Tag: drama

It’s not an easy process for founders to undertake after running a firm for decades. “That’s your identity,” said Morten Bennedsen, professor of family enterprise at INSEAD and the academic director of the Wendel International Centre for Family Enterprise. “So they go back to working 80 hours a week managing the firm, and no time to think about these things.” 

And what happens to succession as a result of that willful neglect?

“Too many happen by heart attack,” Bennedsen said. “If you don’t plan and if the founder doesn’t want to speak about these things, ultimately nature will make the transition, and in the worst possible way.”

His research surveying family firms suggests that founders in the U.S. and Europe have improved on succession planning, but even in these more developed markets, a surprisingly larger number still don’t have a plan in place. Among small- and medium-sized firms in Europe, roughly 40{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} of founders surveyed say they are planning to create a succession plan within 10 years, but have not done so yet, and he said the same is likely true for the U.S.

In mainland China, there are hundreds of thousands of private firms without a roadmap for succession, and with China’s population policies of the past half-century, often a lack of many children to even consider as successors.

“Planning means more than thinking about it in your head,” Bennedsen said.

Plans have to be communicated to family members, especially those who expect to be successors, and to the board of directors.

This is a process that Delaware-based Nixon Medical got right. Founded by Murray Berstein in 1967, it remains a family business with a high rate of growth. In 1997, the company, which provides medical apparel and linens, had revenue of $9 million-$10 million. By 2007, as Murray was transitioning out of the business, the firm had grown to $20 million in annual revenue. Now annual revenue is north of $80 million as it has expanded from the mid-Atlantic and three locations to 10 locations now serving the mid-Atlantic, New England and Texas.

Jason Berstein, the company’s current president and one of Murray’s three sons now in executive management, attributed the success, at least in part, to his father’s willingness early on to develop a high-level succession and ownership plan, and contemplate a life for himself after giving up control of the company. “My dad remains passionate even with no ownership interest or leadership,” Berstein said. “It was really hard for him to let go, but he knew it was right thing to do for us.”

Nixon Medical mapped out how the process would work, but did not make the decision on who would be chosen leader until it needed to be made in late 2006 before their father transitioned away from day-to-day leadership in 2007.

The three Berstein brothers, as well as a family business consultant, were part of that plan in their 20s and all retain roles in the company suited to their skill sets. “Unless you knew we were brothers, you would just think we’re three executives,” Berstein said.

“One benefit of being in front of stuff in terms of succession issues is if you can make these decisions on how things will work without an immediate decision, if it is all forward looking and not emotionally charged, everyone understands how things work and it results in a much smoother outcome then when it needs to be an emergency,” he said.

Their father also began transferring ownership of the company to his children, a process that Berstein believes is important for family firms so the new leadership can run the operations financially independent of the founder.

“He doesn’t have to worry about it, it doesn’t impact him financially, but he cares about it because it’s his fourth child, or maybe first child, and we were the next three,” he said. 

Nixon Medical had one key advantage in addition to a founder who was ready to take action on succession: the children wanted to lead the company. A lot has changed in society since the 1970s and 1980s when it was an expectation if not a duty for the next generation to take over a family firm.

“You cannot force kids in the U.S. or Europe to take over the business. The next generation says no more often,” said Bennedsen. “It’s not very popular among peers, going back to mom and dad. Everyone wants to be Steve Jobs today and create something on their own.”

If no family member is available as a leadership candidate, “Take the money and give it to the kids rather than saddling them with something they don’t want to do,” said Jennifer Pendergast, executive director of the John L Ward Center for Family Enterprises at Northwestern University’s Kellogg School of Management.

For family firms where children are interested in taking over, an apprenticeship model to groom successors is important because there are idiosyncratic aspects to running a family firm and operational reasons for in-house grooming. The network the founder has developed in business and politics is easier to transfer within a family than to a “McKinsey type,” Bennedsen said. “It’s important the next generation has those idiosyncratic skills to be successful,” he said. “The more you expose them to the firm, the more it is maybe an option.”

Ionnie McNeill’s mother Ann, who founded MCO Construction and was the first African-American woman to found a general construction firm in the state of Florida, shared her entrepreneurial life with her two daughters throughout their childhoods. “I got work experience and exposure to the business and entrepreneurship the way most children do not,” McNeill said. “I went to school and then went back to the office with my mom, did homework in the car, helped to sort mail.”

But the best successions within a family are more likely when a next-generation leader has a CV that includes an external education and leadership experience outside the family firm. “If you want to give the company to the next generation, it’s very important to have a balance of family assets and the ones professional CEOs share, and that is often what is missing,” Bennedsen said. “If you don’t have your own skills you are in a weak position … if all you can do is what your parents have told you.” 

First-generation wealth creators possess a skill set that is often different than what their children possess.

“It doesn’t mean they are not as bright,” said Michael Sonnenfeldt, founder of Tiger 21, an investing and professional networking organization for business founders. “They’re just children who grew up with all the benefits that their parents didn’t have and so it’s not the natural order to think children of great entrepreneurs can match the entrepreneurial skills of their parents. It happens sometimes, but it is the exception to the rule.”

“So many people work so hard to build businesses and want to give kids the opportunities they may create for themselves. Passing on a business can be like a lead weight around the neck, not in every case, but the general notion that it’s very hard to pass operating companies to the next generation is substantially correct,” he said.

That is one reason he says most Tiger 21 members have sold their companies or taken the companies public, believing the value they created and can pass on to children is better preserved in the proceeds of a sale than in the business itself.

There are exceptions, such as real estate or natural resources, which maintain value better than operating companies. “But operating companies, unless the very best, the next guy who starts a competitor will put you out of business. It’s simply less likely the next generation will have the skills of founders in operating companies. When the only assets are the people it’s harder to keep up with competition,” Sonnenfeldt said.

Nixon Medical will face the same challenge again in the future, and Berstein, 49, said he is now thinking about how challenging the transition from generation two to generation three of his family will be. The brothers have yet to decide if the firm will remain under family leaders for a third generation.

“If you go back in time for us, at least, the business was much more manageable in size,” Berstein said. If the firm continues to be successful, finding a qualified person within the family to lead will be even more difficult. “You have to be all-in,” he said. 

“I have plenty of runway left, but one thing we decided was whoever is the leader, it is not guaranteed for life,” Berstein said. “It depends on performance and we set up the independent board to manage my performance and set my compensation.”

Challenges Bernstein and his siblings will face include the fact that not all have the same number of children, diluting ownership, and not all of those children (nine in all) will want to work in the family business. “We don’t expect the majority, we expect the minority to work in the business,” he said.

But the plan is the same as what their father laid out for them: to not wait until it is too late to put the leadership succession and ownership transition process in place, when it might be harder to give it up.

McNeill said her older sister, 12 years her senior, was intended to be the next generation leader at MCO Construction based on business plans from the 1990s, but her sister wasn’t the right person for the job. “She would leave and come back and leave and come back and my mom didn’t think she could handle the business,” McNeill said,

That led her to become the likely successor, but over the past six years, “I did this merry-go-round,” she said.

“When it came down to the succession plan and saying ‘Hey, mom can you do one?’ I quickly had to realize my mother also is a person and in that realization, I had to honestly look at her stress and her weaknesses and quickly came to see she was never going to give it up,” McNeill said. “For two to three years I had been like, ‘Hey, we need to do this.’ The amount of energy I was spending trying to get her to do a succession plan, I realized I should do one for myself, and I exited the business.”

Once she was able to see clearly, McNeill also was able to verbalize her realizations to her mother and instead of the relationship suffering, they renegotiated how to have a mother-daughter relationship without the business. That didn’t happen without hesitation. “She was always like, ‘I support you,’ but I don’t think she really believed I would do it.”

McNeill says she worried her mother might spurn her if she left regardless of what her mother said, and some of the questions swirling around in her head led to feelings of shame, such as, “Will you still love me if I left?” but she says getting it all out into the open was important.

“I am paying for therapy so I do have to get my money’s worth,” she said. “The next generation needs to be okay with saying, ‘It’s not a family business, it’s your business.”

For second-generation family members, a sense of obligation should not be the reason to lead a family firm, Pendergast said. “‘Lucking out’ is not necessarily something everyone would want.”

“People who found businesses often can’t let go, and have tough personalities. How fun is that? If they second guess every decision. You still have Thanksgiving and Christmas and do you really want it to be all about the business?” she added.

McNeill’s relationship with her mother is different now, but it isn’t broken. They have been co-hosting a podcast called #MyInvestingStory, and she has dinner with both of her parents every night. “We don’t talk about the business unless she has some exciting news to share,” she said.

“Family businesses get a lot of bad publicity,” Berstein said. “People say ‘Oh my god, it sounds like a nightmare, and you hear about all the tragedies. The reality is there are a lot that are fantastic places to work and are run professionally and are great for the economy.”

More divorces and multiple sets of kids are part of a family structure that is changing and which will add to an already complicated natural succession planning process for multiple-generation firms. But demographic and cultural mega trends may be good thing, as many of the family successions that do take place should never have been completed. The vast majority of private firms are family firms, and among those two-thirds have ownership transfers inside the family, while one-third are sold. That may decline to 50{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}-50{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} in the future.

“I think we will see less family succession in the future,” Bennedsen said, “but hopefully less catastrophes.”

He has seen many of those across the globe, from a Nigerian founder with multiple wives and dozens of kids and 40 companies, “which all went to pieces”; to a founder in his home country of Denmark who sold a major firm to institutional investors but then bought it back at the age of 94 and still didn’t want to talk succession with his children, holding on until he died at 99; to allegations of murder being committed over control of family fortunes.

Having watched “a few” episodes of “Succession,” Bennedsen added, “You cannot imagine what happens sometimes in family firms. But all inside one family? I am not sure.”