Operating a family-owned business comes with unique circumstances and considerations that other companies and corporations don’t face.
Transparency and ongoing communication are keys to preparing members to work in and eventually lead the family business. The company needs to constantly work at preparing and grooming the next generation to work in and eventually transition into leadership.
Those were among the takeaways from participants in a recent executive roundtable discussion on family-owned businesses hosted by MiBiz. Participating in the conversation were:
- Todd Custer, second-generation president and CEO of Custer Inc., a Grand Rapids-based office furniture dealer
- Dave Ellis, senior vice president of West Shore Bank Wealth Management, which sponsored the roundtable, and the former owner of Ellis Capital Management
- Mike Fettig, second-generation president of employment firm Fettig in Grand Rapids
- Brien Fox, third-generation CEO at Kentwood-based beer and wine distributor Henry A. Fox Sales Co.
- Ben Thompson, second-generation president of Grand Rapids-based Thompson Remodeling Inc.
- Bruce Young, partner at Warner Norcross + Judd LLP and third-generation shareholder at The Behler-Young Co., a Grand Rapids-based wholesale distributor.
Here are some highlights from the discussion.
How soon does a family-owned business need to start planning for the transition to the next generation? Is it a constant process?
Young: would say it’s a constant and you need to start early. The time to start is now, at least planning for it. Research tells us three things highly correlate with success transitioning a family-owned business, which is having an outside board where you have more than just family members involved, having family meetings so there’s some conversation going on among family members, and having a strategic plan for the business. Doing some of those best practices are things that help get the company ready to go and to go successfully.
Fox: When you talk about transitioning a family business, there are really two transitions: transitioning the operating and the management of the business, and there’s transition of the ownership of the business. I would say it’s a constant analysis of how to transfer the ownership of the business. No employee should lose their jobs because the owners didn’t thoughtfully plan the transition through the passing of a family member or to estate planning. There’s a lot that goes into the ownership. On the operating side, just because you’re the owner of a family business doesn’t mean you have the right to work at the company. There has to be a role for you as a family member if you want to be involved in the company.
Ellis: In my situation, I started on succession the day I started the business. I was about 44 then and I had two children, and they didn’t have any interest in the business, so I just kept looking around and finally I found somebody who was going to take over for me. They got cold feet, so right after that happened, West Shore Bank called me and said, ‘Would you like to talk?’ I said, ‘Sure.’ One thing led to another and that’s how it transitioned over.
Custer: There are two distinct differences between owning and operating, and we started that process really early. My dad (Dave Custer) was pretty good at having family meetings. We started family meetings when my two brothers (Mark Custer and Scott Custer, both of whom are involved in Custer Inc.) and I were in high school. We’d meet every 16 to 18 months and just have conversations throughout the year about the state of the business, what’s going on in the business, opportunity within the business. It was always his comments of, ‘There’s no pressure to come into the business. You may choose to do something else. You may still own it and maybe work somewhere else, or you may want to come together and sell the business at some point.’
It really helped to have those family meetings to get everyone on the same page and understand what’s going on and opportunities within the business. If you did want to operate the business and become the CEO and president, here’s what you need to do, the step action plans, the work ethic, expectations, and those were very well laid out. Nothing is given at all in our business. That really helped to say, ‘OK, if I really want to move into that CEO role, here’s what it looks like, here’s what I have to do, and here’s how I can earn it.’
Thompson: As a rising generation where things are changing, in my situation particularly, it’s much more of a practice. It’s much more of an apprenticeship and then there’s an ownership transition. Now at 20 years later from entering the business as a kid, it doesn’t have to be something you do forever. That’s a different conversation or a thought process to have.
Fettig: For operating the business, the thing I want to be focusing on in the future for myself is: Who is able to operate it next? They need to be able to be ready at the same time the current person is ready to exit. The timing of that needs to be coinciding pretty quickly, then also you need the culture of the business to be ready for that change to happen, and the economy. I’d be looking for succession planning to have timing where you’ve had some successes going on and it’s a smart time for a transition, especially depending on the person’s impact who’s operating it.
Ellis: There are so many different variables. Pick the right time? Sometimes it picks you.
What’s the best thing your father or mother did to prepare you to take over?
Thompson: Transparency. I always knew what my parents knew. It’s that early involvement that was really helpful for me. And I keep my kids involved, too.
Custer: We had the opportunity to work within the business at a young age — summer work or college breaks, whatever it is — to get exposure to the business. But before we were allowed to work full time in the business, we needed to get experience somewhere else for a minimum of five years. My dad was always very transparent on that rule. ‘If you want to come in and work for the business, you can’t come in right out of college. You have to go work for another corporation or someone else, ideally outside of Grand Rapids, (or) out of state, to get other exposure and experience before you come back into the business.’ That helped a lot to just get a different point of view, coming back to the business after working somewhere else and getting that experience. That helped set us up for success.
Fox: That outside experience working for a different organization, it’s not only good for the individual so they understand their worth and value, but it’s also tremendously valuable to the family business. When they go back, they’re able to add value and other experiences and challenge the status quo. The other thing that was really helpful in our situation when we did our transition was we never went backwards. When the last generation handed something off, whether it was an area of responsibility or a department, the handoff was completed and kept moving forward down the succession path. I think there is a risk in some family businesses where the last generation has a hard time letting go. I’m thankful in our company where we had a thoughtful father who really had a well-thought-out plan in the transition. We didn’t go backwards. We kept going down the right path.
Ellis: Do the future generations have to learn from the prior generations on how to smoothly do a transition?
Fox: In our case, there were some missteps in prior generations with the estate tax and corporate structure. Sometimes you learn the positives. Other times, you learn just from what two generations up from you did and how they struggled with some of the transitions.
Thompson: A pretty impactful thing for me was my dad establishing a board of directors. It’s an advisory board, but active in the business, a good sounding board to talk through strategic ideas about the business, but also family conflicts and family ideas to get support as you’re dealing with it.
What tells you when it’s time to bring in outside voices or management?
Fettig: I’d say the sooner, the better. I don’t think there’s going to be a point where somebody establishes outside help too soon.
Fox: I talk to family business owners, and they don’t think they’re large enough or sophisticated enough for an outside board of directors. I would strongly encourage an outside board of directors for any size organization. It makes you a more professional organization (and) it holds your CEO more accountable, not to mention you get great advice from your advisers. Your board of directors helps you on your strategic plan. There are a lot of people who think they are not at a stage where they need a board of directors, but you can use a board at any size organization.
Fettig: Having outsiders that you’re prepping for and engaged with and can speak to causes everybody’s game to be elevated more.
Young: I couldn’t agree more that having outside directors is a best practice. Whether you’re a family business or not, do that early on. It’s getting some other people up to speed on your business and it is different to have your leadership team be accountable to some additional people than just the family. It changes the dynamics.
How did you find your way forward when you took over the business from the prior generation?
Fox: Every family has a different dynamic. Probably the biggest advantage to a transition is transparency and an open conversation. We’ve been able to really be successful with that. Some families struggle with that. It’s having transparency and an understanding, not only for the generation coming in, but also the generation that’s going out. Just be transparent with both sides so everyone has an understanding. There’s so much value there from that last generation. You want the sounding board, you want the advisory and that institutional knowledge, but in the next generation, you want the innovation and the energy and the ability to steer a new strategy or new course.
Thompson: Primarily, it is a fabulous experience to have somebody who loves you tremendously to want you to improve the family business. By and large, it’s such an amazing positive to have a parent or brother, or whomever, come in and offer that idea to benefit the business. That’s the tremendous benefit of family business. You get to learn from people who love you.
What happens when the next generation is not interested in taking on the business?
Ellis: Call an investment banker.
Young: It certainly happens when there isn’t anybody in the family that has both the skillset and the interest to want to step in and be involved. Families need to be careful they don’t push someone in that seat who lacks either one of those things, the skillset or the interest. That becomes a disaster, but there are at least a couple options. Sometimes a family will say, ‘Well, we don’t have the family member who’s appropriate to take the helm right now, but let’s have a non-family member be the leader of the business for some period of time — maybe it’s a generation — but continue to own it and be part of the board of directors.’ Maybe a family member will come along later.
We’ve all heard the saying, ‘Never do business with family.’ How do you react when you hear that?
Fox: I couldn’t disagree more. It’s been one of the most rewarding experiences in my life. You can really grow your family relationships stronger through family business. There are always stories of the negative. I would just say the positive is unbelievable.
Fettig: The non-family business that’s trying to be successful, if they’re doing it well, they’re all about culture and growing a family-oriented environment inside your business and developing family-like relationships among their leadership team and their executives to create that kind of environment that we naturally have. The problems and the challenges that we have are communication and close proximity to everybody, so you know which buttons to push when things go awry. But I think everybody wants that closeness in their business because then we’re all one together, we know where we’re going, (and) we know each other’s thinking before we’re even thinking it, potentially.
Young: One aspect that hasn’t been touched on is different roles for different family members in connection with the business. Where maybe some are involved in operating the business, others are passive owners not involved in running the business but might be owners of real estate that is leased to the business as a way to derive income while not being involved in the day-to-day. Even in family philanthropy, there are different roles for different family members to be engaged in … the family enterprise that sometimes is more suited to different personalities and goals. Sometimes engaging people in those different ways are ways to paint some family harmony by having those different roles.
Ellis: There’s a stat that 80 percent of family-owned businesses that move to a second generation are successful. So there’s a lot of success in working with the family.
Fettig: (The idea of not doing business with family) comes from people who have worked with family for short periods of time on projects, and that haven’t lived in the trenches long enough to really understand and develop it. With time, that helps in understanding each other. If it’s, ‘Do you want to work with your brother on remodeling your basement,’ (that’s) probably going to be painful and could be a little bit of a challenge. But working on growing a business together, once you’ve been doing it long enough, you start to realize and appreciate the strengths and weaknesses of each other.
Thompson: The best family businesses still are bringing in a performance culture, they’re keeping nepotism at bay, (and) they’re working on communication. Yeah, there’s a little conflict, or there could be, because in a family business, there’s more points of contact, which we’ve identified as the good and the bad.
How do you resolve business disagreements with family?
Thompson: Sometimes you can’t, and you shouldn’t work with each other. That would be an extreme. Sometimes, it’s outside help.
Ellis: Having an outside board helps, too.
Fettig: Being as transparent as possible with each other is really key. You’re going to have conflict. It’s going to come up at some point. Working through that, having outside help, outside boards, outside coaches, whatever it is, helps you work through that conflict and resolve it. The key is being really transparent and not hiding anything.
Young: One of the reasons for having family meetings or some kind of family counsel is it’s a platform for discussion that is a little bit apart from the business. It kind of helps cement and strengthen those family ties so that when issues come up in the business, there’s a broader culture or connectivity to help get past those and weather some of those storms.
Fox: I find that family meetings are helpful, too, because not every family member is involved in the business and a family meeting can create an environment where it alleviates misconceptions and gets everybody on the same page. Oftentimes, there’s perception and there is reality, and you get to a family meeting and you sit through perception and you get down to how things really are.
Ellis: You don’t make it personal and you go to what is best for the company: ‘We’re all working toward the common goal.’ That can help.
What’s the biggest misperception out there about running a family business?
Custer: A lot of people think that this is just something that’s given, you walked right into it. In a lot of successful family businesses, it’s earned. You start somewhere and you work your way up. Nothing is just given and you earn your title, your status, your salary, whatever it is. (People think) just because you’re an owner and family member, you get the best job, you get the car and everything else, but you really do have to earn that.
Do you have to work even harder?
Custer: Yes. You hear that a lot. You have to work even harder to get dad’s attention or mom’s attention. They have higher expectations of you being a family member. Going in, you know that.
How do you go about taking over as the next generation, finding new ways to innovate and making sure you’re always doing what you can to grow?
Fettig: That might be a misconception also — that we are the same and we think the same way. I don’t know if everybody is the exact same as their predecessor. Just because we’re all family doesn’t mean we don’t have our own styles, personalities and things like that. Part of keeping fresh is staying on top of our industry trends and studying it, and being a student of the business and knowing what’s going on. I don’t think that’s any different from family business than non-family business. You need to be innovating and staying on top of new technologies. AI (artificial intelligence) is a big deal for us today and what we’re using and the different platforms. You need to stay on top of it, growth with it, and figure out how to implement what you want to use and things like that.
Young: Innovation can be a challenge to a family-owned business. The senior generation needs to make sure they’re giving the younger generation the freedom to innovate, instead of feeling like if we go in this other direction, that’s going to offend dad or mom. Or, this is the way grandpa always did it and I’m afraid to knock down those walls. With any business, innovation is essential to grow and change because things change like crazy. If a business doesn’t keep up with that, it won’t be around.
How do you overcome generational differences?
Custer: That’s a challenge. My dad’s a traditionalist and I’m a Millennial. When we look at the difference in generations and how we think and what’s important to us, you start to look at where you come together and your strategic plan and your long-term goals. You start to look at the people you’re hiring and your culture and the people that you have now and what they want and what they need, where is the business going, and you start to collaborate on all of that.
In our case, we came together on all of this stuff where it may have been my dad saying, ‘We’ve never done that before, but we’re going to have to do it this way to be successful. We’re going to have to start doing strategic planning more and doing structured strategic planning on a quarterly level. Or we’re going to have to invest in this technology.’ Certain things that we never did before and it costs money, but to ensure future success and to hire the type of talent we need and retain talent and have them be successful, we have to invest in this type of stuff.
It’s talking through all of that. Even though it’s not the way they did it, it’s the way we need to move forward to be successful, and coming to a conclusion (that) we do need to do this, we do need to invest in this, even if it’s different.
Fettig: You prove that out by statistics and facts. If there are generational differences, they’re overcome by actual factual information to support it, rather than just feelings. The younger generation should not just say, ‘This seems good.’ They should come up with the real reasons for it, real examples and show it.
Fox: There’s a mutual respect that comes with the territory. Quite frankly, different generations bring diversity to an organization. If you embrace that diversity within an organization, you’re going to be better and stakeholders are going to care for it more. Diversity comes in a lot of forms and multi-generational perspectives are certainly one of them.
What advice do you have for anybody thinking about going into business with family?
Fettig: There has to be the right role or roles and path for yourself. Don’t do it just because it’s a family business. You should be good at it to do well with it, and you have strengths and skills in that space.
Custer: And have a passion for the business, and a passion for what your company does and for the clients and the customers you work with.
What your advice on what someone needs to avoid doing?
Fox: If you’re a family business and a family member, the mistake you can make is to just rely on the family business for your education. Look outward for your education, whether that’s being involved in our industry associations, whether it’s being involved in things like the Family Business Alliance. There’s a lot of opportunities for you to continue to grow as an individual. If you just rely on the inside of the company to do that, you’re probably limiting yourself and your potential.
Custer: I always believe in multiple coaches. I can always go to my dad for certain things, but it’s great to go to that FBA peer group to talk, or to my mentor and talk to him about stuff. Having people you can go to outside of the family is really, really important.
Fettig: I would avoid offering up a lot of ideas and changes right away. I’d try to give myself some time before I try to impact too much change if I’m new. It takes a while to learn the perspectives and the reasons why decisions have been made or continue to be made.
Does treading carefully with change apply to how you work with the entire management team and staff?
Fettig: There are other people that are paying attention. When the new kid, new blood shows up on the block, they’re paying attention to what that person’s going to do. If they’re coming in and suggesting a lot of changes right away, I’d be cautious of that.
Ellis: You have to earn their respect.
Custer: A lot of times, it’s hard to earn maybe that leadership team’s respect. You have to prove yourself. Coming in and questioning or challenging right away may not be the best way to do it, especially with a seasoned, veteran, good management team. Whatever that company has, you have to earn the respect of them, and that takes a lot of time to do.
When each of you transitioned into the leadership position at your family’s business, what was your biggest learning curve?
Thompson: I became the president of Thompson Remodeling in 2008 not knowing (the financial crisis of) 2008 was coming. The learning curve was the impact of personal stress from being the decision maker in a very, very difficult climate. I drastically underestimated that as a leader.
Custer: Managing family is hard. There’s no course or anything you can really do to prepare you for that, managing other family members in that role. The stress that goes along with that is tough, too. You have the stress of running the business and managing a team. You can’t really prepare for that, especially in hard times. Making hard decisions is tough, but then the stress of managing the family was a hard transition I wasn’t quite prepared for.
Fettig: One of the tougher things is maybe going through the first big termination or role change that you have to make after becoming a leader. Whether that’s because of the economic situation or performance, after becoming that person running (the business) and then having to make any form of leadership change is a difficult spot. It was for me because you felt like you were maybe under a little bit more of a microscope at that time.
What effect does the concentration of family-owned businesses have on West Michigan?
Custer: It’s big because naturally we want to give back to the community. One of our missions as a family business is to give back to the community we live in, where our employees live. We want to help it thrive. You have a lot of family businesses in the region doing the same thing and have a strong commitment to West Michigan. They want to see it grow, they want to see it thrive, so they’re going to give maybe at a higher percentage than other non-family businesses or other regions where maybe they don’t have a stake.
Fettig: I think we’re more likely to retain employees if economic downfalls happen because we are a family. They’ve been with us for longer periods of time, and we’re more likely to show them through different forms of benefits and things that we care about the people who are working for us. I think that’s a benefit to life and the people of West Michigan that they have so many family-owned opportunities to work in because we do retain people longer.
Ellis: You’re loyal to the people that got you there, and they see that loyalty and give the loyalty back.