Keeping It in the Family


July 31, 2005

Paper Trail

Dean Herriges, CR, president of Urban Herriges & Sons Inc. in Mukwonago, Wis., is a sixth-generation remodeler, in the midst of planning to hand over the family business to the seventh generation, his three children. For him, it was important that they spend a considerable amount of time — each has worked at the company for more than 10 years — before he brought up succession about four years ago.

Brothers Dean (center) and Robert (second from left) Herriges are sixth-generation contractors and third-generation owners of Urban Herriges & Sons. Dean's children, Lisa, Joseph and Julie are continuing the family tradition.  Photo by Nathan Kirkman

Putting in this time not only allowed Lisa, Julie and Joseph to master business, design and carpentry skills, but also proved to Dean Herriges that his children had the commitment required for a successful hand off.

"We do a lot of revisiting of the company's history," he says, noting that the kids have studied old ledgers, project photos and other documents. "The key is to keep a dialogue about the business. We meet formally once a month, and we always reserve time to bring up new ideas."

It's important to start preparing for succession early. Without a strategy, an illness or death can leave the business and the family floundering. Doug Dwyer, president of DreamMaker Bath & Kitchen by Worldwide, learned that lesson firsthand when his father died suddenly in 1994. Dwyer, his mother and his siblings had to sort out the Dwyer Group's numerous franchise businesses.

"My father trained us on how to get results, how to set goals, but on the financial side, he kept that pretty close," Dwyer says. "There was not a full succession plan in place, and we were very shallow on systems and infrastructure.

"Sorting all that out after he died made for a very hot, pressure-cooker environment, and it was a big disruption in our lives. It felt like all we did was work for a year and a half. I really think the more planning and thinking about succession and grooming people for the next level you can do, the better off you are."

To avoid a similar predicament and to provide a successful, strong business for generations to come, you should start making plans for succession — yesterday. Be prepared to revisit, revise and revamp every day thereafter.

"The biggest roadblock in family succession planning is that people have unclarified assumptions," says Bonnie M. Brown, Ph.D., president of Transition Dynamics Inc. Her Eugene, Ore., consulting firm specializes in organizational transitions in family businesses. "Succession needs 10 to 15 years of active work; it's not just having legal documents but assessing the competency of your family members to do the job, doing performance reviews, setting up mentoring programs, writing job descriptions.

"Human capital is the family's greatest capital, and it should be grown, developed and nurtured."

Timing is everything

Like Herriges, Jerry Podesta, CR, waited until his son, Matt, had worked in the business for a few years before talking succession. Matt Podesta, vice president of Podesta Construction in San Francisco, says that having the chance to help improve the business systems was essential to getting him excited about taking over one day.

He also points out that substantial succession planning can't begin until the older generation's estate planning is almost finalized. "I think the first step is getting your personal finances squared away," he says. "As my parents determine what they expect to live off of, that will drive my father's exit strategy."

Neal Hendy Sr. (second from left) founded his Cincinnati remodeling business in 1972. Brother Jack (third from left) works with him in sales, as do son Steve, son Neal Jr., sales associate Frank Kuhlmeier, and son Alan.

Having multiple family members join the business complicates matters further. Alan Hendy, CR, vice president of Neal's Design-Remodel in Cincinnati, works with his father, an uncle and two brothers. While establishing their own succession, Hendy and his siblings saw that planning for a third generation of siblings and cousins would be exponentially more difficult. As a result, he says, the company's succession planning focuses on establishing written standards for how family members can enter the business, expectations for their employment, and how to conduct financial transactions among relatives.

"As the business grows, you need more rules, and you have to be a little more corporate and a little less casual," Hendy says. "There are no promises. You have different personalities and talent levels; you think about what is fair and perfect. The biggest part of that is setting goals."

Integrating the new faces into your marketing and branding early on is critical to ensure recognition among customers, subcontractors and industry contacts alike.

"What happens when people call for Jud and Jud's not here anymore?" points out Jud Motsenbocker, CGR, CAPS, founder and owner of Jud Construction in Muncie, Ind. "There's an obligation to introduce my son to all faces, to all people, so clients have that confidence. That was an important part of this transition and that takes time. We've been doing it for a year and a half, and we'll continue to do it after I leave to make sure everyone has the same confidence in him that they have in me."

The power of four

An attorney, an accountant, a banker and an insurance broker: Motsenbocker says you cannot plan for succession in a family business without having four trusted advisors in these roles. He is in the process of selling his business to his son, Mike.

"You have to work with everyone, because each of these people will bring different aspects of your plan to life," he says. For example, explains Motsenbocker, his insurance agent flagged issues that his accountant would have missed. Those catches meant he and his son cut one year from the succession timeline and introduced changes over time rather than activating them all at once.

"If we would have waited and turned it over all at the same time," he says, "my son would have started as a brand-new company." And that would have cost them the real market value of a family-owned business: reputation and the family name.

Be prepared to spend around $5,000 just for fees and retainers to assemble a succession advisory team. Herriges estimates his company will end up spending between $5,000 and $10,000 to complete the succession plan. About $2,000 went toward what he dubs a "hit-and-miss trial period" early in the process.

Pay the cost to be the boss?

To sell or to gift, that is the question. Doug Reymore, CKD, CGR, CAPS, a second-generation remodeler and president of Cascade Design/Build in Seattle, bought the company from his father. However, he has seen what a quandary the financial part of succession can be for the next generation. One of his friends from college, he says, had a successful, growing business and two sons who wanted to take it over. Inheritance regulations, however, would have cost the business most of its value in taxes and left the sons without the means to buy the company.

Selling and giving both have practical and philosophical pros and cons. Both benefit from a stretched timetable, though. Consider parceling out gifts or shares over the course of a few years rather than doing one big transaction. This will limit tax liability and give you room to backtrack or speed the succession timeline if the value of the business fluctuates or plans change.

"Maintaining partial ownership as you go along protects you," Reymore says. "I think it's real important to have a realistic perspective of how long you want to stay in the business, and then once you get five or 10 years out, look at your options and give or take based on market conditions. It's also an easy way to minimize the economic impact on offspring."

Phasing out of business ownership allows time for the outgoing generation to plan retirement funding, such as retaining ownership of the office building and leasing it to the new business owners. In a buy-sell situation, it can give the younger generation the chance to borrow the purchasing money from the older generation at a below-market interest rate. This approach also prevents the transition from becoming an unsubstantiated promise the exiting generation uses to prolong giving up control.

"My kids have worked very hard for this company, so ownership is like a reward for all of their hard work," says Herriges, who co-owns the firm with his brother, Robert. Over the next few years, Dean will begin to give shares to his children. When Robert retires in five years, Dean plans to remain majority owner, but divide his brother's shares equally among the children and continue to give them his over time. "Gifting over a period of time also squelches a certain amount of misconceptions and fears they may have about ownership," he says.

Family matters

To help her clients understand the emotional complexity of a family business, Brown uses three intersecting circles: one representing family, one management, and one ownership. Then she places a MoneyPowerLove triangle in the place where the three circles intersect. "These are the greatest source areas of potential conflict," she says.

As Brad Swartz, vice president of J.J. Swartz Co. in Decatur, Ill., looks to become the fourth generation to lead the business, he and his father, Tom, have spent a lot of time reading on the subject. Some advice they've heeded, such as deciding not to split the business among multiple inheritors. "My sister and I get along great, but we decided we both shouldn't be in the business," he says.

In other areas the Swartzes have gone against the grain, such as using the same accountant and lawyer rather than each hiring his own representation. They each wrote a separate succession plan and then compared them rather than writing collaboratively.

There are an increasing number of industry-specific courses on the subject, and institutions nationwide have institutes and seminars that focus just on the family business. There also is a lot of value in asking other remodelers about their own transition experiences, which may offer as much insight about what not to do as what to do.

Most remodelers will tell you this: Protect family bonds above the process. If you aren't blessed with an easy nature and good communication skills, try implementing conflict-resolution strategies, setting up a family council to regulate communication and information flow, and looking to your consultants and advisers to solve problems before they inflict irreparable damage.

"The primary resource in a succession plan is time, and a willingness to broach subjects that are painful and emotionally charged," Brown says. "If your family relationships aren't built upon trust — if people don't trust that it's okay to talk about certain things, or they don't know how — then you risk damaging relationships and destroying your business."


Paper Trail

No matter how long you've been thinking about succession plans, they don't become real until you put them on paper. Here are a few essential documents to have:

  • Buy-Sell Agreement. The agreement should address each stockholder's estate and stipulate how stock should be passed on and whether insurance policies are necessary to help offset financial burden if a shareholder passes. Consider cross-purchase agreements, which are executed outside the business and provide an outline for how shares will be distributed or sold to multiple owners in the event one owner exits or passes.
  • Financial Statements. Include cash flow statements and balance sheets for the last three to five years.
  • Insurance Policies. Individuals' policies can give the company a liquidity boost given unforeseen circumstances. Make certain that whatever structural changes the company may undergo once ownership is transferred will not prompt your carrier to re-evaluate your coverage or consider the firm an entirely new business.
  • Job Descriptions. If the exiting generation wishes to remain active in the business, outline what each individual's role and compensation will be.
  • Non-Compete Clause. As improbable (and uncomfortable) as it may be to think a child would strike out on his or her own, a complete succession plan must address all scenarios.
  • Outlines and Summaries. Include the notes, directives, action items and solutions from all strategic planning sessions and meetings with accountants, attorneys, insurance carriers and bankers.
  • Sale, Purchase and/or Transfer Agreements and Schedules: In addition to ensuring the agreement reflects the most recent, accurate value of the business (and accounts for depreciation on items such as office equipment and work trucks), don't forget to outline directives and plans that pertain to warranty work and jobs-in-progress initiated by the exiting generation.
  • Wills and Trusts: No one wants to imagine losing a loved one, but your business cannot afford the shock of an unanticipated passing. Each family member in the business should have a comprehensive, up-to-date will.

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