When the founder won't leave or plans poorly, it's anyone's guess how a company could end up.
Attorney Bea Wolper can tell some mind-boggling tales about family businesses transitioning from one generation to the next.
There’s the founder who in his 80s wouldn’t relinquish control over his $900 million business because he said he might need all the money for his future health care.
And the father who gave each of his sons half the business without taking into account the hatred the brothers had for each other—a hatred that resulted in the end of the father’s carefully nurtured company.
These kinds of difficulties—when the founder won’t step aside or doesn’t adequately plan for their eventual exit—aren’t unusual, Wolper says. It’s one reason only 30 percent of family businesses survive to a second generation, 12 percent to a third generation and 3 percent to a fourth generation.
Two decades ago, Wolper and attorney Dick Emens started the Conway Center for Family Business as a way to improve those outcomes. The nonprofit Columbus organization hosts peer groups, educational programs and networking events to help the more than 6,000 family businesses in central Ohio survive to the next generation.
Mike Crotty, president of Spirit Services, is a Conway Center member and tries to help other family businesses avoid the turmoil his company has experienced. “There’s so many things that can derail a company, but the family is what usually ends up destroying it,” says Crotty, the fourth generation to run Spirit.
His great-grandfather, Fergus, and a friend started the firm in 1934, leasing shop towels to companies in Dayton under the name Van Dyne Crotty Inc. Fergus Crotty’s three sons worked in the business and, after their father died in 1962 without a transition plan, acrimoniously split the business into a Dayton company and a Columbus company.
Mike Crotty’s grandfather, Frank Crotty, headed up the Columbus company, followed by his son, Timothy. By the time Timothy’s son—Mike—assumed the president’s role in 2012, the company had diversified and expanded into several other states but was paying a huge “family tax”—salaries for family members and family friends who weren’t pulling their weight.
“The family tax was drowning us,” Mike Crotty says. “My grandfather was, in effect, retired, but he was getting a full salary and benefits as if he were running the company.”
Finally, after threatening to leave the company, Mike Crotty bought his father’s company stock, became the majority shareholder and, in 2012, forced his elderly grandfather to take a severance package.
“No one should ever have to terminate their own grandfather, but it was necessary for the company to survive,” Mike Crotty says.
Now, the company is thriving and Crotty and his grandfather are once again on good terms. Crotty has a succession plan for the company, something he says could have spared the family plenty of heartache had it been in place sooner.
“Bad planning—or no planning—leads to bad results,” Wolper says. And while business owners seem to understand that, many don’t embrace the idea when they should. Wolper says 90 percent of family business leaders say they want a company succession plan but less than 50 percent do anything about it.
“They’re always going to do it tomorrow, or do it this year, and then the year goes by and they haven’t done it,” she says. “Procrastination is the biggest problem. You should start thinking about it when you’re in your 40s, then have a first draft done when you’re in your 50s and have it done for sure when you’re in your 60s. If you don’t start doing something by the time you’re in your 70s and 80s, it’s very hard to give up control.”
Inability to Let Go
A major reason many family businesses don’t survive into the second generation is the founder’s unwillingness to step aside, says Kelley King, vice president of W3 Wealth Management in Worthington. “A lot of them think it can’t run without them,” King says. “They look at the people around them including their family and don’t think those people can run the business.”
That’s a real problem for the next generation. King advises them to be patient and understand that for most business founders, giving up control is emotional and difficult. “Most of these people have gotten where they are because they are in control,” King says. “What they don’t realize is that they’ll be more in control of the outcome if they plan for the transition now, rather than when they’ve had a triple bypass.”
King says the founder of one local business was so reluctant to relinquish control that he refused to give up his front office after new leaders took over. Finally, when he was out of town, the company leadership moved his belongings to a small back office.
When it Gets Nasty
Fritz Reitter, president of the 103-year-old Reitter Stucco & Supply Co. in Columbus, wishes his father had a detailed succession plan in place when Reitter’s older brother Gabe, who was company president, demanded complete control in 1991.
“Gabe said, ‘I want everything and you get the spoils,’ and so we had to say: ‘We’ll see you,’ ” Reitter says. Gabe Reitter started a competing company, much to his father’s dismay, and family relations were nasty for decades.
“My dad had a [succession] plan, but it wasn’t formal at the time,” Reitter says. “We started getting formal after the split and since then we’ve tried to make sure our legal documents take care of all the ‘what ifs,’ ” he says.
Now the company is transitioning again, to the fifth generation of Reitters, with a years-long plan that will eventually turn it over to Fritz Reitter’s son, Kyle, and son-in-law Dustin Wilshire.
“It’s easy to change the ownership of a company, but what’s tough is getting the management structure in place so the future of the company has the best opportunity to succeed,” Fritz Reitter says. “We could have avoided a lot of troubles and mistakes if we’d had a plan for prior generations. In a family business you’ve got brothers, cousins, wives, all connected to the main stream that’s supporting the family, and someone’s going to have a sense of entitlement because of their name. With the proper steps, entitlement gets mitigated and minimized.”
Rhett Ricart, CEO of Ricart Automotive Group, says his father had an open mind about transitioning the company when he entrusted it to Rhett and his brother Fred in 1981.
Paul Ricart had started the business in 1953 and gradually let his sons take over as they gained experience.
“You do the work, you get the rewards,” was Paul Ricart’s management philosophy, his son says. Now, as Rhett Ricart transitions the business to his son, Jared, and nephew Rick, he’s following a similar path.
He coaches the new generation and allows them to make mistakes. He also has an advisory board of outsiders and a facilitator who meets with family members several times a year to discuss the business.
“It takes work, and you have to address the issue all the time,” he says. “Too many business owners are helicopter owners. I tell my kids: ‘I’m not a helicopter, I’m a satellite.’ ”