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Splitting Heirs (1988)

Nearly a hundred years ago, Lorenzo Vaughn planted a time bomb in his company. Finally, it went off

AFTER 141 YEARS, L. VAUGHN CO. had finally made it. At last, the woodworking company was going to contribute to one of the most prestigious new buildings in the country. Rising 37 stories above Manhattan's Madison Avenue, AT&T's corporate headquarters was sure to hold its own beside such handsome neighbors as the Empire State Building. Only four woodworking firms in the country were even invited to bid on the job.

The Warwick, R.I., company turned its $4-million contract into work of breathtaking quality. Company craftsmen paneled AT&T's executive floors in a rich honey-colored teak, hand-rubbed with a natural finish. They wrapped the 30 columns in the employee lounge in teak panels, giving it the ambience of an English library. For the boardroom walls, they created panels of leather, teak, and studded brass nails. This was old-world craftsmanship that people would surely admire a century hence.

"Only a couple of jobs of that size and caliber come along every year," says John Mielach, owner of Mielach/Woodwork, an L. Vaughn competitor. "If you do one, you're very visible. You can go out the next time and say to the architect, 'Look what I did for AT&T."

For L. Vaughn, though, the reality was something quite different. The company was struggling to survive its good fortune, its fast growth suddenly igniting problems that had simmered for decades. Five relatives in this fifth-generation family business held all the company's stock, but none of them had control.

While L. Vaughn's employees were gently hand-rubbing and hand-sanding their wood, it seemed as if the cousins were bludgeoning each other with two-by-fours.

Not many family companies survive intact to the fifth generation. A variety of maladies can kill them, but perhaps none is more lethal than the problem of succession.

The survival of any family business depends in large part on how wisely one generation passes ownership to the next. When several children emerge as potential heirs, the owner faces a terrible dilemma. Anointing a single heir with a controlling interest -- or turning over management to an outsider when no family member appears to be a chip off the old block -- is often the best thing for the company's future. But it can cause tremendous personal animosity within the family. "The more heirs you have, the more complex, geometrically, it becomes," says Richard TenEyck, a Denver family-business consultant. "The possibility of trauma increases. Little factions develop. And that can turn into open warfare."

From the point of view of the company, though, the alternative is clearly worse. Dividing the stock among all suitors may keep everyone happy, but the company is destined to become paralyzed. Such was L. Vaughn's fate.

For generations, the family had been splitting the stock among any offspring who showed interest in the company. L. Vaughn was theirs to have, to reap its benefits and enjoy them equally. But equal distribution became, ultimately, a license to fight. And there was no mechanism -- say, an outside board -- to mediate the conflicts. "I don't think there was ever consensus on any subject," says D. Michael Carroll, the only non-Vaughn board member for many years. "They carried the sins of their forefathers on their shoulders."

Blame forefather Lorenzo Vaughn. Back in 1847, he set out to build a company that could participate in the development of Rhode Island. By horse and wagon he delivered the sashes, doors, and blinds he made in his shop. None of Lorenzo's children lived to adulthood. When he died in 1904, his will surely pleased his two nephews and his great-nephew. Each got one-third of the company. After 57 years spent building his business, old Lorenzo inadvertently doomed it by failing to choose a single successor.

The three nephews, in turn, passed their shares to one child each. Fortunately, a strong leader emerged in both generations to run the company. In the fourth generation, three of the owners were male Vaughns; they split two-thirds of the stock between them. The remaining stock (one-third) went to the first female Vaughn heir, Louise Vaughn Gaddes. Her husband, George Gaddes, became president of the company.

Gaddes's 16-year reign, which ended in 1969, now stands out as a golden age. "The last time L. Vaughn was successful was when George Gaddes was alive," says one longtime competitor. "He was just a good businessman" A charmer, Gaddes was known for inviting customers and competitors alike to his home. There, by a salt pond, they talked over business.

There was plenty to discuss. After World War II, the industry prospered as it followed the baby boomers, helping to build high schools and then college dorms. Under Gaddes, L. Vaughn also began building such laboratory furniture as benches and tables.

Over the years, L. Vaughn's craftsmen gained a reputation for their mastery of matching grains, the art of arranging bundles of veneer sheets, or flitches, to create patterns. They even came up with inventive forms by creatively using such defects as dark mineral streaks or the blotchy "cat faces" that dot various woods. Mostly, they developed sharp eyes and steady hands for mastering such delicate "Michelangelo jobs" as the finely detailed balustrades that line the stairways of Rhode Island School of Design.

The fact that Gaddes owned no stock himself, and that his wife owned only a one-third interest did not stop him from gaining effective control of the company. He was a natural leader; when he ordered a task done, his own sense of personal authority brooked no interference from the other relatives. Perhaps Gaddes's main advantage was that he was not, strictly speaking, a Vaughn. "He was free of the encumbrances that the other cousins had," says Carroll. "They could relinquish all their power to him, and it wasn't as if one of them was getting ahead of the other."

Never again would the Vaughns so willingly surrender authority. "Gaddes was able to make sure the owners were not cutting each other's throats," admits Charles T. Vaughn Jr., an owner who has held every company office except treasurer.

Unfortunately, George Gaddes didn't live forever.

When it came time to pick a successor to Gaddes in 1969, his son and two grandsons inherited his wife's one-third. But none of the family members -- Vaughns or Gaddeses -- really wanted to be chief executive officer. Somebody had to take the job, though; they did own the business, after all. So the honor fell upon Charlie Vaughn.

Though Charlie had been raised in the mill, his management style went against the grain. Loud, gruff, and high-strung, he rarely kept his opinions to himself.

That aside, Charlie hadn't wanted to be president. Who could blame him? Four major stockholders worked in the company, and they disagreed sharply on every operating decision. Should the bookkeeper get a 10% raise? Do we really need that new machine? Long-range issues such as budgets, acquisitions, and strategy fell by the wayside. "You can't get four people to agree on too many things," says Charlie, sighing.

After about five years of infighting, Charlie couldn't take much more. Neither could the company. Under Gaddes, L. Vaughn had been modestly profitable; now, in 1975, it was barely breaking even. "I felt an inability to cope with the management problems," Charlie says. "I thought somebody better educated should take over."

But who? Charlie recommended his older brother, Norman, a chemical engineer who owned one-sixth of the company. Norman didn't want the job. Neither did Dick Gaddes, George Gaddes's son. So Dick Vaughn, who owned one-third of the stock, became the family's choice -- the only choice left, in fact. Then 48, he'd worked at the company since age 12, when he swept the factory on Saturdays. "Dick became president by default," says an insider.

Had they admitted that they had no strong leader among them, the owners could have looked for a talented manager for the company. But that option wasn't even discussed. "When you've got an old company, some people think that the locomotive will stay running no matter whether anybody is feeding it or not," says Charlie Vaughn. "But you have to ask: how long can a company find talented people among its own relatives?"

The Vaughns never answered that question honestly.

Sadly, Dick Vaughn was not a leader who could unite the family factions. The five manager-owners called one another "partner," and they all earned roughly the same pay, even Dick. And none was about to take orders from any of the others. Mostly, they bickered. The subject didn't much matter. Should this job be subcontracted? Each one weighed in with an opinion, often tinged with digs at one of the others. "Everybody wanted a certain amount of input into everything," Dick recalls. "It made for a consensus type of leadership. It was not easy."

You could see that just by sitting in on one of their frequent meetings. I'd like to see estimates broken out so that we can compare them to final costs, Dick announced. Good idea, they all agreed. I'll do that, said the cousin who handled milling. I beg your pardon, the cousin who handled estimating interrupted, but I believe that comes under my domain. They were off and running, arguing over who should take responsibility. Of course, the project wasn't done at all.

Next, they'd try to prioritize jobs. Let's concentrate on the hotel first, Dick began. Fine, Charlie said. Later, it would become apparent that Charlie -- who, after stepping down as president, had gone back to running the mill -- had focused on a different job. And if Dick asked for a report, he knew better than to think he'd ever see it. "They had such a bad reaction to being told what to do that they would forget what the hell it even was," he says. Why should one cousin report to another? That was the antithesis of their partnership.

As the company's performance deteriorated, the loan officers at its bank became concerned. The bank held about $1.5 million in outstanding loans to the company, which was barely breaking even. In October 1979, it dispatched D. Michael Carroll, a CPA, to diagnose L. Vaughn's problems and help solve them.

The family grudgingly accepted Carroll, only because he was the bank's emissary. Carroll came in a couple of days a week, with carte blanche to wander around, talk to employees, and examine the books. Everywhere he looked, he saw the same thing: a gaping power void. He needed only to examine the company's financial statements. A million-dollar billing dispute, for instance, had languished in arbitration for years because no one had taken responsibility for resolving it. Gross margins were sinking because none of the family knew -- or wanted to know -- anything about marketing. "Inside the company, the family could never decide who was leading the parade," says Carroll. "Major decisions were held up because of all the second-guessing. There was a serious authority problem."

Not surprisingly, L. Vaughn was too paralyzed by family squabbling to develop any coherent business strategy. The company was floating like driftwood -- away from the rest of the industry.

Smart woodworking companies had positioned themselves to tap a new and growing market, corporate interiors. They could see it coming in the 1960s, when big companies began building more and more elaborate offices and lobbies. They used premium architectural woodwork. Custommade desks, cabinets, and credenzas offered a personalized touch. For the woodworkers, the ornate interiors offered huge profit margins, sometimes up to 300% larger than standardized items.

But it was difficult to manage such complex work. The company couldn't be certain of its costs on custom jobs. Careful estimating is crucial and requires an understanding of three diverse areas: manufacturing, installation, and raw materials. The family simply couldn't wing it.

The owners were too busy bickering to see the opportunity to pursue corporate interiors. "The Vaughn company did not know about that market, nor was it interested in it," says Gideon Loewenstein, later head of L. Vaughn's marketing division.

With few exceptions, the company stuck to jobs that called for working with general contractors who weren't seeking skilled advisers; they simply hired the woodworker with the cheapest bid. As a result, L. Vaughn wasn't making great profits from its woodworkers' skills -- even on the few intricate jobs it sought. For the most part, the company fell back on its reputation as a mill house, capably producing such standard, thin-margin items as windows, doors, and moldings.

Carroll had been working with L. Vaughn for three months when, in early 1980, he assembled the embattled owners for an afternoon meeting. He handed out a 20-page business plan; it was the first time in anyone's memory that L. Vaughn had had a business plan.

This company has great potential, he began, if we can just clear up some issues involving responsibility and authority. He read aloud relevant passages from textbooks. He showed the owners an organizational chart and pointed to where the president sits. You may call each other partner, Carroll said, but this is really a corporation. And the person in charge, he warned, can't be very effective if every decision is second-guessed. The family members sat quietly as he spoke.

Furthermore, Carroll went on, you are going after the wrong kind of jobs. We need to cultivate contacts among designers and architects in New York City to get those higher-margin jobs. The owners also have to work together to button up inefficiencies in the company's production cycle. Too many errors -- chipped cabinets, desks with the wrong number of drawers, paneling that arrived late -- were turning thin profit margins to sawdust.

When Carroll finished, he invited responses. Dick Vaughn cleared his throat. The afternoon sun ducked behind the clouds. Carroll wondered if the owners had even heard him. "We just weren't ready to accept it," says Dick today. Besides, the hour-long analysis didn't change the basic problem. "It was a good talk," says Charlie Vaughn. "But Mike Carroll didn't have the power to carry it out. No one was given the power to make those decisions."

Some things did change, though.

Although he wasn't by nature much of a leader, Dick Vaughn now had Carroll backing him up. Over lunch every day, Carroll pounded the message into Dick's head: you are the president, you have the right to make decisions. I do, don't I? Dick would respond. Bolstered by Carroll, Dick hired Loewenstein to start a new marketing division. He recruited a chief financial officer from the outside. Dick also added Carroll to the board -- the first nonfamily member ever to serve -- though he said it was the bank's idea, not his.

Loewenstein had a decade's worth of valuable contacts. Armed with slides and pictures, he started carrying out Carroll's mandate to reposition the company. Gradually, L. Vaughn began landing bigger and bigger jobs. AT&T's corporate headquarters. Trump Plaza & Casino and The Tropicana Hotel, in Atlantic City. The Aetna Life & Casualty Insurance offices, in Hartford. And the company's revenues started moving smartly: in 1982, sales climbed 70% to $9.5 million. In 1983, sales rose 30% to about $12 million.

Paradoxically, the big jobs only hastened the company's decline. A repositioning of the company had been desperately needed, but without equally dramatic changes in management and leadership, L. Vaughn wasn't ready to cope with the demands of complex woodworking jobs. Losses increased to nearly $400,000, and the company's short-term credit line ballooned from $192,000 to $1.6 million.

The company had done everything right in winning the AT&T contract. Loewenstein attended to every detail. For the mock-up, he flew to West Germany to find a rare Burmese teak. When the architect told him that it was important to create a homogeneous look, Loewenstein suggested a method for matching perfectly the inside and outside door panels. And according to industry sources, L. Vaughn's bid of just under $4 million was far and away the lowest. The closest bid, according to one industry source, was said to be nearly $1 million higher. The reason would soon be clear.

Delays began almost immediately. The squabbling, which had intensified, didn't help any. When Charlie got fed up with Dick, the president, he would simply shut down the mill and go home. "There was finger-pointing back and forth," recalls Harold "Skip" Belsky, who was then chief financial officer. "There was a lot of yelling and jumping up and down." Once, Dick asked a cousin to work overtime. He's not working late, said the cousin, pointing to another partner, why should I? Family members lunched at different spots to avoid one another. "There were weeks when everybody was walking around not talking to others," says Loewenstein.

Loewenstein, who felt his professional reputation was on the line, was furious. He charged into a board meeting to tell the owners what he thought. "I can't believe you people," he shouted. "We get the jobs, all right, but then when it comes down to delivering what we say, we don't carry through." He stopped and scanned their faces for a response. Charlie gave the only reply: he blushed. Loewenstein was fed up, and he soon quit the company.

The company was crumbling around the family. The AT&T estimate was way off; tasks that had been estimated at 80 hours took more than three times that amount. Even when they had the numbers in front of them, the cousins couldn't agree on what they meant. L. Vaughn paid for it. Hammered by overtime costs, the company lost at least $1 million on the $4-million job.

When Dick Vaughn closed the books on 1984, he was opening the final chapter in the story of L. Vaughn's disintegration. The company had lost $700,000 on record sales of about $14 million. There must be some mistake, he thought. He had been working seven days a week, promising everybody that the company was going to post a profit.

The company's banker wasn't interested in excuses. You deceived us, he said. No, Dick pleased, we took too many jobs at once. "If they didn't believe my story, there was nothing more I could do," he says.

The bank urged L. Vaughn to hire Peter Pelletier, a turnaround pro. Pelletier quickly pushed the family aside. During his first meeting with the family, he turned to Dick and asked, "What is your goal in the woodworking business?" "I want to be the best woodworker there is," Vaughn replied. Pelletier's voice boomed back: "Don't you want to make a profit?" Dick soon found himself without a job -- or even an office.

Having dispatched Dick, Pelletier was greeted as a savior. The adoration didn't last long, though. He inflamed old wounds by criticizing family members in front of one another. Charlie is too old to run the mill, don't you think? he asked. Family members grew more and more alienated.

The most alienated were two members of the fifth generation. Charlene Vaughn and Norman "Woody" Vaughn Jr. had inherited small stakes in L. Vaughn, bringing to eight the number of relatives holding minority stakes in the company. "I could see the potential of the company growing," says Charlene, "and I could see [Pelletier] wasn't pursuing that." In 1985, consistent with Pelletier's strategy of shrinking the company while he put new controls in place, sales dropped to $10 million.

In January 1986, the family fired Pelletier.

As they took their seats in the conference room, each family member was given a copy of a letter. L. Vaughn, the bank said, had allowed its ratios to fall too low. As a result, the bank was freezing its line of credit. To get it back, the family would have to provide personal guarantees.

The family immediately began attacking one another. Some of the Vaughns were ready to offer up their houses as collateral. But the Gaddes wing of the family steadfastly refused. You were wrong to get rid of Pelletier, they said, and that's why the bank has prepared a noose for us. "It was a horror," recalls Woody Vaughn. "We were afraid they'd foreclose."

Soon after that meeting, Pelletier relayed a short message to the family. He wanted to meet with the owners in the conference room at a nearby Sheraton hotel.

His presentation was brief and to the point. I know the bank is ready to foreclose, he said, so I'm going you a way out. I'll buy the company for $500,000. Dick Vaughn couldn't believe it: sell the company their parents and grandparents had passed on to them?

As soon as the family was alone, Dick spoke up. What an insult, he said. It's bad enough to think about selling the company, but for $500,000? Why, our real estate alone is worth more than that! He looked around the room, expecting to see heads nodding in agreement. Instead, the others were mostly sullen. It's all over, one family member said. Anyway, added another, there's no way we can raise the money in a short enough time to keep the company alive.

They took a vote, and the company was gone.

Dick Vaughn may have felt alone as he drove away from the Sheraton, but for once he wasn't. His cousins Charlene and Woody, both newcomers from the fifth generation, were his natural allies. After all, it was their inheritance that was being sold. "I felt like I was burying a family member," says Charlene.

Woody and Charlene owned only minor chunks of stock. Nonetheless, Charlene says, "it was time for some of the younger people to step forward and show that we were interested in pulling together and getting the funding we needed." The next morning, she, Woody, and Dick agreed to work together. They conferred with a lawyer. "From that point on, we went forward," says Dick Vaughn.

Following their lawyers' advice, their next stop was the bank. The whole family cant's agree, they told the banker, ignoring the fact that the family had voted to sell out. Dick and Woody agreed to pledge their houses in return for $250,000. The bank went along.

But the deal with the bank would mean nothing unless they could reverse the vote to sell the company. Dick Gaddes, a one-third owner with his sons, held bitter feelings against the Vaughns; that left only Charlie Vaughn, Charlene's father, as the swing vote. He had voted in favor of selling the business, but nobody believed that he really wanted that. Dick, Charlene and Woody hammered away at him. We're strong enough to keep this company going, they told him. And the Vaughns should stick together. Charlie refused.

Finally, Woody Vaughn offered Charlie a deal. Sell your stock to me, he urged. I'll give you the same price as the outsider. Charlie couldn't believe it. He thought for a minute. If you people are that confident, he said, then count me in.

Now, they had the majority they needed. The Vaughns -- "we had finally banded together," says Dick Vaughn proudly -- presented a solid front. We are not selling L. Vanghn, they announced.

Soon after, the Gaddeses sold their shares to the Vaughns.

Dick Vaughn is standing by the doorway, waiting for the new president of L. Vaughn to sign his pink expense form.

The president is Mike Carroll. After rescuing the company, the Vaughns finally created a strong leadership position at the top of L. Vaughn, and they acknowledged that the family itself had nobody strong enough to take the helm and overcome the difficulties of a company still plagued by minority ownership. Carroll owns 10% of the stock, and 30% more is now owned by outside investors. He has a three-year contract that stipulates "strict operational control." Says Carroll, "somebody has to have complete control. There is now no question who runs this company." The Vaughns are a minority on their company's five-member board; Dick is chairman.

Under the new arrangement, the company is it its second straight profitable year. "What matters to me now is perpetuating the Vaughn name in the woodworking business. It's very selfish to worry about who will carry that out," Dick says. "A family has to accept its shortcomings, or it won't have a business. That's the only way to survive."

But have things really changed? Already two members of the fifth generation own stock. At least one other is expected to climb aboard. "It's our job to pass it to the next generation," says Dick.

And they'll do it just as they always have, splitting the family legacy into pieces. "There's a sense that they want to pass it that way forever," says Carroll, sighing. "If there were 20 Vaughns, they'd split it into 20 pieces."

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