Passing the Torch in a Family Business

Published on December 09, 2010

To prevent the infighting that can wreck a company, the owners of family businesses should plan ahead to decide which family members will fulfill which functions before control passes from one generation to the next.

This was the recommendation offered by two executives of family-owned firms who spoke to the student-led Family Enterprise Group on November 10 at Harper Center.

“Studies show the most difficult transition you’ll ever find in a family business is from the first generation to the second,” when free-thinking entrepreneurs who don’t want to face their own mortality fail to leave a clear governance plan in place for the future, said Ray Neisewander, president and CEO of Raynor Worldwide.

Siblings may wind up taking over the business from the founding parent with no clear mandate on their responsibilities or rewards. “It’s like a pick-up basketball game with no referee, and they’re calling their own fouls on each other,” he said. “Everyone has their own whistle, and it’s chaotic.”

At Raynor, the controlling ownership mantle will pass from Neisewander’s grandfather to him. The middle-market company makes residential and commercial garage doors. Headquartered in Dixon, Illinois, it has dealerships in North America and in 50 countries across the world.

Fights at family-owned firms have become the stuff of legends, said Tim Nicholson, ’09, vice president of PVS Chemicals. He said he has heard of other companies where fist fights erupted in boardrooms and siblings squabbled over who had the better corporate jet. “These are the things that tear companies apart,” he said.

PVS was started by Nicholson’s grandfather, who used chemicals to clean boilers. One day he decided he’d be better off selling the chemicals, and the family business was born. Today it employs 800 people, Nicholson said. PVS is headquartered in Detroit, Michigan. Nicholson’s dad, James B. Nicholson, ’67, is the CEO at PVS. Nicholson said his brothers James M. Nicholson, ’90, and David Nicholson, ’92, are vice presidents, and carry much of the responsibility at the company.

Three Kinds of Family Businesses

Nicholson, who helped launch the student group at Booth, described three models of family business: the controlling owner, the sibling partnership, and the public company.

The controlling owner makes all decisions, possibly with a small, rubber-stamp board of directors. Such companies can be nimble and make quick choices, Nicholson said. But the disadvantage is that the controlling owner may use the company solely to support a lavish lifestyle.

In the partnership model, the company is usually run by a pair or group of siblings. The disadvantage to operating under this type of model is that sometimes the partners spar. “A lot of times you get the, ‘If Mom says no, I’ll go to Dad’ issue,” Nicholson said.

In the public company model, those appointed to the board of directors are usually a mix of family and outside members. The board is responsible for hiring management. But the disadvantage is that “information flow from management to the board of directors can be difficult,” Nicholson said.

Neisewander said different dynamics arise when, after a generation goes by, a controlling owner gives way to brothers and sisters. “All of a sudden, the rules have changed,” he said. The dynamics change yet again when the third generation arrives to take over. A consortium of cousins may have shares in the business and question whether it is being run in their interest. “You have to get your head around the fact that, depending on what type of business model you have, the businesses behave very differently,” Neisewander said.

A field of study has grown up around family business dynamics. “One of the best things you can do for yourself is look at your family business and understand what those dynamics are,” Neisewander said.

Neisewander sits on the advisory board of directors at PVS. He is one of three independent directors, another of whom is Craig Iseli, ’93, a graduate of the Evening MBA Program. Five family members sit on the board.

Having a corporate board with nonfamily directors forces preparation and “really encourages fact-based discussions, because the outsiders are willing to challenge you” on opinions and suggestions, Nicholson said. “It’s a much more formal way of handling big projects and big decisions,” he said. Additionally, the PVS board is working on a family employment policy in preparation for the next generation to avoid disputes.

Eduardo Arturo Carrillo, a first-year student in the Full-Time MBA Program, said the presentation opened his eyes to “a lot of problems you never foresee” when a family business changes hands from one generation to another. His family owns a fixed-income boutique investment bank in Mexico. He said he sees now how it would be easier for his father to set up solutions ahead of time before the business is passed down to him and his siblings.

— Mary Sue Penn