The Family Plan
Within every chief executive officer who claims to want to retire beats a heart that can't let go of the company. That's what the family-business consultants say, anyway. Not so with Billye Ericksen-Desaigoudar, who has worked at Capsco Sales Inc., in Sunnyvale, Calif., for eight-and-a-half years and has been its sole owner for four-and-a-half. At age 50, she is training five recently appointed company managers, including her three children, to take over. She is even setting up a new board of directors specially selected to help her educate the young managers in the ways of the distribution business. And her hope to sell the company to her successors through a leveraged buyout a few years down the road is no secret. She has gone out of her way to keep her banker, her employees, her suppliers, and her customers up to date on her plans.
Ericksen-Desaigoudar has many reasons for getting out of the business she bought for $1.2 million in a leveraged buyout a few years ago. When she took over as sole manager, Capsco, a distributor of electronic components, had $6 million in sales. She feels that at $10 million, the company needs a different sort of management. "You have to put in all these administrative controls," she says, "any my nature is not going to encourage that." Besides, "you start looking more like a Lockheed, and that's not where I want to work." And, finally, the company is taking up time she wants to spend on other things, including two other businesses she started, a cosmetics company and a venture capital group.
Why such a specific succession stategy? "I saw the previous owner of this company get to the point where, at age 65, he was desperate," she says. "He had done nothing to prepare for his retirement, he had no succession plan, he was vulnerable because of his age, and all his assets were in one place. I thought to myself, I hope I learn something from this." She did.
Ericksen-Desaigoudar first came up with her idea a year ago Thanksgiving, flying home from Hawaii. "The only thing I had to write on was the back of an eye prescription," she recalls, "and the first thing I put on top was 'My Retirement." Exposing her young managers to other companies was part of her plan from the beginning, but Ericksen-Desaigoudar didn't want them to work full-time away from Capsco. Not only did she need them to help run the company, she was afraid, once gone, that they might be lured away permanently.
So she decided to appoint a board of directors made up of top managers within the electronics industry who would help educate her young managers while they continued to hold down jobs at Capsco. In return for taking on her successors in six-week stints over the course of the next couple of years, the board members will get quarterly payments now and a share of the buyout price when it occurs. The training is the board's most important contribution, in Ericksen-Desaigoudar's eyes, and members have been promised neither board seats nor stock once the buyout occurs. And, perhaps surprisingly, there is no ban on their hiring away her trainees. It is part of the agreement, however, that they will be honest about a trainee's ability as a manager. There is a monetary incentive to take the training and evaluation seriously as well. After all, the LBO won't happen if a lender is not confident of the management team in place. And if there is no LBO, the board members will forfeit their compensation -- a share of the buyout price.
Two board members already have been selected and are working with Capsco's managers; two more will be chosen shortly. The prospective trainees, so far, are Ken and Kirk Ericksen (30 and 26 years old, respectively) who head Capsco's new high-technology rep division; Kathy Ericksen (28), vice-president of operations; Charlie Cox (29), field sales manager; and Safdar Ighanian (35), controller. The plan is for all members of the team to work individually with each board member in a variety of management disciplines -- six weeks on sales, six weeks on finance, and so on -- and then report back to the group.
While six weeks doesn't sound like enough time to learn much of anything, Ericksen-Desaigoudar believes that "when you're working with the top people in the company, you're exposed to things that even the people who work there would not be -- the individual's 20-years-plus business experience, philosophies, and top-level strategies." And she is not rigid about the time frame. Ken and Kathy Ericksen, for example, have already spent more than six weeks scurrying back and forth between Capsco and two Silicon Valley manufacturers, one of which is owned by their stepfather.
Chan Desaigoudar is CEO of California Micro Devices Corp., where Ken has spent every Saturday and two hours every other workday for the past two months. Desaigoudar is helping Ken in four areas -- corporate structure, marketing, product planning, and negotiation. "If this process works," says Desaigoudar, "there will be a lot of satisfaction. We may find that this same learning technique can be used in training within our own company."
"You have a tendency to be myopic when you work only within your own company," says Kathy, who is now meeting regularly with the vice-president of manufacturing of a CAD systems maker. She is getting an inside look at a company that, she says, "is a typical customer for a distributor." Her teacher is getting another sort of inside look. "It's a learning experience for me," says the vice-president, who asks not to be identified. "I've never been on a board before, and it's a challenge to be involved with a growing company and help channel its direction."
To keep her company growing and successful during the transition, Ericksen-Desaigoudar has had to think well beyond her new managers and their mentors -- to her other employees, for starters. "When I first started working on the plan, I thought about how people would feel if their name wasn't Ericksen. You could very easily say, 'Well, I'm not going to make it at this company, because she's got those three kids." So she distributed to her 45 employees a diagram identifying 14 key positions that will have to be filled when the company hits $20 million in sales -- a goal she optimistically believes Capso will reach in the next two years. "I encouraged everyone to pick something and decide 'that's where I'm going to be.' Ken, Kathy, and Kirk know full well that they will end up with some kind of ownership, but they might not be the owner/managers, and that's all right." Utopian as this approach may sound, it seems to be working.
"The employees that are not part of the succession plan have got it in their minds that they do have a chance to move up in the company," says Capsco salesman Mike VanDyke. "Everyone realizes that Billye wants her sons and daughter to move up -- but there's no guarantee they'll want to do it forever." And, as Ericksen-Desaigoudar says, "There are going to be 14 positions, and I have only three children. For me to be leaving the company and getting it to the right level, these people have to be identified and moving through the company."
Admittedly, the plan puts the would-be successors in the spotlight. Kathy, who has worked at the company nearly as long as her mother and is the most likely to succeed her as president, confesses that she sometimes finds the idea "scary." The nonfamily managers, too, feel the pressure. "We try to learn as much as we can every day with the realization that there's two years and there's a lot to learn," says Charlie Cox.
On the other hand, it may well take more than two years for Ericksen-Desaigoudar to carry out her transition strategy. That strategy calls for a gradual building of confidence in her successors by all those who deal with Capsco. Her lawyer, her accountant, her suppliers, her customers, and her banker are all in on her plan and are kept up to date on its progress. A year ago, for example, she appointed Kathy vice-president of operations, and made her responsible for all major factory negotiations. "The initial response was, 'Where's Billye?" she says. "And I'd say, 'You'll have to talk to Kathy about that." And now they do.
"We've gotten used to dealing with Kathy," says Frank Richardson, western-area sales manager for Unitrode Corp., a $200-million electronic-components manufacturer based in Lexington, Mass. "And we've already developed a degree of confidence in the people Billye's chosen for the succession. It's been an evolutionary process."
Capsco's banker gets special attention. "Whenever one of the five makes a presentation to the board, the bank is there," says Ericksen-Desaigoudar. "They have to see these people functioning for two to three years before they'll conclude it's all right." Kazuko Tokoshima, vice-president of the Sunnyvale branch of California First Bank, agrees. "They are putting forth every effort to make sure that they will be an efficient management team," says Tokoshima. "And unless we feel confident about management, we wouldn't extend a loan, even if the company were financially stable." The bank, which has made no commitments to the LBO, will continue to observe the progress of the succession plan.
For the time being, Ericksen-Desaigoudar is less concerned with the details of the LBO than she is with laying the groundwork for her departure. And she's sure she's on the right track. "Otherwise," she says, "what I would do is work like a bat out of hell, not train anyone, and then at X date, call The Wall Street Journal, put an ad in the paper, and say I want to sell my company. And I think that's like cutting an arm off. This way, I can look at the transition, I can see the growth of these people, and I enjoy that. This isn't the only way to run a company, but it's the way I feel the best about."
DONNA FENN | Inc.com Contributing Editor
Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.