Dad, When are you Going to Let Go?
PROFIT – October 1991
Managing the transition from one generation to another is a complex matter of timing, testing, marketing and motivation. Here's how some families are beating the odds.
To keep the family name alive in the printing business, Lawrence Pollard, president of Winnipeg-based Pollard Banknote Ltd., mortgaged everything he owned. He borrowed $5 million in 1985 to acquire the technology needed to turn his 77-year-old printing house into a lottery ticket printer. Gambling on this new niche, he hoped, would not only bolster the firm's chances of survival. but pique the interest of his two eldest sons – John, 30, then in accounting, and Gord, 32, a corporate lawyer. "Young people," mused Pollard, then 56, "like to go where there's growth."
Pollard's gamble – and his insight into youthful ambition – paid off. John and Gord came back to bolster what is now a $35-million international "scratch and win" business. And Lawrence has a satisfaction shared by few principals of family businesses: knowing the company founded by his grandfather will carry on into the fourth generation.
"Successful transitions between generations don't just happen overnight." notes family business consultant Aron Pervin, who heads Toronto-based Pervin & Co. Inc. A successful transition is a combination of salesmanship and tough love. "Owner/managers have to consider both the 'soft' topics, like handing down a sense of stewardship and pride in the business, as well as the 'hard' topics such as estate planning."
It's never easy deciding ownership splits, share transfers, who can join and who can't, how to escalate heirs' responsibilities, and when to hand over the reins. Mistakes can saddle the company with warring siblings, bickering spouses, or uninterested, ill-prepared or incompetent heirs whose gripes may eventually sink the business. In truth, says Pervin, most families blunder into "animosities and dissension that can complicate a family business in ways that make 'Dallas' seem boring."
The failure rate for family business successions is astoundingly high. According to Pervin, 70% are either liquidated or sold after the founder bows out; only 13% pass to the third generation. This "heir today, gone tomorrow" syndrome affects a huge part of the Canadian economy. Family firms represent 70% to 90% of businesses in Canada. and one-third of the Canadian Business 500; they employ more than 60% of the Canadian work force and pay out half the nations total wages. Headline-grabbing squabbles at such successful family-owned businesses as Birk's Jewellers and Canadian Tire demonstrate the tricky nature of handing down a family business. As Lawrence Pollard discovered, it involves a precarious balancing act. You need to provide challenges and responsibility, yet not too much, too soon.
Lawrence joined Pollard Banknote at his father's invitation in 1947 and worked alongside his older twin brothers. The company prospered as a printer of advertisements and stationery, and Pollard bought out his brothers in 1984. But his own sons did not consider the staid printing company an automatic career choice. John, now vice-president of finance, says family loyalty didn't figure highly in the equation: "If it was going to continue as the same old commercial printer, I would not be here."
Pollard says his sons have been instrumental to the growth of the business. John, who came on board in 1984 helped allay the bank's fears over its investment when the new equipment proved difficult to master and production lagged. "I gave the best accounting I could to the bank, but they didn't take a marketer and entrepreneur seriously," Lawrence says. "John was able to make them a little happier because he talks their language." Gord, who joined in 1987 and is now vice-president of marketing, put his legal training to use drafting government bids. His ability to deal with 200-page proposals and complex contracts helped land government lottery jobs. With John and Gord's skills, sales have surged from less than $5 million in 1984 to $35 million in 1990.
To plan an orderly succession, Pollard drew up a detailed estate plan last year with his accountant. A heart attack he suffered in the first year of hectic changes helped him realize he couldn't take the future for granted: "My heart condition made me focus on my estate planning more. I wanted to have the terms as current as possible in the event of my demise." Pollard's forced agenda is common among business owners. According to Pervin, many owners are reluctant to plan for the disposal of their business after their death. "Until illness or age forces them to do it, they think they're immortal."
The cardinal rule of Pollard's estate plan states only family members who work in the business may share in its spoils. That will leave out his two daughters, who chose not to work in the firm, and possibly a third son, Douglas, who is still in university. That condition improves the odds of company survival says Pollard, because control passes to those who prove they're interested in running it. The children not involved in the family firm will inherit non-business assets. Pollard's estate plan gathers all common shares in a trust to be divided evenly among active members after his death. Pollard may divest some shares in the next few years to reward John and Gord, but says he wants to maintain control – at least 51% – until he retires.
Pollard also wants to keep enough shares to pass to 20-year-old Douglas, should he join the firm later. But this shows the difficulty of covering all contingencies. If he dies before Douglas enters the company, Douglas won't inherit any shares. "If John and Gord shut him out," Pollard says, "Douglas is out of luck." He doesn't want to interfere with the intent of his estate plan.
Last year, Lawrence Pollard got a preview of his sons' decision-making powers when they flatly told him he wasn't up to the day-to-day grind as chief operating officer. "We told him he was too slow. Our senior managers work 60-hour weeks," says John Pollard. "We had to ask ourselves if our father at 63 had that kind of energy." Pollard willingly vacated the post in favor of a 30-year-old non-family professional manager. Being outpaced by a thriving business, he figures, is probably the best way to exit. For the past year, Pollard has been happy being strictly "the overseer" and is even going to let his heirs "figure out for themselves who should be the next president."
Those who aren't ready to bow out when the next generation is anxious to take over could take a tip from carpenter Helmut Hinteregger, 48, and wife Helen, 47, a bookkeeper. In 1969 they founded Concept Developments Ltd., an Edmonton-based builder of custom homes and number 38 on Profit's 1991 Fastest 50 list. Their two sons helped with odd jobs on construction sites since they were kids, but Rick, business-administration graduate, finally joined in 1984 and son David, 23, a building engineering graduate, signed on in 1998. Over the past two years, "the boys", as Helmut calls them, proved their mettle when they re-costed for healthier margins and strengthened their roster of contractors by 40% to tackle more homes at once than their parents had ever dared. Rick, as general manager, David as construction manager, have helped boost sales from $1.6 million in 1985 to $8.8 million in 1990.
Their ambition is not in question. "Sometimes," says Hinteregger, "they'd say 'Dad, when are you going to let go? We've got it under control.'" To recognize their sons' abilities, the Hintereggers gave them each 20% of the company last January. That, says Pervin, is a move that must be carefully planned. "Giving the kids a part of the company before they take control helps keep them interested he notes." But they have to have earned it. It's not a good idea to transfer all the ownership or management abruptly because the children need the mode of mom or dad to guide them."
Helmut and Helen realized it time to loosen their grip after 22 years' hard labor, but they weren't ready to retire. Their accountant had the answer: a share buy-out and land-inventory transfer scheme that will give the sons control of Concept Homes in four years while providing the parents with seasonal work and a retirement nest egg. To do this, the accountant determines the value of the company's fixed assets at the end of each fiscal year. The company pays dividends based on the increase in asset values over the previous year. Each son will use dividends, salary and pre-tax bonuses to chase the remaining 60% of the firm.
To make letting go a little easier, the elder Hintereggers plan a new enterprise of their own that will also ease Rick and David through the transition. While the sons are busy building homes, the senior Hintereggers will be buying and developing residential land. Concept Developments' land and retained earnings will be moved to the parents' new enterprise, Concept Realty Ltd. In warm-weather months, Helmut and Helen will develop water and power lines on lots they will then sell to their sons.
"To save the boys from going into heavy debt, we may forego complete pay-off at once," says Hinteregger. "But we'll take a portion of the future profits on the lots. In effect, we'll be their banker." He's proud that his sons won't have the same start-up woes he had. "When I started out, I didn't have that advantage. I mortgaged my home to raise capital."
For all the Hintereggers' planning, however, they recognize that resolving some problems will depend on good family relations. For instance, Rick and David will share Concept Developments 50-50, and Helmut hesitates to nominate a clear successor as boss. "My wife and I have always worked by consensus and there's no reason why the boys can't operate the same way." Rick Hinteregger agrees: "We never label things 'mine' and 'yours'. Family business is like a marriage."
But at least one expert is not so sure. "I don't know of any growth company that has worked con sensually for a long time," says Gordon Sharwood, president of Sharwood & Co. in Toronto and honorary chairman of the Canadian Association of Family Enterprise. "It's important to acknowledge all members' viewpoints for a family business to work, but the buck has to stop at one person who can make decisions when something goes wrong. You've got to pick a leader." Often, he says, founders have no problems passing on ownership; they usually divide shares equally. But when it comes to picking a successor, he notes, they shy away from making their selection because they hate to abdicate authority and want to avoid family resentments.
Like the Pollards, Jim Macdonald, 75, former president and minority share-holder in Nova Scotia Textiles Ltd., in Windsor, N.S., would add "interest in the business" to the top of the list when selecting an heir. When he was scanning for a successor in 1980, his gaze kept returning to this only child. Edward, a business graduate and corporate lawyer, then 30, was looking for a career change. Fortunately, years of listening to his father talk shop at the dinner table helped him gain an interest in textile manufacturing. When Jim Macdonald suggested Edward join the company, he says the board gave its approval readily. "We also talked with the senior executive group," he says. "They knew Ed would be my successor."
Ed was continuing in the footsteps of his father and his maternal grandfather. J.E. Mortimer, the firm's first president. He and four unrelated families formed Nova Scotia Textiles in 1922. It now makes underwear and fleecewear, including Roots brand sweatshirts, and reports 1990 sales of "slightly" below $30 million. Jim married J.E.'s daughter, Winnifred, and was groomed for the presidency.
Each original family held 20% of the company, but over the years estate splits broadened the platform of shareholders from five to 20. Nova Scotia Textiles had to narrow the widening shareholder pyramid that afflicts many family businesses because, as Jim Macdonald explains, "Unless somebody can do the decision-making, the business can't continue." In 1987, the hoard decided to restructure the company to concentrate shares in fewer hands. Ed worked out a system where he could pay for the shares over a 10-year period, giving him the time to raise the necessary funds. Almost all the inactive shareholders opted to sell, says the senior Macdonald: "I think they realized there was a lot more money than they thought."
Ed, who became president last year, says the consolidation helped convince him to take a financial stake in the firm's future. Eventually, he will own almost all the shares, but says his game plan is to build a strong management team with an equity stake in the company. Ed has no children waiting in the wings and hasn't put his mind to finding a successor just yet. Laughs Ed: "But I'm 41, not 61."
Nonetheless, advisors like Pervin say the key to a smooth succession in a family business is for owners to start planning while there's plenty of time to train and observe the next generation. He finds it ironic that most founders want their legacy to live on, yet find planning for its continuance so difficult. After all, facing the future squarely offers a very special reward. As Concept's Helmut Hinteregger says, "There's nothing like keeping it in the family."