Balancing Act

For more than 30 years now, brothers Ken and Jerry Larsen have been running their Waukegan, Ill.-based dealership and marina in a joint effort to continue the success their father established back in 1935. Milt Larsen passed the business on to them, and now the brothers are passing Larsen Marine onto their children.
This road may not be as easy as the one that Milt took, though. This round of succession includes five children, three of Ken’s and two of Jerry’s. The pie just can’t be sliced as easily as it was with the last generation.
“Sometimes it’s a little bit awkward,” Jerry admits. “It would be easier to have less children to deal with in the business.”
But that’s the way it goes in a family business.
In any family-owned or operated business, there’s a delicate balance between the business and the family. The two sides are inseparable, yet they co-exist with a certain amount of tension between them that helps the system work very well, when it works. But when it doesn’t work, warns family business expert Glen Ayres, “it’s double trouble.”
And this is of great concern to the marine community. Industry leaders estimate that at least half of all marine businesses are family owned or operated, and family business experts suggest that that number could be even greater than 75 percent.
Trouble on the horizon
Succession is the single most-important issue that family businesses face. The statistics verify it.
According to Joseph Astrachan, editor of the Family Business Review, even though more than 30 percent of family-owned businesses survive into the second generation, less than half of those (12 percent) will still be viable into the third generation, and a mere 3 percent of all family businesses survive the handoff to the fourth generation.
Nationwide, family-owned businesses account for 60 percent of total U.S. employment, 78 percent of all new jobs, more than 50 percent of gross domestic products, and 65 percent of all wages, according to the Family Firm Institute’s Web site (www.ffi.org).
All told, family firms comprise 80–90 percent of all business enterprises in North America. And 39 percent of family-owned businesses are expected to change hands over the next five years.
These facts, along with other issues, have mandated that family businesses begin planning their company’s succession earlier and to tap into the advice of family business experts such as Mike Henning.
In his 19th year in the business, Henning became a management consultant after spending 12 years working at his family’s auto parts business. There, he “learned how fathers and sons tend to cannibalize themselves” when it’s allowed to happen. Because of that experience, he decided he wanted to help people run successful family businesses.
Currently, he’s helping the Larsens plan for their next succession.
“We’ve had a lot of guidance from [Henning],” Jerry Larsen explains. “It helps to have a mediator in some cases. I think it’s very important, particularly when you have so many family members in these matters.”
Plan of attack
Experts like Henning and Ayres know that one of the most crucial elements of running a successful business is the formulation and follow though of a plan for succession.
“People seem to love having one,” Henning says, “but they don’t like creating it.”
Bob Soucy of Port Harbor Marine in South Portland, Maine, has just begun creating a plan. He bought his marina in 1974, has three children involved in the family business and five children total.
He has done well with the philosophy of treating his children like employees. Without planning the details of turning the business over, however, Ayres says there could be a lot of trouble in the future.
“Choosing between children is very difficult,” he explains. “Dad loves the kids the same. He likes to treat them the same. But the idea of absentee ownership is not something that sits well with him. And the idea of having the president not be in control is not something they’ve experienced.
“Developing a plan that fits the needs of the next generation, and Dad’s idea of what works, are often two different things.”
That’s why the Larsens have turned to Henning for ideas on how to make the succession go smoothly.
“One of the things that Mike suggested,” Jerry Larsen explains, “is a cousins’ forum to help the children get along. They get together with spouses and go out to dinner, do things outside the business three or four times a year. And they hold meetings among themselves where Ken and I don’t participate. Most of these ideas came from Henning.”
Soucy is in search of a consultant to help with his planning. He also just attended a seminar on succession. They’re all steps in the right direction, according to Henning, who says that business owners should “seek advice from professionals who know how to structure succession plans.
“Most make the mistake of making their first visit to the attorney,” he says. “That visit is a mistake because a business owner can’t create a legal document until he has a plan.”
“Time is so important,” agrees Ayres. “If we can get them to sit down and develop some good communication patterns and get the thorns out on the table, ‘avoid the avoidance’ as we say, then they may have some time to build a retirement pot.”
A University of Connecticut Family Business Program survey of 800 family-owned businesses showed that in nearly 50 percent (47.7), the transition and ultimate collapse of the firm was precipitated by the founder’s death.
Amazingly, despite the fact that 19 percent of family business participants have not completed any estate planning (other than writing a will), and that only 37 percent have a written strategic plan, more than 60 percent are “very positive” about their company’s future, according to an Arthur Andersen/MassMutual study completed last year.
If this step is not taken, says Ayres, in the end the future planning of the owner’s business “will get done, but it will get done in the third car back from the flowers by the lawyer and widow.”
Facing financial realities
Planning for the unexpected and undesirable aspects of life is difficult, but the future success of the family business may depend on it.
Kent Wooldridge, president of the United Marine Manufacturers Association, believes that small businesses “are very much in peril because of” estate tax. He should know. Wooldridge has launched more than 20 companies during his career and still has about a half dozen active today.
“Under current tax laws and current inheritance laws,” he explains, “a great many businesses in America get destroyed or sold off because the families can’t afford to pay the taxes on the transfer of the valuation.
“When you die … most of what you have left is going to get hit with up to a 53-percent tax. No business can sustain that.”
Henning agrees that this is a serious issue to consider, but he believes that proper planning is the key, noting that business owners can structure plans so that they pay minimum taxes.
“It doesn’t have to be that the estate tax will tax them out of business,” he says. “In the past, when the tools were not available, your estate was going to be in jeopardy. Today, since our personal exemption continues to rise ($1.5 million per person) and will go up to $3.5 million by 2009, there are options. Through a partnership or limited liability corporation, the senior generation can control but not own major assets.
The key, Henning says, is to find a competent lawyer to help with the planning. This is not an area, he warns, where business owners should look to minimize their advisory expenses.
“The tools are available,” he says. “It can be a very big issue if you don’t do anything. But if you’re out there and doing your planning with competent people, it should not be that big of an issue.”
Before the tax can even be levied, businesses can be faced with harsh financial realities. The Lorenz family, for example, which owns and operates Lorenz and Jones Marine Distributing in Ankeny, Iowa, doesn’t expect that the business will be bought by or handed down to the fourth generation. Having grown significantly since the last succession, the amount of money it would take to buy out the current generation will most likely be too much, says Ray Lorenz.
“As we grow in dollar volume,” he explains, “it takes more and more money to buy the previous owners out. It becomes harder for each generation to buy the business. Even if you can work out a payment schedule, it’s hard also to have the financing available to keep the business going.”
That’s where the third-party interests come in.
“If I’m a major dealer of Glastron boats,” says Ayres, “and I’m moving a lot of product, Glastron cares a whole lot that the succession between generations is smooth. The last thing they want is for this dealership to fall apart.”
That’s where Ayres may be wrong, however. While it appears it would be in any boat builders’ best interests to help its dealers plan for the future, we weren’t able to find one boat manufacturer that offers any sort of assistance in succession planning for dealers. In fact, the only third-party stakeholder that the Marine Retailers Association of America could refer us to was KeyBank. Jan Culver, national sales manager for McDonald Financial Group Trust Services, which is offered through KeyBank, says that the company offers a range of services that include succession, tax and estate planning.
“Our people have very sophisticated planning skills,” she says. “They work with people on a case-by-case basis and help them arrive at the right answer.”
We were unable to find any other assistance being offered in the industry for succession planning, other than estate and tax planning.
More planning
Transitioning into retirement may be equally as difficult for the business owner as taking over the business is for the children. This underscores the importance of beginning the planning process early.
By their very nature, entrepreneurial business owners are not good teachers. As Henning says, they’re “doers.” They need strong communication practices in order to pass the business on. They need to ask the tough questions and find the right answers. This takes patience and a willingness to struggle — not things that entrepreneurs do very well.
“Oftentimes, they have a hard time letting go,” Ayres says. “That’s what [Dad’s] done for the last 25 years. He’s good at it. He likes being Mr. Boat Dealer. He likes the status, the power. [He doesn’t] know what comes after boats.”
“They have a real difficulty because they don’t have a life outside of their business,” Henning agrees. When they do retire, “they’re siting at home wondering how to clean out the refrigerator to keep busy. They try to travel, but that never lasts long.
“They need to evolve into something else that they can be excited about — as excited as they were when they began in the marine business.”
Milt Larsen handed over his business at a gradual pace. He started by cutting back the hours he was putting in. Little by little, Ken and Jerry Larsen took on more and more responsibility. This transition was a success.
The Lorenz family saw the same sort of successful transition. Currently run by the family’s third generation, each previous owner transitioned out of the company slowly.
“I would say the other thing my father did is that when it came time to retire, he slowly backed away from the business,” explained Ray Lorenz, who runs the company with his brothers Gary and Tom Jr. and another partner, Steve McKee. “And he gave us more and more reign and let us make more and more of the decisions — even though it wasn’t always the right decision.”
If business owners get a succession plan formed in their mid to upper 50s, says Henning, “chances are there is plenty of time to let things develop.”
Home-work assignment
If a failure to plan is one of the most important issues that family businesses face, then an avoidance of difficult issues is right up there with it.
The typical avoidance problem goes something like this, according to Ayres: There’s a problem at work and it’s not dealt with right away. Then there’s another problem, and that one, too, is swept under the rug for the time being.
“You do that for a while and all the sudden somebody says something at Thanksgiving dinner, and everything comes out,” Ayres explains. “The knee-jerk reaction is to avoid it rather than sitting down and confronting it. By the time they get to a really big issue, they have no capacity to deal with their differences.”
In all of our discussions with successful family businesses, there’s been an obvious tendency toward strong communication and a dedication to leaving work at the office.
“When we are here, we work as hard as we can until the job is done,” says Ray Lorenz. “When we go home, we try to leave the business at work. And when we get together at family gatherings, even though my two brothers are there, we try not to discuss business.”
“What makes family businesses different,” Ayres explains, “is that instead of having just a business system, they have two systems to worry about that are interlocked: the family system and the business system. They cannot be separated.
“If you are having a little trouble with your teenage daughter, you can hide out at work. If the boss is giving you a hard time at the office, you can hang out at home for a while. Family businesses can’t do that.”
Soucy says his family hasn’t had a problem separating family and business. If business does come up during family time, he says, it’s always voluntary from both sides. And it’s never one person pushing an issue — it’s just a conversation that pops up.
“If it is a problem in a company, it’s because it’s a one-way communication process,” he explains.
A lack of communication often leads to broken relationships and serious conflicts, says Henning. Communication needs to be open about everyone’s wants, needs, and direction.
“Somewhere along the line, the parents need to sit down with their kids and their mates and decide, is it really in their best interest to continue this business in the family?” he explains. “Can they work together? Do they really have the ability, the drive, the commitment, skill and talent to take it forward successfully? Or do they just want to develop an exit plan?”
Success story
Success can mean different things to different family businesses. For most family businesses, success means keeping the family together while making a profit.
To a family business, being profitable oftentimes means something much different than it does to a publicly held business. Family businesses tend to plan goals by decades or generations, Ayres says. Their horizon for planning is not the next quarter, but rather making money at a reasonable rate over an extended period of time. And their benchmarks for success include such things as market share, quality of products or services, and jobs for lots of people.
Even so, success doesn’t always mean transition to the next generation. Success, according to Henning, includes three ingredients: First, that every working family member develops their skills and is challenged so that they feel good about themselves and what they’re doing, rather than just collecting a paycheck: Second, that the business is operating at capacity and has the capability to grow and develop at the maximum rate that is deemed healthy for the business. And finally, that there is a degree of unity and harmony in the family, that everyone gets along and supports each other, and they don’t lose a family member through the transition.
The truth of the matter is that all family businesses face the same issues. Some handle it well and succeed. Others fall flat on their faces and run themselves out of business, are forced to sell, or worse, tear their families apart.
Communication and planning are the key ingredients to finding success. The earlier the planning is started, the better off the business and the family will be. They’re inseparable systems, and the balancing act between business and family is “the birthplace of the trouble,” according to Ayres. “And it’s also the birthplace of the competitive advantage … if they operate well.”