Should You Leave the Company to Your Kids?
Your children work in the business. Should they take it over when you retire?
BOB DAGGS: CONSIDER EMPLOYEES. First and foremost, I wanted a succession plan that would benefit me, my family, my 500 employees, and our customers. Second, I was looking for liquidity; most of my net worth was tied up in the company. Third, our product technology was changing rapidly, and I didn't want the company to lose its momentum. Fourth, I wanted a strong and experienced leader. Finally, I hoped to minimize income and estate taxes.
My two sons were in management positions at the company. While I liked having my boys in the business, I had never promised them they would take over. I had always left that question open. When I was ready to retire as CEO, I considered phasing them in gradually as my successors. However, I felt they would need time to learn the job, and I didn't think we had that luxury. I could have sold the company, but that would have jeopardized jobs--and I wouldn't have had a place to come every day and have fun! My last option was an ESOP--an employee stock ownership plan. The more I weighed it, the more sense an ESOP made. I suppose I could have said, "My family has six people in it; let's just take care of ourselves." But our company wouldn't be where it is today without our employees, so they represented a much larger family, whose welfare I also had to consider.
A year ago we did an ESOP and sold 51% of the company to our employees. Steve Morgan, my former second-in-command and a very skilled leader with broad experience, is now CEO. I still own 49% of the company and will gradually give some of my stock to my sons, who remain with the company, and some to the rest of my family.
I'm thrilled with the results. Sales and profits are up, the ESOP defers taxes, and I'm financially diversified.
Bob Daggs is chairman of GRC, a $50-million imaging-supplies manufacturer in Chatsworth, Calif.
MORT AND MARCY OCKENFELS: THE KIDS EARNED IT. Nine years ago we started thinking about retiring. Our kids had grown up in the company and helped build it, so we wanted to hand the business down to them. We had five sons working in the company, but it was important to us that there be a designated successor. Our son John had the most experience, and everyone involved agreed that he should take over the leadership responsibility.
To help us plan the succession, we had consultants lead several days of meetings with all our children and their spouses. We talked about family problems--even things that had happened when the children were very small. Although there were tears, those meetings were the key to our success. One of the consultants worked with our sons to develop a job description for each of them; now they are less likely to tread on one another's toes. I think the whole process brought our children closer together.
We had already given stock to some of the boys as part of their compensation. After we retired in 1990, we waited about three years before agreeing to sell the rest of the company to them. By that time, the children already had 49% of the company stock; we had given voting stock to the five boys and nonvoting stock to our two daughters, who are not involved in the business. John, who is now the president, has the greatest amount.
By the time we sold the remaining stock to our sons, they had proved that they could run the business. We worked out a buyout agreement with a 20-year contract. We get a nice check from them at the beginning of each month. Now all we have to do is live long enough to spend it!
Mort and Marcy Ockenfels formerly owned City Carton Inc., a $13-million Iowa City, Iowa, recycling company.
A huge number of family businesses are currently making succession decisions, and as one might expect, a virtual army of consultants, authors, and financial advisers are standing in line to help them out. Here's a partial list of reliable resources: Passing the Torch: Succession, Retirement, and Estate Planning in Family-Owned Businesses, by Mike Cohn (McGraw-Hill, 800-338-3987, 1992, $17.95); the Family Business Leadership Series, by Craig Aronoff and John Ward (Business Owner Resources, 800-551-0633, $14.95 for each of eight booklets published between 1992 and 1996); Working with the Ones You Love, by Dennis T. Jaffe (Aspen Family Business Group, 800-835-5883, 1991, $13); and Inside the Family Business, by Leon A. Danco (Center for Family Business, 216-442-0800, 1995, $19.95).
NetMarquee Family Business Network is a top-notch Web site for family-business owners. You'll find articles, news items, and listings of seminars and conferences, plus a directory of family-business education programs offered by colleges and universities nationwide.
Transitions and Traditions is a bimonthly newsletter that covers financial and management issues specific to family businesses (Cohn Financial Group, 800-422-3883, $30 per year).
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