“Passing the Torch”

Some frightening facts about family businesses:

• Although 80% of entrepreneurs want to pass their businesses along to the next generation, only about a third of family-owned companies survive to the second generation.
• By the third generation, the survival rate is one out of eight, and only one out of 33 will make it to the fourth generation.

What prevents these entrepreneurs from seeing sons and daughters take over? The obstacles are rarely the typical business issues, such as profitability or capital. The real problem is people.

It’s not easy for parents to objectively evaluate whether their son or daughter is really ready to move into the CEO’s chair, much less to make a decision about which one of their children is best suited to run the company. As a result, entrepreneurs often avoid the problem by making one of two mistakes:

1. Do nothing. They let the chips fall where they may.
2. Keep the decision a secret. These entrepreneurs call in their lawyers and accountants and draw up the paperwork — then hide it away without divulging the decision, leaving offspring to live with the results of an arrangement they had no part in creating.

Either alternative means that your company probably won’t survive to the second generation.

One family-owned company that has successfully made it to the third generation and is already thinking about how to involve the fourth is Juanita’s Foods Inc. in Wilmington, Calif.

Starting out as a small fish-canning operation, today Juanita’s Foods is a leading supplier of Hispanic foods. The company has sales of $40 million and employs 110.

Gina Harpur is the granddaughter of George De La Torre Sr., who founded the firm in 1946 with his nephew, Albert Guerrero. Her father, George Jr., took over in 1968 upon his father’s death. Gina was named president in July 2000, and her father stepped up to chairman.

Harpur, now 42, has two younger brothers who also work in the company, one in manufacturing and one in marketing.

Although Harpur was the most experienced of the three siblings, she was elevated to CEO only after a careful review by the company’s outside board of advisers — three senior executives of other food companies. "We wanted to be sure that we were making a decision that was right for the company and right for the family," says Harpur. "Running a business is one thing. Running a family business is a whole other thing."

Harpur and her brothers want Juanita’s Foods to continue as a family-run company. All three have young children, none of whom is yet old enough to be thinking about their careers. "We’ve already talked about the guidelines we want to follow for the next generation," she says. "It’s fine for them to take summer jobs here, but we’d want them to spend a few years working at another company before coming to work at Juanita’s Foods. We think it’s important for them to gain a broader perspective elsewhere and to bring that experience with them."

Another family business that’s beating the odds is Krusinski Construction Co. Joseph Krusinski founded the Oak Brook, Ill.-based company 28 years ago and has grown it to $60 million in revenues. He has carefully planned for succession, and although three of his four children work for Krusinski Construction, none of them will take the company reins.

Jerry Krusinski, Joe’s brother, is executive vice president and the designated successor. At 41, Jerry is 14 years younger than Joe and has been with the company for 15 years. Joe’s four children understand that Jerry is the next generation of leadership, Joe says: "Actually, I think they are somewhat relieved that they won’t have to step right into running the company, and instead will have the benefit of his tutoring them. They’ve seen at other companies that there can be real difficulties when the next generation takes over."

Obtaining perspective

To help with their succession solutions, both Krusinski Construction and Juanita’s Foods turned to nonprofit family-business advisory services. Juanita’s Foods worked with the University of Southern California’s Family Business Program, while Krusinski Construction got help from the Family Business Council at the University of Illinois at Chicago (see sidebar).

Many entrepreneurs find it difficult to communicate with their family members about the future ownership and management of the business. Communication is often easier when a formal facilitator is involved. Most people are more polite and constructive in a meeting with an outsider present.

Because entrepreneurs both own and manage their companies, they think of the two as inextricably linked and may not realize they can separate ownership succession from management succession. Yet it may be best to have the ownership of the company represented by a family council, while management reports to a board of directors.

It’s also important for parents to recognize that their children have different needs. For example, one entrepreneur left equal shares in his company, which was valued at $12 million, to his three adult children. Two worked in the company, but the third was a single mother with young children; $4 million of closely held stock was a poor investment for her. The parents would have been wiser to give her cash or other liquid assets.

Just as a psychologist can help families confront the emotional issues of succession planning, an outsider can also assist in the sometimes-difficult decision of who should move into the CEO spot. A consultant can help family members recognize their own strengths and weaknesses.

Examples: An entrepreneur’s son may be good at marketing, but doesn’t have the desire to run a company. Perhaps the best choice is to bring in a professional manager to run the company, while the son handles the marketing. Or perhaps an entrepreneur’s daughter will be an ideal CEO — in a few more years. So an interim CEO is brought in while she gets more experience.

Although succession planning typically focuses on family issues, other stakeholders must also be considered. Consider how trusted employees, who are key to your company’s success, will view your succession plan. By getting input from everyone who is involved, you’re far more likely to get buy-in.

Writer: Alexander Auerbach. E-mail: auerbach@lowe.org