10 years before the expected transition of a company.
“First-generation owners, they don’t appreciate what it takes for next-generation family members to work together. There needs to be preparation to understand the business,” Sorenson says. “Probably one of the most extreme cases occurs when the owner has not prepared the next generation and suddenly dies of a heart attack or something else.”
The Family Business Center at St. Thomas offers programs and courses for owners who are grappling with family business issues.
“Small business owners are hesitant to hire competent consultants that could help them work through this,” Sorenson says. “Research shows that there’s more conflict in the second generation of a family business. I think it’s never too early to start preparing next-generation family members to work in the business.”
The family-owned Klein Bank has been in business for more than 100 years, tracing its history back to 1907. When third-generation CEO Dan Klein was looking to retire, the bank faced a dilemma: No one in the fourth generation was yet in a position to take a leadership role at the bank.
The Klein family opted to bring in a non-family member with deep banking industry experience to be a good steward for the business.
“Their feeling has always been that this management of the bank is different than the ownership of the bank,” says Doug Hile, who was tapped as CEO in 2009. “I don’t have an ownership position in the business. They want the business to stay in the family. My objective is to run a really good banking organization.”
Hile, 62, notes that he has extensive background working with family businesses: He spent nearly 20 years working for the family of Carl Pohlad, including serving as CEO of Marquette Bank. The Chaska-based Klein Bank has assets of $1.9 billion and 21 offices, heavily concentrated in the southwest suburbs.
The three third-generation brothers are all semi-retired, but serve on the board, which is chaired by Dan Klein. Four of the seven children in the fourth generation work for the bank. Hile says it will ultimately be up to the family to select the bank’s next leader. For now, Hile’s job is to keep the bank in the best shape possible leading up to that transition. He says that the bank holds quarterly family meetings to discuss business issues.
“I can be pretty objective at this stage of my career. I’m in there to run the business the right way,” Hile says. “It’s completely owned by the Klein family; there are no other investors.”
Larry Hall started Woodbury-based Logistics Planning Services in 1987; his wife Pam joined the business in 1995.
Pam Hall says that they began working on the transition plan in 2008 and 2009, accessing outside legal and financial advisors to guide them through the process of passing shares and management of the business to their three children. The leadership transition began in 2010.
Pam Hall passed the CEO title to her daughter, Kirsten Hall, in 2012. Brothers Justin and Nate are, respectively, president and vice president of marketing and IT.
“We went through that for about three years,” says Pam Hall, of the transition process. “Everything was set up and we did our living wills and all our things that we needed to have in place.”
The company is still owned by Larry and Pam Hall, who both remain on the board of directors. The three children will start to get ownership shares in 2016.
Kirsten Hall says that the book Traction: Get a Grip on Your Business has offered guidelines for running the company. It seems to be working. Kirsten Hall says that the company’s revenue has grown from $15 million in 2010 to $60 million in 2014. The company has about 90 employees.
“We’ve continued to hire, we’ve continued to invest in technology and our people. There’s nothing magical about Traction—it’s just an operating model,” says Kirsten Hall. “Traction forces you to have quarterly targets. Every employee has an idea of what the plan is for the business.”
But she admits that she and her brothers don’t necessarily agree on everything.
“It’s a very difficult balance,” says Kirsten Hall. “We try to respect each other’s opinions. But as a leadership team we have to come into alignment on decisions that we make.”
The most important thing for the parents? Letting go.
“When the kids really started the [system] and really took hold of their roles—we really had to set a mindset of letting go,” says Pam Hall. “We kind of stay in the background and only participate as required.”
Richard Murphy Jr., CEO of Minneapolis-based Murphy Warehouse, did not start out working in the family business. Instead, he worked as a landscape architect early in his career. Murphy joined the business in 1983, working for one of the family’s trucking companies in sales.
Murphy, 62, became CEO in 1993 as the company was redefining its business model, after two family trucking companies folded amid deregulation and the tough economy of the 1980s. The third-party logistics provider was founded in 1904. Today the company has revenue in the range of $35 million to $50 million, and 225 employees, Murphy says.
Murphy is a fourth-generation family member and notes that no members of the fifth generation are yet working for the company. The business currently has 35 owners.
“We actually have a family policy if somebody in the fifth generation wants to come in, they have to go work somewhere else for a while,” Murphy says. “You have to graduate from college. You’ve got to work somewhere else for a minimum of three years. We will only bring you on board if there’s truly a spot for you.”
Murphy says that it’s important for family members to work somewhere where their name isn’t on the door.
“From my perspective, I think it’s a healthy way to do it,” says Murphy. “We do have a formal succession plan in place.”
Murphy stresses that even in a family business, it’s important to keep business and family separate. “If you were one of the kids and you came to me for a loan, I’d throw you out of my office,” Murphy says.
Tom Hubler has made a career of working with family businesses on management, conflict resolution and succession issues. Hubler says that the challenge—and opportunity—for many businesses is the intersection between family and business issues.
“From my perspective the issues of family businesses are the overlap of family and business systems. The way you create balance between these two systems is to have structure and formality,” says Hubler, founder and president of Minneapolis-based Hubler for Business Families. “Part of the way you deal with that is to have a plan.”
Hubler says there are four critical plans that family businesses dealing with succession need to establish:
1. The Ownership Plan
A plan that outlines a financial exit plan for senior executives and specifies governance. In addition to an active board of directors, Hubler notes that it’s important to have outside advisors who don’t have a vested interest in the company.
“Most entrepreneurs are irreplaceable, so you have to come up with a new system,” Hubler says.
2. The Management and Leadership Plan
This should outline planning and development for the next generation of leadership. Hubler says that this should address the criteria for family members to join the company and detail compensation plans.
3. The Business Plan
Many founders and entrepreneurs have run their businesses on pure gut instinct, he says. But that won’t work once the company passes to the second generation. “When you have multiple owners of a company, you need to have a business plan,” Hubler says.
4. The Family Plan
Family businesses need to have regular meetings—shareholder, employee and family meetings—that are “designed to deal with the overlap” between business and family issues, Hubler says.
While the economy was still reeling from the Great Recession, Massachusetts Mutual Life Insurance Co. surveyed business owners on a variety of issues, including succession.
The Business Owner Perspectives study from 2011—the most recent from Springfield, Mass.-based MassMutual—found that only 26 percent of business owners have a formal business succession plan in place.
According to the MassMutual survey, here are business owners’ plans for transition:
would leave the business to a family member
would sell the business
say they “don’t know or haven’t thought about it”
plan to leave the company to a non-related key employee
plan to leave the company to no one; partner(s) would take over
plan to leave the company to a friend
Note: The survey allowed for multiple responses so the numbers total more than 100 percent.
Burl Gilyard is the senior writer for Twin Cities Business.