Family Business in Crisis: Letting Go

Only one in three family-owned businesses survive into the second generation, and just one in eight into the third. The reasons? Problems transferring business control from the older generation to children or relatives, business experts tell JCK.

” ‘Letting go’ is without a doubt the most difficult issue in family business operations,” says Paul Karofsky, director of the Center for Family Business at Northeastern University in Dedham, Mass. It’s an issue Genovese Jewelers, a successful family business in St. Louis, has faced. Here’s how the owner and his son dealt with it, along with advice from family business experts on the best ways to handle the process.

From the day he opened his store in 1980, Michael Genovese, 57, expected son Joseph, now 32, to come into and eventually take over the business. Joe started working there part time while still in junior high, engraving and polishing. “Dad offered me a job, and I jumped at it,” he recalls. He did repairs, made jewelry, and worked in sales. “He worked hard and did the dirtiest jobs” as he learned the business from the bottom up, says Mike.

The experts say: “Within two to five years of starting the company, a business owner should have a succession plan, so he knows where he’s headed and can start grooming [a replacement],” says financial planner Carol Akright, who writes about family business succession. Dr. Dean Fowler, a family business consultant, notes, however, that too many family-owned businesses hire and promote relatives for “family” reasons, rather than using professional criteria of skill and performance, and this can create transition problems later.

After graduating from college, Joe returned to the store, although Mike had urged him to first “get some different experiences working in another job.”

The experts say: Most jewelers’ children go right into the family business. But “without outside experience,” says Dr. Leon Danco, president of the Center for Family Business in Cleveland, “the only exposure to business [the owner’s child] has is what he knows about his own family business.” Outside experience “is important for the younger generation,” says Karofsky, “so that they know how to succeed in business, and what creates a successful business other than theirs, in case something happens to their own.”

Back in the store, Joe was soon out-selling the other salespeople. Mike also began gradually training him in management duties—i.e., buying, working with vendors, personnel duties (like hiring and firing), financial matters, and managing the sales staff—as he groomed him to lead the business. “I never had a written [transition] plan,” says Mike, “but in my mind I planned this from the time he was a kid working here.”

The experts say: Transfer of a family business should be gradual, starting three to five years before an owner lets go completely, says Akright. “That gives time to be sure he has the right successor and for staff, suppliers, and clients to feel comfortable with it.” Sudden transitions are less successful than gradual ones, notes Karofsky: “Transition over a few years lets the senior generation gradually let go, while giving the younger one time to assume the reins.”

Fowler says, “A clearly written plan, with performance criteria, differentiation of roles [of the owner and successor], and how the successor takes over [management duties] prevents confusion.” It should address family dynamics (relatives’ involvement in the business), management development (performance, compensating the owner), business development (the strategic plan), and ownership (Will the next generation buy the business or inherit it on their parents’ death?).

Karofsky also suggests a “Career Tracking Plan” be drafted jointly by the owner and would-be successor. “Both sides decide what the younger one will do and when, and [outline] the knowledge, skills, training, and experience needed to run and take over the business,” he says. “Both then know what’s expected, and how to assess the budding leader’s performance.”

Six years ago, Mike had a serious heart attack. With his father incapacitated by bypass surgery and months of recovery, Joe—then 26—began running the business, helped by his cousin Richard, the store’s manager, and Bill Wright, the store’s chief financial officer, who continued Joe’s management training.

While recuperating, Mike made a conscious decision to “let Joe take over.” “He needed to slow down,” says Joe, “and I felt I was ready to take over the business.” So, his father “just stepped away, and let me run it,” he recalls.

The experts say: Transferring control of a family business should occur by the time a successor is between 35 and 45, and the owner in his or her 60s. “By 35, a competent successor has worked there several years and is ready to lead,” says Fowler. “However, tension rises in many family businesses then, because parents aren’t ready to let go.”

Mike was out of the business for more than a year. When he returned, Joe was now boss, though not yet owner. That led to what both call “serious head-butting” over how the store should be run.

“Joe has a different way of doing things. That’s understandable,” notes Mike. “But I felt he didn’t converse with me [about the store] as much as he should and made unilateral decisions without asking what I thought. I was [the store’s] ‘dictator’ for 20 years, and now I had someone working for me who wasn’t conversing with me. I got angry with him, and he with me.”

“It’s tough having two kings,” says Joe. “It was confusing for us, and for the staff.” However, Mike notes, he never challenged a decision by Joe in front of the staff.

“The biggest disagreements concerned suppliers,” recalls Joe, especially his decisions to drop some old-timers. “Dad bought from them for years and had personal relationships with them. But I didn’t, and for various reasons, I didn’t think it beneficial to the business to continue buying from them.”

Despite their arguments, Mike and Joe were determined, in Joe’s words, “to keep our relationship amicable.” They learned from an acquaintance of Mike’s, a car dealer who also brought his son into the business. Those two argued constantly, even getting into fistfights, damaging both their business and personal relationships. “We didn’t want that to happen to us,” says Joe.

So he and his father began meeting weekly for lunch at a local restaurant to discuss the business. “It had to be outside the store,” says Mike, “because there’s too much there every day to distract us.” At the meetings, Joe tells his father what he’s planning and why, and Mike offers advice and comments based on his experience.

“I completely understand he wants to be kept in the loop,” says Joe. “After all, this [business] is his baby.”

They also work hard to keep their business and personal lives separate. “We go golfing and hunting, and the conversations aren’t about work,” says Joe.

The experts say: “It’s important to maintain dialogue,” says Karofsky. “If dad still owns the business, the son should listen to him, and if dad expects the son to take over, he should listen to what [the son] has to say.”

Unrestricted transfer of business information also is essential. “There’s power in information,” says Danco, who notes many business owners “hold back useful information as a way of keeping power. So, a child has to be responsible for getting the facts he needs, and a father really has to give them.” Karofsky urges parent-owners to “hyper-inform”—give their children-successors far more information about the business than expected. “That gives the young person greater awareness of what’s going on in [the business], and the more information they get, the more they feel they share power in running it with their parents.”

Though semi-retired, Mike remains active in the store, performing tasks separate from running it, but contributing to its success. The biggest was overseeing creation of the new store, a longtime dream of father and son. Once they chose the property (on a busy highway), “We agreed Dad would build the building, and I would run the business,” says Joe. “It was the smartest decision we made.”

Joe “focused 100% on the business,” while Mike steered the project through design, municipal planning and zoning, and legal requirements. When construction began, he was at the site daily to ensure plans were followed and to deal with problems. Today, the 21,000-sq.-ft. Genovese Jewelers store (which opened in late 2001) boasts a 4,000-sq.-ft. showroom, an interior design combining Old World charm with modern elegance, a staff of 30 (up from 19 in the old store), and 2002 sales that were 30% over 2001 figures.

Mike also has his own clients (both longtime customers and new ones he seeks out), represents the business at local events, and greets store customers when he’s there. “I still spend lots of time [in the store],” he says, “but refer any questions about running it—whether from employees, vendors, or customers—to Joe. There can only be one boss.”

The experts say: An owner-parent should have a retirement plan for when he’ll retire, how prepared he is for it, and what he’ll do after retirement, says Akright. “He needs to think about what he’ll do when he’s no longer in the store, such as traveling, visiting grandchildren, or community work.”

However, “many older people love what they do, and want to keep doing it as long as possible,” notes Karofsky. So, if an owner doesn’t expect to retire immediately, says Akright, “the transition plan must make clear what Dad’s role is” in the company. “Father may be a great diamond buyer and can ensure the store has an adequate supply of diamonds,” says Danco. A retired owner can be a consultant, says Fowler, or the store’s “ambassador.” Whatever the senior does, he should remain in that role and not second-guess the children’s decisions, says Korofsky. “There has to be a clear understanding of the roles each side plays after the change,” notes Danco.

Mike and Joe have made sure that documents defining transfer of the business are now in place. Shortly after Mike’s heart attack, legal papers were drawn up specifying Joe as president and his cousin Richard as vice president. There also is a written plan defining “what happens with everything,” says Mike, including succession, insurance, assets, the building, and a timetable for transfer of legal ownership to Joe. (Mike, who is still sole owner, recently transferred 49% ownership to Joe.)

The experts say: “Transfer of leadership is separate from the transfer of ownership,” notes Karofsky. “The younger generation can run the business, while Mom and Dad still own it,” he notes, “but a plan should be in place on how, to whom, and when ownership will be transferred, so young people feel empowered.” Traditionally, for tax reasons, ownership is transferred on the owner’s death. But with people now living into their 80s and 90s, that can cause confusion over who controls a business, notes Fowler. He advises family business owners to transfer voting control and business ownership during the parents’ lifetime.

Mike’s financial situation in retirement also has been clarified. He will “always get a salary, plus income from the building and property, which he owns,” says Joe. (The business is the legal tenant.) Mike’s estate planning also has earmarked a cash settlement for Joe’s sister, who isn’t involved in the business.

The experts say: It’s important to clarify a retiring owner’s financial status. “He or she should be as financially independent of the business as possible,” says Korofsky. If not, “he’ll constantly second-guess the younger generation, and pressure them. He should have sufficient assets outside the business, such as revenue from property where the store is located, [and] retirement savings.”

Also, Akright cautions, specify in writing what interest any non-participating relatives have in the business. Do they own shares, have voting rights, or share in profits? Unless such matters are clarified, they can become bones of contention among siblings.

Today, both Genoveses are pleased with how the transfer of the business is going. While there are “still times when we get upset with each other, it’s a wonderful transition,” says Joe. “We’re fortunate it’s such a success.”

“Joe runs this business now,” says Mike. “He’s doing a good job, and doing it right. It makes me feel good.”