January 17, 2012

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Mixing Business with Family

Execs Speak Candidly About the Joys and Challenges of Family-owned Businesses

Carolyn Campbell

January 17, 2012

Family-owned businesses—they are the world’s dominant form of business organization and a staple of the U.S. economy. Family firms comprise 80 to 90 percent of all business in North America, based on figures compiled by the Family Firm Institute. Some of the world’s biggest and best-known companies—such as WalMart, Ford, Firestone and Levi Strauss—are examples of U.S. family businesses. According to Financial Planning magazine, family-owned businesses account for 60 percent of total U.S. employment, 78 percent of all new jobs and 65 percent of wages paid. Despite their big impact on the economy, most family-owned companies don’t survive past the first generation. Indeed, working in a family company is not necessarily easy—and leading one is even harder. Jeff Nelson of Nelson Laboratories and Chester England of C.R. England Trucking Company have each assumed leadership of their family business. The two men share the joys, the struggles and the strategies of working their way to the top in a family firm. Love at Home—and at Work Nelson Laboratories Inc. was founded by Jeff Nelson’s parents when he was in high school. Nelson is currently the CEO of the medical device and pharmaceutical testing company, which now employs 433 people. He says that working with family provides a lot of closeness. “There is depth in the relationship that is very meaningful when you’ve worked together as a family to achieve a common good, sat in the same meetings and debated issues,” he says. “When your family owns the business, you spend your time together.” Shared principles are another common advantage in family businesses. “I learned many values from my parents. If we talk about something, we are speaking from the same set of principles or values,” says Nelson. “It’s easier to maintain a cultural community for the business. If you have a brand-new CEO who is totally different from the last owner, there is a changing value and priority set.” While such closeness is greatly rewarding, it can be a challenge to separate business and work on non-work occasions. “It’s hard to have down time with your family,” says Nelson. “It’s very easy for discussions to transcend into business after spending a whole week working together dealing with challenges and issues. I could be dealing with a frustrating issue, then there is an invitation to come over for dinner. There can be some tension around that,” he says. Tensions and struggles even impact the relationship between execs and their spouses. “If I come home and vent to my wife, I am not just talking about the people I work with—they are also her in-laws,” Nelson explains. Such problems are common with family businesses, says Glenn Stewart, entrepreneur in residence at the Miller Business Innovation Center. “It’s hard enough to make the business come first if it isn’t a family business, and if it is, it’s even harder,” says Stewart. When a family business fails, often because of interpersonal conflict, management issues or succession disagreements, the family relationship can decay into bitterness. Yet when the business works well, benefits such as trust, long-term orientation and unity are “absolutely prevalent.” “I learned my work ethic and responsibility at an early age. The buck stops with the founders. When the ox is in the mire, you take care of it as a family,” says Nelson For Dan England, respect is the key to balancing business and family. “Even when we’re going through dicey negotiations, my brothers and I respect each other. We have the same sort of resolve and commitment to the company. I won’t say we’ve never had a problem, but we’ve never had a problem we couldn’t work through,” he says. As the grandson of founder Chester England and son of Gene England, Dan England is the third-generation England to lead C.R. England Trucking Company, which was founded in 1920. England currently serves as president and chairman of the board of this Utah firm, which is the nation’s largest refrigerated carrier company. C.R. England employs more than 6,500 drivers, independent contractors and non-driving personnel, and provides transportation services nationwide. England says his family tries not to discuss business at home. “If I’m over in a corner talking about business, that can be irritating to spouses and kids.” Just Another Employee “As a company, you need to be in a position to attract talent outside the family, particularly because you will need a lot of good management,” England says. Appealing to non-family talent is critical, not only to maintain a competitive advantage, but also for the survival of family-owned businesses. Therefore, family-owned firms should promote themselves as equally attractive as non-family organizations in terms of employment opportunities. But another key to the survival of a family company is the expectation that family members must earn any leadership positions they may be given. At C.R. England, family members don’t have an automatic status or income level. “If they want to ascend to the executive committee, they need to have a four-year college degree,” says England. The company also requires family members to work outside the firm for two years. “When they come back, they bring experience and helpful knowledge to our business.” Recruiting outside talent and mentoring the next generation of leaders is a constant demand. “It is a continuous cycle,” says England. “It’s not like you can sit back and say, ‘we got this all worked out and can forget about it.’ The next thing you know, the next generation is in place.” Nelson recalls working his way up the ladder at his parents’ company and says nothing was handed to him. “People look at a family business and think …‘you must be working at the company because your parents are there,’” he says. “When I first started working here, I never reported directly to my parents. I was very often given to very challenging or demanding supervisors, who expected me to perform like any other employee. It’s been very motivating for me to prove my capability and show that I have the skills, experience and abilities to perform here for the good of the company.” Not that the demands were easy. “It really weighed on me and I actually considered leaving the business,” says Nelson. “But I was really driven to try to be successful and show my capability, and, today, I’m grateful for that motivation.” Describing his business relationship with his father, Nelson says, “Today, I can speak to him very candidly and respectfully. When I was younger, there were times when I would disagree with him. I was disagreeing to establish my own identity, just to define myself and not really focusing on the principle that I cared about. “I had to get to a point where I argued because it was something I believed in, not just to be different. Today, our trust is absolute. We can be on totally opposite sides and still know that our relationship is solid.” Passing the Torch The succession of leadership in a family business, whether to other family members or to unrelated third parties or employees, is an important process. Company leaders must consider the continuing financial needs of the owner and the owner's spouse, family dynamics, continued successful operation and management of the business, and complicated estate planning and tax issues. The success rate for family business succession is low enough that only 30 percent of family businesses survive into the second generation and fewer than 15 percent make it to the third, according to the Small Business Administration. According to Stewart, even successful, solid companies have difficulty surviving into subsequent generations of ownership. “In some instances, the second or third generation has no passion for the business or the industry changes and they don’t adapt.” For those reasons, company founders need to plan far ahead for their own replacement. “If a business doesn’t really work on identifying and finding someone who is passionate about the business and really has the capability to run it properly, they should find someone outside the family who will run it properly,” says Stewart. He adds that a business model changes over time. While one person might seem to be the front runner to head the business in a given year, three years from now it might be a much different business. “You pick the person to succeed you based on the business needs, not who is the oldest, or brightest, or best-liked within the family.” “To be able to integrate a second generation into the business requires more effort than people ever appreciate,” adds Nelson. At age 62, Nelson’s father still loves the business and plans to work quite a while longer. “He is certainly not retired, but we’ve worked out a role change that focuses on his strengths in science, training and teaching,” Nelson explains. “My advancement has allowed him to let me take care of the business administration aspects more, and the role differentiation has afforded him the ability to do more of what he likes. That will allow him to be present at the company longer, and for each of us and the business to benefit from our strong partnership.” Nelson Laboratories went through an estate planning process that was intended to protect not only the financial futures of family members, but the success and survival of the company. “We wanted to ensure a smooth transition across generations so that the business would not be disrupted in case of a catastrophic event. Our family’s commitment to personal financial security provided the company with continuity. We were planning not only for ourselves, but also for the long-term good of the company.” Nelson adds, “I’m now running the business with confidence knowing that the estate planning issues are resolved and that the company is protected from the risk that might have otherwise been significant. This allows me to focus on growing the company and continuing the legacy of Nelson Laboratories.” C.R. England now has third-generation leadership—and employees who are fourth-generation family members. The company has worked very hard on determining succession and setting the direction of where company ownership is going. “If ownership succession isn’t being addressed, there is going to be a train wreck at some point,” says England. Five years ago, England, his three brothers and father, Gene, bought out Gene's brother Bill and his family. “It took a couple of years of hard negotiation; however, we remain friends.” Later, England and his next oldest brother, Dean, currently CEO, were able to negotiate with their two younger brothers, Todd and Corey, on a buy-down arrangement over a 10-year period, which will end in seven years. “At that time, Dean and I will have two-thirds of the business and they will have one-third,” England explains. “In buying down these two brothers, it was a hard thing for them to recognize that in the future, their families are not going to be involved in running the company—but they are getting compensated a great deal for their ownership. This gives them the opportunity to be very active in investing in businesses and real estate. I’m happy for them—they are both still in the company and have exceeded their financial expectations by a long shot.” England’s succession story illustrates the keys for effective succession planning—beginning such planning several years in advance, moving past the idea that each family member should receive an equal share, involving family members in discussions and negotiations and viewing the family realistically and planning accordingly. Family businesses embody great positives such as loyalty, continuity and shared values—juxtaposed with the challenges of managing relationships, overcoming assumptions and ensuring good planning. “If you work at our company, you are part of the family. We want to feel the close-knit bond as family members with all employees,” says Nelson. “Along with employee unity, it creates a sense of loyalty in the customer.”
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