Family Planning

Strategies for a prosperous succession

Back Longreads May 1, 2012 By Anne Gonzalez

When Albert and Frances Lundberg fled the Dust Bowl-ravaged cornfields of Nebraska in 1937 to settle in the greener pastures of the northern Sacramento Valley, they did so with hope for the future.

Having seen the results of soil erosion and farmers’ misuse of the land, the young couple and their four sons laid the fertile groundwork for an organic rice business that would sustain their family for generations to come.

“A lot of their experiences surviving the Dust Bowl and Depression had a big impact on how we farm our products today and how we treat the environment,” says Grant Lundberg, a third-generation owner of Lundberg Family Farms. “They also wanted a predictable and reliable source of income for their family.”

Like many families that head regional businesses, the Lundbergs face an extra layer of challenges and joys in passing an operation to the next generation while keeping a hard-won legacy and value system at the core of their corporate culture.

More than 85 percent of businesses nationwide are family owned and operated, producing about half the gross domestic product and employing half the country’s workforce, the Family Business Association reports.

As a business person ages, it’s only natural to dream of handing the reins to trustworthy loved ones, especially if the business carries the family name or has a long history and good reputation. But as romantic as it sounds, keeping it in the family can get messy, which is why only about 30 percent of family businesses make it to the second generation, and only 10 percent make it to the third, the association says.

Kurt Glassman, a Sacramento expert in family business and succession planning, says multi-generational companies must carefully plan a sound management transition as well as the transfer of capital.

The odds are against family business retention, and not all family businesses should be perpetuated. They can be cumbersome and contentious. Still, when there’s a healthy handoff, they can also produce a source of family pride and loyalty — and a marketing coup.

Family businesses, however, are under siege now more than ever. The economy is squeezing out competition, and proposed tax changes could make it even more difficult to keep a family business alive.

Glassman, co-founder and president of LeadershipOne, which designs and implements succession plans for family businesses, says such companies are the backbone of the American economy. California is home to 12,000 family businesses of 100 employees or more, he says, and interest in keeping them in the family is high. An estimated 79 percent of family business owners want to hand their business to a successive generation, and 70 percent of next-generation family or managers would like the opportunity to retain control.

Family-owned businesses that want to transfer ownership and management to the next generation face more challenges than their counterparts in the corporate world, says Kay Brooks, a Sacramento attorney specializing in family business succession.

“There’s a constant tension between wanting to operate as a business, which focuses on the bottom line for survival, and operating as a family, which prioritizes relationships,” Brooks says. “Family businesses are trying to do both, while competing with nonfamily businesses that don’t have that extra layer, that are just out for the bottom line.”

Identifying family members who want to carry on the business and giving them clear roles is the first job of a succession plan. With a limited pool of people to work with, families should establish policies for training upcoming generations and for allowing people to be hired from within and outside of the family, Brooks says.

“If you’re trying to keep a business in the family, you’re trying to hang on to the family name, so there are fewer people to choose from,” she says. “What’s the likelihood this collection of people will all come together and their skills will line up precisely with what’s needed?”

Brooks says there’s no one-size-fits-all solution to hiring and training. Some family businesses allow in-laws, and others don’t. Some allow the next generation to get a job with the family business right out of college, while others require them to work elsewhere and come back to the family business.

“You look at your management team and identify talent in the younger management level,” Brooks says. “You need to make sure they stick around. Train them consciously, incentivize them, make it worth their while to be there.”

No matter what the strategy, effective and comprehensive job training is key, Glassman says.

“If you turn over the business to the next generation without training, it’s like giving a kid a Ferrari without teaching him how to drive it,” he says.

One way to solidify a family business is by forming a family council, an organization separate from the board that represents different branches of the family tree and various generational and leadership levels, Brooks says.

“The council plans activities to keep the business and family together, hosts tours of the business or may have the matriarch or patriarch tell stories about the beginning of the business,” she says. “It helps remind the family what the company stands for and how it began.”

Scott Berger, a third-generation owner of Tony’s Fine Foods in West Sacramento, says the company doesn’t have a formal policy on hiring younger family members. His grandfather, company founder Tony Ingoglia, however, had a loose philosophy that younger people need to work elsewhere first to gain experience, then come back to the family fold.

“If you turn over the business to the next generation without training, it’s like giving a kid a Ferrari without teaching him how to drive it.”

Kurt Glassman, president, LeadershipOne

Berger says the company is forming a family council, and one of the missions of that panel would be to craft a policy overseeing family hiring practices, especially as fourth-generation family emerge as potential employees.

Jessica Lundberg, Grant’s cousin and another third-generation owner of Lundberg Family Farms, says the company adopted an internship program to expose family members as young as 14 to the expanse of jobs in the business and to see where they fit.

“This is not going to be a ‘gimme’ position,” Jessica says of family wanting to work at Lundberg. “We want you to build a career and put value in the business. I think it builds respect on both sides.”

A family business also needs to have a mechanism of governance in its succession plan, says Gina Lera, a Sacramento estate planning attorney with Downey Brand. The company should have a clear policy on the board of directors and how the older generation will play a role in the business as the next generation transitions to power.

“The focus should be on developing leaders within the business, how it’s going to be controlled and what role each member will play in shaping the business,” Lera says.

Transfer of capital and ownership also is a complex issue with family businesses. Brooks points out there are many different scenarios, and each family has to be creative in splitting the ownership.

“Say you have three kids. One may be in management, one may just be working, and one may not be involved in the business at all,” she says. “So how do you transfer ownership, how do you split shares? Evenly, between all three? Do you give more shares to the ones who are working there, or the one in management?”

Berger says his grandfather passed along stock to his four children. By the late 1990s, the company transferred stock from the second generation to the third. The company doesn’t operate like businesses that are not family owned, as money is not the only motivation in decision making, he says.

“Family businesses are different in that we want to perpetuate them, so we think more long-term,” Berger explains. “Many of us aren’t as worried about next-quarter earnings, but more like where we will be in the next generation.”

The biggest snarl in family business, however, is family dynamics.

“Sixty percent of failed family business is all about relationships — how we get along,” Glassman says.
Brooks says tension in the family and lack of transparency or firm policies can be the downfall of a family-owned business.

“They are a source of joy and pride, and can enhance the relationships of family,” she says of family companies. “But when challenges arise, they can poison the family and the business.”

Glassman knows about this toxicity first-hand. He belonged to a fourth-generation bedding manufacturer in Watts that was the victim of family infighting. After his father died, his mother argued with family members, which “ultimately forced the sale of the family business, and we sold to a large Fortune 500 corporation,” he says. “The saddest part of the story is that my mother passed away at age 54 of breast cancer, and the tumor started during this time of stress in her life.”

Glassman notes that not all companies should be kept in the family. If there is no heir apparent, family businesses should be sold, but many others just dissolve, he says, which unfortunately leads to lost jobs.
Berger says he and his brother Karl Berger, both third-generation owners, have worked well together since the two became partners.

“My brother is my best friend, and we’re a great team,” Berger says. “Sometimes it’s a lot of work and you don’t want to do it, but then when you hang in there, you’re glad, because you have something special.”

Despite the hurdles, a successful family business can inspire loyalty and a deeper sense of purpose in its owners and employees and create branding impact, says Grant Lundberg. Consumers see the Lundberg name on 250 rice products on store shelves and instantly recognize the family’s longevity and commitment to sustainable farming.

“People go into a store and see our labels and trust they are high-quality and beneficial to them and the environment,” he says. “They understand family is committed. There’s a lot of value in history and what that represents to the consumer.”

Change is in the air

If you’re hoping to pass the family business to the next generation, now may be the best time to act. Proposed tax changes could make it more difficult to perpetuate family businesses, so some tax and financial experts are advising company leaders to get a succession plan in place this year.

Without Congressional action, tax cuts adopted under the George W. Bush administration are set to expire at the end of 2012, which means personal income, capital gains, payroll and estate taxes could rise. If you own a family business, the estate tax changes could have far-reaching effects, according to Bloomberg Businessweek.

The changes would mean a reduction in the lifetime gift exclusion from $5.12 million to $1 million, so an individual can gift only up to $1 million over a lifetime, beginning in 2013. The gift tax on amounts of more than $1 million would also rise from 35 percent to 55 percent starting next year.

Kurt Glassman, president of LeadershipOne in Sacramento, says there would also be a rise in estate taxes and higher tax rates for shareholders.

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