The Secret to Succession
Succession plans are critical for every retailer who is hoping to pass their business on to the next generation
published in Paint and Decorating Retailer Magazine
Ben Jenkins, general manager of Bennett’s Paint, in Logan, Utah, is the fifth generation of his family to prepare to lead the company since 1912. The 33-year-old studied business administration at Utah State University, then took on the ordering and accounting at the store as he gained experience, following in the footsteps of his father, Greg; his grandfather, Lowell; his great-grandfather, Charlie; and his great-great-grandfather, David.
Ben is learning the ropes from his dad and his aunt, Martha Rose, stepping up as the company grows. It’s a system that has worked for more than a century.
“There have always been one or two family members involved,” said Greg. “That’s probably one of the reasons we’ve lasted over 100 years. [We’re not only a business] but also a family, so you have a lot more at stake, a lot more invested into it.”
It works when the next generation is eager to step up to the plate. But the transition isn’t always so successful. Consider the story of Jerry Chautin, a SCORE volunteer business mentor and former small-business owner in Atlanta.
“One of my own personal failings is not having a solid, written succession plan in place when I exited my business,” he said. “Even though my daughter worked part-time at my commercial mortgage company while she was in high school, she opted to work at a dude ranch in Colorado after graduating from college. That squashed the unwritten succession plan that I had in mind.”
Chautin’s outcome is the more common one. The Family Business Institute says that only 30 percent of family businesses survive into the second generation. Only about 3 percent of all family businesses operate into the fourth generation or beyond. Family business failures can often be traced to one factor: a lack of succession planning.
Succession planning is the intentional and successful transition of the ownership and management of the business, explained John Barce, a partner at Fort Wayne, Ind.-based law firm Barrett & McNagny, LLP, and an attorney who helps family businesses develop succession plans. And a plan should be started sooner rather than later.
“When a business owner delays this process, it is inevitable that others affected by the business develop expectations regarding their role in relation to the business,” said Barce. “If the process starts too late, the business owner could discover there are a lot of frustrated people who developed expectations about the succession of the business simply because the process wasn’t started earlier. The business owners should approach the succession-planning process as a real opportunity to defuse this type of angst and build a team that is informed about their role in the succession plan.”
The person with frustrated expectations just might be the business owner. “Many small retail store owners educate their kids, hoping that they will bring sophistication back into the family business,” says Chautin. “Instead, their children become doctors or lawyers and want nothing to do with the family business. Moreover, the parent had not planned for other choices.”
That’s not the only unexpected outcome, said Chautin. A store owner could have a business partner. If the owner unexpectedly dies or becomes chronically ill, his or her spouse could inherit the business, in which case the surviving partner would have the unqualified spouse as a half-owner. The newcomer may bring little value to the business and may even cause its failure.
Even if there isn’t a partner involved, the business may fold because key employees don’t have the financial wherewithal to buy out the widowed survivor.
“Key person life insurance can provide the funds to buy out the surviving spouse and place the new ownership in the hands of the remaining partner or a key employee who wants to buy the business,” said Chautin. “Disability insurance can do the same thing if the insured owner becomes chronically ill and is no longer able to work in the business.
“In addition to needing an experienced insurance agent to write the best insurance policies, the retail business owner needs a good business lawyer to craft a buy-sell agreement,” said Chautin. “It is the glue that pulls together the insurance proceeds and the transition to the new ownership. It spells out the specifics about how it will happen.”
The succession-plan process—and it is a process, typically lasting six to 12 months—is different for everyone. But Barce identified four groups that are typically involved: senior-generation family members directly involved in the business, junior-generation family members directly involved in the business, key non-family management and family members not directly involved in the business.
All of these are part of the impending transition for Andreina Zuccaro, whose family owns and manages four stores in the Miami area. Zuccaro runs one of them, Sunny South Design Studio, in Coral Gables. Her sister, her father and other family members also are involved in the business.
The family business began in Venezuela more than 55 years ago, when her grandfather, Antonio Zuccaro, launched La Tienda del Pintor. It grew into a chain of more than 150 paint retail stores throughout Venezuela. In 1985, her grandfather and his four children founded Pinturas Flamuko, a paint manufacturing plant in Valencia, Venezuela. When her grandfather passed away, he left the business to his children: Camillo, Paolo, Arnaldo and Manuela.
All four decided to venture to the United States in 1992, opening their first retail store in Miami. Andreina’s father, Arnaldo Zuccaro, has been growing the U.S. business since then, which now includes five stores in Florida.
“There hasn’t been quite a complete transition in our case,” said Andreina. “At this moment in time, my father sets the business course and strategy, which we as a team execute. The way my sister and I have learned the business definitely goes back to when we were little girls. We have always been exposed to the paint and decorating business model in our family meetings, company training, informal communication, et cetera. In addition to our professional development—[my sister] Alejandra has a degree in business administration, and I have a degree in industrial engineering—we both worked in the retail and manufacturing aspects of the family business.”
Besides receiving instruction from their father, Andreina and Alejandra are learning from Benjamin Moore and other manufacturers. And business controller Philip Bourgi is key to the process, said Andreina. “He worked in the business even before my father acquired it back in 1992. He is more than a consultant to all of us when it comes to the accounting and administrative aspects of the business.”
All will need to be considered in a succession plan. “The most effective plans begin with the identification and communication of each affected person’s desires for the business, and the development of primary objectives to be accomplished by the succession plan,” said Barce. He asks his clients a number of questions. For example, what are the senior generation’s long-term liquidity needs, and how willing and able is the junior generation to manage the business?
Often it will become obvious that not everyone’s desires can be incorporated into the final succession plan. So Barce works with the participants to develop consensus around a shorter list of primary objectives.
There are many tools available to help the business accomplish its succession-planning objectives, said Barce, typically designed to address four principal issues: governance/control, retaining key management, distribution/income planning and tax efficiency. The final succession plan involves selecting a combination of the tools that best accomplish the primary objectives—and then executing it.
“The development of a succession plan can be one of the most significant, positive and productive exercises undertaken by a family-owned business,” said Barce. “In that way, the business continues as a going concern and the legacy of the founder remains intact.”
That’s a high priority for Greg Jenkins. “I think the toughest thing would be to put in all these years of work and not have someone who would have that same sense of commitment,” he said. “It would be hard to [sell the business] and see it go downhill. I realize that’s a reality in a lot of businesses, but that’s tough.”
So will Ben Jenkins train a sixth generation at Bennett’s Paint? “He has five children,” said Greg. “I think definitely one of those would be the next. Looking down the road, it’s hard to predict, but that’s the way we would hope it would happen.”
Only 30 percent of family businesses survive into the second generation. About 3 percent operate into the fourth generation or beyond.
—The Family Business Institute
Six Things You Should Consider in a Succession Plan
- What are the senior generation’s long-term liquidity needs?
- How willing and able is the junior generation to manage the business?
- How do the estate plans of family members incorporate and accommodate the succession plan?
- How are family relationships facilitated and fairness maintained by the succession plan?
- How is meaningful participation by non-family managers ensured?
- Is the succession plan income, gift and estate tax–friendly?
Source: John Barce, an attorney and partner at Fort Wayne, Ind.-based law firm Barrett & McNagny
Writer Bio: Julianne Will is a marketing consultant specializing in social media. A former advertising executive, she has crafted and managed social media plans for a wide range of businesses and business owners, including retailers.