Passing the keys

Family businesses have unique generational challenges.

From the pages of In Business magazine.

Family business statistics have been quoted over and over again — 30% of family businesses don’t make it past the second generation; 10% to 15% make it to the third; and less than 5% typically make it beyond that. Sounds bleak, doesn’t it?

In an online article titled “Family Business Survival: Understanding the Statistics,” Craig Aronoff, Ph.D., co-founder, and principal of The Family Business Consulting Group Inc., suggests those numbers may be misconstrued. “How do we know whether a 30% ‘make it’ rate is bad, good, or just plain normal?” Aronoff asks. “What are they being compared to?”

After comparing family business success rates to that of General Electric Co., which in 1996 was 100 years old and the only original company still listed on the Dow Jones industrial average, Aronoff determined the chances of success to be similar. “Rather than bemoaning family business survival rates, we should judge them as somewhere between normal and extraordinary,” he concludes.

We spoke with several area family businesses — Reynolds Transfer & Storage, Gordon Flesch Co., Endres Manufacturing, and the former Soderholm Wholesale Foods — to get a look at their dynamics and plans for the future.

The experts weigh in

Family businesses are far from unique. Approximately 80% of all companies in the U.S. are considered family businesses and they employ 62% of the nation’s workforce, according to the University of Wisconsin–Madison Family Business Center. Its 58-member roster from around the state is down slightly from previous years, according to Director Sherry Herwig, but it’s growing again.

Herwig disagrees with some published reports suggesting family businesses are on the outs. “I think things are strong, but expectations are changing. It’s not necessarily a given that the next generation will take over a family business and some research shows a bit of a decline in family businesses that plan to pass a company to the next generation, but the reasons vary.”

In many cases, Herwig explains, millennials are the next generation. “Millennials tend to be raised with the idea that they can pretty much do anything, so they don’t feel that they have to stay on a certain path, but their desire to make a difference really plays well in family owned businesses,” she adds, citing their desire to give back and connect with the local community.

Healthy relationships and communication is key. “If the family is not doing well, it’s really hard for the business to succeed. Impacts can be minimized through legal documents, but emotions cannot be controlled.”

Neil Fauerbach, partner and director of business development and marketing at Smith & Gesteland, helps family businesses plan for longevity and success. The keys are having a solid succession plan and an ability to adapt to change and innovation along the way, he says; yet a recent PricewaterhouseCoopers survey says 73% of family businesses do not have a formal plan in place.

On any given day, Fauerbach may meet with family run companies in various stages of preparedness. Sometimes, he says, parents want to turn the business over to their kids but the children aren’t adequately prepared to run a business.

Sometimes the parents aren’t ready to relinquish the reins. “In a couple of instances, we see families trying to figure out how to get the now generation (parents) to move aside,” Fauerbach says. “Dads, in particular, often have trouble letting go, but then there are stories where dad suddenly turns the keys over and says, ‘You’re it.’”

Wrede “Bud” Smith is an attorney at DeWitt Ross & Stevens in Madison, and also part of a family business bloodline. Smith’s brother and cousin run The American Popcorn Co., producers of Jolly Time popcorn. Founded in Iowa in 1914 by his great grandfather, Smith’s brother represents the fourth generation, with more generations on the way.

“The company is still strictly family owned,” Smith reports, “and it was an easy transition from my dad and uncle, but the next transition will be harder because there are about a dozen members of the fifth generation. Who steps to the plate from that group is a bit unclear. There is interest, but interest and ability don’t always line up.”

Smith does not handle any legal work for his family’s business, but says a common challenge he sees when working with family businesses is figuring out how to treat everyone fairly. “Often the family business itself is the single largest asset of the business, so how do you pass the business onto the active child? Or do you pass it on to all children? What about the inactive child?”

Senior owners who struggle with letting go can sometimes be nudged along if they see that they will be financially secure afterward. But at times, parents are afraid to let go no matter how old their kids are. “The business is their life,” notes Smith. “They often fear they’ll lose their identity or lack confidence that the next generation will work as hard or have the passion for the business that they had.”

That can be difficult for the next generation, as well, Smith adds, “when they’ve been working in the business for decades and dad is still calling all the shots.”

Emotions can come into play when transition talks begin. Some family members may want to keep the legacy going, while others would prefer to sell. “Business can very easily get in the way of the family,” Smith warns, causing rifts that wouldn’t exist but for the family business. “Usually what I find is that as long as mom and dad are around there can be harmony, but when they’re gone so is the glue and those differences can get very, very difficult. Everyone reacts personally.”

He offers the following advice for various scenarios:

For parents not wanting to leave:

Parents often assume they know what their kids want but after a hard one-on-one discussion, they may be very surprised. “Talk to them. Don’t assume that any one child may or may not be interested in the business,” Smith advises.

For mid-sized family businesses facing major competition:

Finding the time and resources to train the next generation can be difficult, but successful businesses emphasize education and find ways to properly train or have others train the family members in waiting. Industry leaders or trade groups may offer training, as well.

If selling is an option:

There are many reasons to sell a family business. Senior ownership may not have the resources or the finances to take the company to the next level. Maybe there’s no family member in line or none showing interest, or the next generation lacks skills the parents would like. “If that’s the case, everyone’s probably happier to let go. At least the parents get the sale proceeds and nobody’s forced to do something they weren’t cut out to do,” Smith says.

Following, several family businesses share their stories.

(Continued)

 

Gordon Flesch Co. Inc.

62 years old

Patrick Flesch, 37, is the grandson of the company’s namesake. He and his brother Mark represent the Gordon Flesch Co.’s third generation, and their young children, the fourth. The second generation, brothers Tom (Patrick’s father), John, and Bill, remain heavily involved. The family has three offices — in Madison, Illinois, and Ohio — and employs 589 workers, including about 300
in the Madison area.

The second generation of the family Flesch includes (standing, left to right) brothers Bill, Tom, and John. Seated, generation three is represented by brothers Mark and Patrick.

Patrick and his brother Mark are also best friends and share the same titles, vice president of sales, in two different divisions: Patrick handles the western region and Mark the east. There are no female Flesches involved in the business. Patrick and Mark were raised in Columbus, Ohio after Gordon sent his dad there to open a branch. Mark still works there.

Patrick recalls how hard his father worked and the long hours he put in. “Friday nights we’d have dinner with dad in the office, sitting in demo rooms surrounded by big copy machines and usually eating pizza.” He also remembers feeling unique in that he recognized that the family was privileged and lucky that it had a company, “but I didn’t know how successful that company was,” he admits.

Grandfather Gordon, meanwhile, instilled a rule that family members wanting to join the business would have to earn a college degree and spend at least three years working elsewhere before applying. After college, Patrick found a job as an inside account manager at CDW in Chicago and loved it. “I was young and single and working in downtown Chicago when I got a call from Tom saying a territory had opened up in the Oakbrook/Elmhurst area and they wanted me to consider it.”

Now he’s at the Gordon Flesch Co. indefinitely, “and not just because I’m a Flesch,” he insists. “I love the technology we sell, I love our customers, and I love the people here.” The average employee tenure is 10.4 years, he reports, and “that’s a testament to Tom, John, and Bill’s leadership. Hopefully Mark and I can continue that forward.”

What about his kids, ages 6, 4, and 1? “It would be a dream of mine to see them join the business,” Patrick acknowledges. “As exciting as it may be to have your children in the business and transferring the company to the fourth generation, that comes with a lot of work and pressure. I want them to do what they want to do. Let them figure it out.”

A portrait of founder Gordon Flesch.

He admits there are challenges inherent in family business: “I really think it’s helped our company that people are located in different states and we don’t see each other every day. When you’re in the office every day with your family members, I think conflicts can become more prevalent.”

There’s also the challenge of non-active family members, he notes, who are always invited to the annual board meetings. How much do they want to know about the company? Do they care? When it comes to finances and making sure that everyone is taken care of, do silent members get the same breakouts?

As far as a company succession plan goes, details are not yet known to the brothers in generation three. “If there is one, Mark and I aren’t privy to it,” Patrick notes. “I assume they have a contingency plan should something happen to Tom. Bill, the youngest of the three, might be the natural option,” he suggests.

But just to be safe, Patrick notes that company executives often travel on separate flights to company meetings because “having all the top earners on one plane is not a good situation.”

So what would grandfather Gordon say now? “I think he’d be proud,” Patrick says. “He used to tell Tom, John, and Bill that he dreamed of making a top line revenue of $10 million. Now we’re at $155 million.

“He’s got to be smiling.”

Reynolds Transfer and Storage Co.

130 years old

Back in 1888, Anna Gault Reynolds started a livery stable and hauling firm with four rigs and 10 horses and operated it out of a barn next to her house on East Mifflin Street. Until recently, few women have held corporate roles in the Reynolds family business. Mom Michelle plans community outreach and social media while Natalie Evans, daughter of Michelle and Tom and twin to their son Ben, has taken an active role as director of information. Tom, Reynolds’ president, is thrilled. “We’ve never had a daughter come into the business,” he says. “I’m proud of that generational change.”

The Reynolds family bloodline includes generations five, six, and possibly, seven. Left to right, Benjamin, Eli, Madeline, parents Tom and Michelle, Michael, Natalie (holding baby Nell), and Garrett.

There could be another, as well. Natalie’s six-month-old daughter, Nell, represents the company’s seventh generation.

Tom and Michelle represent Reynolds Transfer and Storage’s fifth generation, and their six children comprise the sixth. Ben, director of operations, Eli, 27, vice president, and Natalie are actively involved full time. In addition, a sister, Madeline, age 23, a student at UW–Madison, brother Michael, 20, and Garrett, 16, who still is in high school, have all worked for the company on a part-time basis.

“We’re very fortunate,” Ben says. “Everyone likes each other.”

After all, there’s a certain expectation involved in being a part of a 130-year-old business. “It’s pretty awesome,” Ben admits, “but comes with the responsibility to see that it continues to grow, thrive, and provide incomes and livelihoods for our employees.”

The company, he says, is working on a succession plan — again. They started the process about five years ago before Ben’s dad Tom and Tom’s brother Mark decided to go their separate ways, creating a separate business, Reynolds Rigging & Crane. The decision was amicable, but that sent the family back to the drawing board on succession planning.

With the help of the Family Business Center and Smith & Gesteland, succession plan talks have resumed. “We kind of forgot about it, to be honest,” Ben admits. “Now we got the necessary kick in the butt to get back to planning.”

Above, Anna Gault Reynolds founded Reynolds Transfer & Storage on East Mifflin Street in Madison. Below, Reynolds Transfer moves a portable stone crushing machine in the 1940s.

Ben says one of the biggest challenges is leaving business matters at work. “Not only is it a family business but any business owner gets stressed out about owning a company that goes to a different level than being an employee.” Ben, like Natalie, spent time away from the company before choosing to step back in, but one of the things he loved most about working for another company was being able to walk away at the end of each workday.

“Here, there’s always a concern about money, or utilization, or other fires,” he explains. “We’re a service company. We do moving and storage, so we’re always trying to help our customers, but it’s very tricky to be the right level of busy. We’re almost always over or under booked. It’s hard to be perfectly booked.”

The cozy notion of family members being in contact throughout the workday does not hold true at Reynolds, he explains. “Often times I don’t see my other siblings or my dad, so if something happens it’s hard not to talk about it at home. Even though we share offices, we’re usually busy in our own roles.”

There are benefits, too. “It’s fun to work with family,” Ben states. As investors in the business, the younger generation can influence the company’s direction and focus on issues they deem important, such as Reynolds’ commitment to charity work and sustainability as a long-term strategy. “That may not happen if you’re just interested in quarterly profits.”

Since joining the company, Ben and Natalie made vast improvements to systems and processes, switching from paper-based to electronic systems that have saved administration time and modernized the business. Natalie, who has a master’s degree in library science, handles accounting work, record storage, and organization. “In addition to our record storage division, we have about 170,000 square feet of storage space, so you do need to have a good record-keeping system to know where everything is,” Ben states. “She’s more like a data scientist than a librarian.”

Ben has an undergraduate degree in industrial engineering and a master’s degree in manufacturing systems engineering from UW–Madison, while brother Eli excels in project management.

Their father, Tom, says they’re doing things differently these days. “We’re striving for better communication so the next generation feels some ownership.”

As he looks to the future, Tom is confident in his kids. “I think they will help the company stay vibrant. I’ve learned a tremendous amount from them as their father. I wasn’t ready for that. Sometimes it’s difficult to listen to their suggestions but they do have great insight into what others out there are doing. I have to make sure I listen.”

He worries about the availability of future workers and admits things won’t be easy for his kids. “I know the challenges family businesses face. Will two kids end up in the business, or all of them? I have no idea, but they all know they need to work hard.”

Leading a multigenerational business is humbling, Tom admits. “I try to impress on the employees that many people have worked very hard for a long time so we can have the opportunities we have every day.”

(Continued)

 

Soderholm Wholesale Foods

53 years

Jay Soderholm, 50, had a very different family business experience. He sold it.

“That was a very emotional day,” Soderholm admits. After introducing the new owners, Michigan-based Lipari Group, to his 75 employees, he got in his car and drove about a mile before he had to pull off the road. “It was tough.”

Soderholm Wholesale Foods was a middleman between food producers and retail stores. “We’d buy yogurt, for example, and deliver it to supermarkets,” Soderholm explains. “We handled about 3,500 different products, and about 95% were either refrigerated or frozen items.”

The company was started by a couple of Jay’s uncles in 1961 but his dad became the sole owner soon after. Jay started working in the business in 1989, joining other relatives, as well. In all, there were four owners — mom, dad, Jay, and his brother. “We got along great,” Jay recalls. “We tried to act like a non-family business. We had to work hard and got promoted only if we did a good job. I think we handled it very well.”

Jay says his parents were hard working east siders who came from meager means. He remembers his dad working long hours doing everything he could for the business, from sales to driving truck. “He’s the best dad, but there were things he didn’t have time to do with me as a kid, although we still did a lot,” Jay says. “By the time I joined the business, I worked Monday through Fridays and had no real physical labor because the company had evolved to that point. As a result, I always had more time for my kids.”

Over time, Jay saw the grocery industry beginning to change. Among the challenges, Soderholm’s biggest customer was becoming its biggest competitor. He also realized that the Lipari Group would want his company to either get bigger or get more specialized. “Bigger called for a greater investment, and I didn’t want to become more specialized.”

His own children were too young to be involved at the time. “Frankly, I didn’t want them to be involved in the business because I knew the direction it was headed,” Jay admits. “I didn’t want to put that burden on them.”

Seeing the writing on the wall, he approached his parents and stated the facts. “They were both in good health and I wanted them to realize that they could reap the benefits of a sale, as well.” They agreed.

Soderholm Wholesale Foods was sold to the Lipari Group in December 2014.

Looking back, Jay has no regrets about why he decided to sell, but with limited bidders for the business, he laments that he couldn’t sell it to a group interested in keeping it local. Lipari was in an acquisition mode, he said, and two months after the sale, some employees were retained but the rest were let go. “There might still be angry people out there,” Jay acknowledges.

Still, it was the right decision, Jay says now. “At the time we sold, our sales were slower than we wanted, or even flat-lined. It took a mental toll.

“One thing people don’t understand is that when you own a family business, you take it home with you every night, every weekend, and on your vacations. It consumed us. The holidays were difficult because we always had to work late on Christmas Eve, so it took some of the fun away.”

Because the company had a written succession plan in place defining specifically how any proceeds of a sale would be split between the parents and their two sons, the transition went smoothly.

Three years later, Soderholm’s parents are healthy and often spend time in Florida. Darren, a musician, found a job he enjoys with a wholesaler in the electrical trades and was able to invest money into his own music studio.

Jay now works for Legendary Way Marketing handling marketing and hospitality for the American Family Insurance PGA Championship. “Now I do what I do because I enjoy it. I was paid well then and make much less now, but money isn’t everything.”

Endres Manufacturing Co.

92 years old

“Emotions make a family business the most gratifying, and the most challenging,” notes Sam Ballweg, the fourth generation president at Endres Manufacturing Co. in Waunakee.

Above, Sam Ballweg (standing, orange t-shirt) joins the third, fourth and fifth generations of Endres Manufacturing Co. in Waunakee. Below, an old-school Endres team.

Endres is a steel manufacturing business that’s been around since 1926 when started by Lawrence Endres Sr. His son, Larry Jr., took over in 1948, and Larry’s son-in-law, Ken Ballweg (formerly married to Larry’s daughter, Diane) became the third generation leader in 1990. Sam, 38, is Ken and Diane’s son.

Sam has two other siblings, as well, and he says the family spends a lot of time together. “My family was always clear that any one of us could work in the family business,” he says. College and working outside the business was also a prerequisite, but Sam admits he knew fairly early on that he wanted to be involved.

As a youngster, Sam remembers visiting his dad at the shop on Saturdays. Sometimes he’d bring a coloring book, and later he’d sharpen pencils or do some filing. “I assumed it was normal to work on Saturdays,” he says.

After starting in the office at Endres in 2004, Sam made his way through most of the departments, from designing the company’s first web page to working on the shop floor.

“I needed to prove that I wasn’t just the boss’ son. I wasn’t going to automatically be president. Sometimes in family businesses, sons of bosses get a bad rap.”

Sam was named president in 2013. Ken remains CEO.

“I think it’s important that the company employees see you work hard,” Sam remarks. “You have to lead by example. If you ask the employees to do more, you also have to do more and listen to them to gain their respect.”

Endres currently employs 66 workers and the company continues to reach out to trade schools for future prospects. “We see some young employees not wanting to get their hands dirty, but our business is becoming more automated, as well, so the work is changing.”

Each of the company’s leaders left their mark through the years, Sam notes. Lawrence, the founder, was an inventor. Larry Jr. started welding and moved the company more into steel and machining. Ken has grown the industrial steel business, and Sam believes his stamp may lie in technology and automation.

“It will be interesting to look back in 10 years. Automation in our business is a sign of growth. We’ve never laid a person off, so it’s about getting more tonnage out the door in less hours.”

The 92-year-old family business does not have a formal succession plan in place, but Sam is confident in its solid management team. “We’re relatively small and private. There are just five of us so it makes planning a little easier. Sometimes there are challenges in a family business.”

The parents and their three children recently redid their shareholder agreement. At this point, Sam says, family members are at different levels of ownership.

His three young children, a 10-year-old and 8-year-old twins, are part of the fifth Endres generation. Might they become future leaders? “It’s difficult,” Sam sighs. “You have to have the right person in the family to keep the business moving forward, but nobody should feel trapped into a job. That’s not normal.”

Can Endres Manufacturing survive without a formal succession plan? “Of course,” Sam answers. “Dad is still active. Right now, we’re good, but if Ken is no longer around, we might reconsider. He’s a nice safety cushion.”

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