Plan for the Future
By Mark Brock
If you were to survey family business owners, including specialty retailers, the majority likely would say that their ideal vision for the future would be a family member continuing the business after their retirement. Unfortunately, the statistics are not encouraging of this vision, with only about 30% of small businesses transitioning to the next generation.
Factors behind this statistic are many. Children of the founder may have other career interests, having seen their parents work incredibly hard and sacrifice much for many years. Or the business owner may be trapped by the forces of delay and denial, neglecting to put a succession plan in place until it’s too late.
There is, however, no need for despair. If a family business owner can step up to the challenges of open communications, grooming successors, gradually relinquishing control and accepting expert advice, then a successful transition within a family is certainly achievable. A family-owned business can become a legacy that grows and changes with each new generation.
|L to R: Jerry and Linda Newton.|
Leader’s Casual Furniture Succession Inspired by Culture
Tim Newton was a teenager when he began working for Leader’s Casual Furniture in Florida, unwrapping furniture and assisting with deliveries. The company was founded in 1971 and his father, Jerry, joined the company in 1978 with an ownership interest. Jerry Newton became the sole owner in 1993 and, along with his wife Linda, led the company’s expansion over many years.
“I was often at the store during my growing-up years and saw the sacrifices that my parents had to make to run the business,” Tim said. “Seeing how hard they had to work, I think I was turned off from working for the family business and headed to college with a double major in business management and mechanical engineering.”
After four years of intense academic work, Tim decided to take a summer off and reached out to the sales director at Leader’s in 2001 to secure a full-time position in sales at one of the stores.
“At first, I really wasn’t very good, but I enjoyed helping people and I enjoyed the challenge of sales,” Tim said. “I eventually learned the system and worked up to being average.Because I was crazy enough to take the offer, and possibly because of nepotism, I was offered a management position in 2002 in the worst performing store in the company.At that same time, as fate would have it, I attended a seminar on selling based on open-ended questions, and I was hooked on that approach.”
Asking open-ended questions is a sales technique in which a salesperson develops a personal connection with a customer by asking questions that encourage a lively conversation and delve into the customer’s true wants and needs. Tim used this same technique in a second store assignment in which he led another turnaround in sales performance. At this point, his engagement in the family business was continuing to grow.
“After we successfully turned around the second store, I was offered a junior management position that focused on sales team training,” Tim said.“I wrote a training program and standard operating procedures that created more accountability. This is where I discovered my passion for trying to help others be successful.I am intrigued by the challenge of getting people engaged and learning despite any bad habits they might have developed.”
As Tim became more engrained in the company, he also discovered that the company’s direction was not in sync with the values of his family. He approached his father and together they began to transform Leader’s in fundamental ways for continued growth, exceptional customer service and a positive work environment for its team members.
During 2007-2008, Tim assumed the responsibilities of managing director and his father and mother retired from direct involvement in running the company in 2008. Jerry and Linda Newton remain majority owners, and Tim has had opportunity to earn ownership based on company performance.
Today, Leader’s is one of the Southeast’s largest casual furniture retailers and distributors, with 19 locations in the western region of Florida, along with a corporate office in St. Petersburg and a 150,000 sq. ft. warehouse. The company employs 170 people who share a culture focused on open communications, teamwork, accountability and performance-based compensation. Tim’s wife, Ashley, is responsible for purchasing and advertising.
“We communicate daily with our team members on how the business is doing and what we need to do to be successful working as a team with shared goals,” Tim said. “Our culture is based on empowering individuals and teams, recognizing outstanding performance and celebrating our successes together.”
Tim acknowledges that the leadership transition and the cultivation of a strong culture have not been easy, but the overall trajectory has been positive. Throughout this process, he’s gained insights that could be valuable to other specialty retailers in similar situations.
“You cannot force someone to be the right person to take a business forward,” he said.“For a family member to successfully take on the leadership of a business, they need to be focused on the teams and individuals who run the business.They cannot be enamored by their title or ownership status.
“If you try to take over a business for prestige or selfish reasons it will be extremely difficult. In today’s environment you must be passionate about the success of the individuals and teams that make up your organization.Without their commitment and success it will be impossible to meet your family’s goals.”
A successful business transition and transformation also requires a strong leadership team capable of taking a candid look at its own abilities and management styles.
“There is no substitute for humility,” Tim said. “Learn all you can from those around you and the team that’s in place. Attend seminars and be active so you can make the most of the experience. Be simple, truthful and consistent. Give thanks and credit for accomplishments every day to team members who add value to the business and help it remain successful. And eliminate ‘I’ and ‘my’ from your vocabulary. It’s all about team, ‘we,’ ‘our’ and ‘us.’”
|Eunice and Wayne Stritsman, founder of Best Fire Hearth & Patio in Albany and Troy, New York.|
Best Fire Hearth & Patio Took Long View on Succession
Wayne Stritsman, founder of Best Fire Hearth & Patio in Albany and Troy, New York, took the long view in planning when he would step back from the business – 10 years, in fact.
“I was committed to seeing the ‘Best’ brand continue, but I knew that before I could sell the brand I had to make it attractive for someone to buy,” he said. “We did that by putting the right processes and the right people in place so that the business is profitable, and so that it can continue without my involvement.”
Stritsman’s commitment to the ‘Best’ brand is understandable given the nearly 40 years that he and his wife, Eunice, devoted to growing the business. It all began in 1977 while the couple was searching for a wood-burning stove. From that experience, they concluded that selling wood-burning stoves could be a good business, and they started operations from their garage. By 1982, the business had outgrown the garage and they moved to their first showroom location and became known as “Alternative Energy Systems.”
Over the years, the business added casual furniture and accessories to offset the seasonality of wood stoves and fireplaces, and continued to expand its retail and warehouse footprint. In 1998, the company rebranded itself “Best Fire Hearth & Patio” in recognition of the broader product offerings. Also expanding was the Stritsman family, which grew to include four children, two of whom – Lucas and Evan – joined the business following college and careers in high technology fields.
“My main objective in preparing to sell the business was to see the brand go on beyond me,” Stritsman said. “We had built a strong brand over many years with loyal customers and leading suppliers in hearth and patio products. Our company achieved 40 years in business, and I wanted to see it go to 50 years and beyond.”
Stritsman said he was open to any potential buyer that would continue the Best brand, whether an outsider or members of the family. As things turned out, sons Lucas and Evan stepped up to the challenge, and in 2015 the process began for a sale that would keep the business in the family.
|L to R: Evan and Lucas Stritsman.|
“We approached the sale as strictly a business deal,” Stritsman said. “We were delighted that Lucas and Evan wanted to purchase the business, but it was first and foremost a business transaction that would assure continuation of the Best brand.”
As a condition of the sale, Stritsman required that his two sons create a partnership agreement that defined their working relationship, including provisions for how either of them could exit the partnership at some point in the future. Stritsman agreed to finance the purchase of his company and included stipulations similar to those that would accompany a bank loan, addressing such issues as future acquisitions. Lucas’ wife, Erika, serves as business manager at the Albany showroom, and Evan’s wife, Morgan, fulfills the role of designer/decorator for the retail stores.
“Communications throughout the process were very important,” Stritsman said. “We made sure that everyone in the family knew exactly what was going on.”
Stritsman and his sons also enlisted the assistance of outside professionals, including a management consultant, attorneys and their accounting firm. Input from these experts was essential to address legal, tax and estate issues.
“We also made sure that our employees were on board with the new owners, and it really helped that they had seen Lucas and Evan work in the business right alongside them,” Stritsman said. “Our consultants said they had never seen a buy-sell agreement go as smoothly as ours.”
As part of the transition of the company, Stritsman agreed to remain with the business for five years, serving as a project manager. His role is to transition relationships with customers, suppliers and industry trade groups, while also imparting his deep knowledge of the industry. He is also available for any special customer projects where his expertise adds value.
“They can apply me wherever they need me for special projects; I work for them now,” Stritsman said. “I am transitioning relationships with manufacturers of more than 40 years, along with my involvement in the Hearth, Patio & Barbecue Association (HPBA). I always said I wanted to back out of the business rather than drop out, and this is the approach we’re taking.”
Best Fire Hearth & Patio is continuing to thrive under Lucas and Evan, with a commitment to taking good care of their employees while continuing to expand through acquisitions. The company’s long-term planning for a transition and its focus on the needs of the business are reaping benefits for everyone involved.
“The biggest issue in the transition of a family-owned business is that many people just don’t plan for the future, and they let emotions get in the way of logic,” Stritsman said. “Keeping the Best brand in our family is the best of all outcomes, but we always focused first on the needs of our customers, our employees and our suppliers.”
Business Succession Expert Applauds Early Planning
Richard Myerson, president and CEO of The Myerson Agency, emphasizes the importance of advance planning as illustrated by Best Fire Hearth & Patio. Delay and denial, says the financial planning specialist, are the greatest obstacles for a small business owner in preparing for a successful transition within the family.
“The business owner is often paralyzed by fear to begin succession planning,” Myerson said. “The reasons for delay are several, but for some business owners, they can be all-encompassing, including the need to maintain control, unwillingness to trust or accept that anyone can do it as well as they can, uncertainty of the ability of the identified successor, no identified successor, relationships they have developed with customers and vendors they do not feel can be effectively transitioned, and the visceral fear of what they will do the day after they retire.”
According to Myerson, there are six essential elements in a successful transition of a family business within the family:
- Identify the successor. This is unquestionably the first requirement and often the most difficult. Sometimes family members in the business are not the best candidates to run the company after the founder’s departure.
- Start conversations with other family members who may or may not be in the business, but have a vested interest, as to why you’ve selected the person to succeed you. Listen to their concerns.
- Identify the key management team to assist the successor. They will be critical to an effective transition.
- Create a plan to incent the key management team to stay with the company after the owner transitions. These are often referred to as “Golden Handcuff” strategies.
- Allow the successor to begin making management decisions while the founder is still around.
- Develop a post-retirement plan. This is critical to the exiting owner’s happiness.
Myerson emphasizes the importance of communications within the family to help avoid conflicts that can not only disrupt the business, but destroy family relationships for a lifetime.
“For a family-owned business, succession planning can quickly get personal, which can become a huge issue,” he said. “Proper communication with other family members is absolutely essential immediately after identifying the successor. Open and honest discussions regarding the transfer of the business, along with other assets, are key to avoiding family feuds that may be irreparable. Allocation of other assets, including the use of life insurance to equalize the transfer of wealth, should be considered.
“We strongly discourage transferring ownership of the business equally among all children while having one or more of them uninvolved in the business,” he continued. “This approach invalidates the sweat equity contributed by family members who remain in the business and will do more for family disharmony than perhaps anything else.”
Planning Experts Help Keep It in the Family
Leader’s Casual Furniture is an excellent example of the benefits that result when a family business can be transitioned within the family. Not only do the hard work and sacrifices of the founders prepare a path for future generations, but the family’s values continue to be reflected positively by an ongoing brand, which was a key motivator for Tim Newton.
Lee and Terry Resnick, partners in nationally-recognized Resnick Associates, specializing in business succession, estate planning, due diligence and life insurance implementation, agree that transition within the family is the ideal solution and can be achieved despite complex tax and legal hurdles. Lee and Terry were guest speakers during this year’s International Casual Furnishings Association (ICFA) conference.
“Business owners are extremely busy and have tremendous responsibilities; we understand that,” said Lee Resnick. “But we also know that owners of family businesses are dedicated to their families and to creating a legacy that lasts for future generations, while other types of business owners may want to create maximum value for a future sale to an outside buyer. This is where business succession and estate planning are crucial.”
One of the most important tools for effective succession and estate planning is the use of life insurance as a tool to provide liquidity, according to Lee and Terry. Many family businesses have been forced into liquidation in order to pay estate taxes, while many others have been hobbled by debt needed to cover this liability. Not only can life insurance provide liquidity for estate taxes, but proceeds can also be used to provide for family members who are not working in the business, but who should be included in the proceeds of an estate.
“We cannot overemphasize the importance of life insurance in business succession and estate planning,” said Terry Resnick. “Unfortunately, many people view life insurance as pretty simple, which it is not when it comes to estates and business succession. It’s important to recognize that the application of life insurance in estate planning is a unique science when it comes to the design and ownership of these policies. We have seen mistakes that cost families millions of dollars because the life insurance was done incorrectly.”
According to the Resnicks, when creating business succession and estate plans, a business owner should involve a team of advisors, including attorneys, accountants, valuation experts and liquidity specialists. Given the complexity of business succession and estate planning, including tax liabilities, it’s important to tap into the expertise of specialists.
“Business succession and estate planning are highly technical endeavors, which is why business owners will be well served to include specialists in the process,” Terry said. “There is an expense involved, but the alternative of ‘saving money’ by not doing the proper planning can put the family and the business at significant risk with the possibility of losing the business as well as other assets.”
After an initial business succession and estate plan is complete, many business owners make the mistake of letting plans sit unattended for many years while the business and family situation changes.
“Business succession and estate plans should be reviewed at least once a year and at any time there is a significant change in the family, business or tax law,” Lee said. “Even if the plan doesn’t require any changes year-to-year, it’s an important exercise to remind the business owner of the details of the plan.”
|L to R: Mary Alice and J.C. Swanson.|
Swanson’s Focused on Needs of Family and Business
One of the greatest challenges for a family business is to balance the needs of the family with the needs of the business as the founders grow older. J.C. Swanson’s Fireplace and Patio Shop of Edmond, Oklahoma, is a good example of how both family and business needs can be met when everyone involved works together.
J.C. and Mary Alice Swanson moved to Edmond, Oklahoma, in the late 1950s to attend what was then Central State College. J.C. began working at the local furniture store while going to school, and after working his way up from helping with the deliveries to the sales floor, he and Mary Alice purchased the interior household furniture store in 1961. The Swansons had two children, Beverly and Al, who were often at the store, playing games or watching TV in what they called the “red carpet room” next to the store office.
“It was most important to my folks that my brother and I were with them as much as possible,” Beverly (now Hayden) said. “I suppose one could say, we were born and raised in the furniture business.”
While furniture was certainly in the DNA of the Swanson family, they took a break from the business in 1979 to pursue another passion – showing Arabian horses. Changing economic times in the mid-1980s, however, led J.C. and Mary Alice back into the furniture business, opening and operating a successful patio furniture store in Oklahoma City. Based on this success, they opened their own patio shop in 1994, J.C. Swanson’s Fireplace and Patio Shop, in the same location as their original business in Edmond.
Beverly joined the business in 1997 after having obtained a two-year degree in Business and working at a local doctor’s office for eight years. Her brother Al established his own business in oil and gas leasing, with an office in the J.C. Swanson building.
“You could say that we were truly a ‘mom and pop shop,’” Beverly recalled. “My father took care of the books and ordered furniture the old fashioned way, as he never once turned on a computer. My mother took care of all the decorating, and together they handled all of the deliveries themselves. Quite the team, they were.”
While brother Al focused on Oklahoma’s oil and gas markets, Beverly came under the tutelage of her father.
“When I came on board, Dad, the natural born salesman and character for sure, showed me the ropes by example,” she said. “I would follow him with my eyes and ears open and my mouth shut. After several years he allowed me to begin ordering all the furniture, and I found enjoyment not only in that and selling and developing friendships, but also in the receiving and handling of the freight. My mother and I found it such a great time together setting up the floor during and for the next season.”
As the years passed, it became evident that business succession and estate planning were needed. Having worked for many years with family-owned businesses in the oil and gas industry, Al had seen devastating results when families failed to plan ahead. The Swanson family enlisted the assistance of an estate attorney in 2015, resulting in the creation of a trust for business assets and plans in place for succession of the business.
|Beverly Swanson (now Hayden), owner of J.C. Swanson’s Fireplace and Patio Shop of Edmond, Oklahoma.|
“We are most grateful for having put those plans in place at that time because my father became ill with a diagnosis of widespread cancer last April (2016),” Beverly said. “After moving him and my mother, who is suffering with memory challenges, to our home for the good fight together as a family, he passed away in September (2016).”
Everyone in the family – Beverly, her husband, Bob, brother Al, and close family friend, Angela Wilson – assisted in the care of her parents. The succession and estate plans put into place during 2015 offered assurances that the assets that J.C. and Mary Alice had worked so hard to accumulate would be preserved for the remaining Swanson family members. All energies could then be focused on the care of their aging parents.
“As many have said,‘it takes a village’ when caring for infirmed parents or family members, and even more so when also operating a family’s small business,” Beverly said.“That was definitely true in our case. Many customers offered so much support to us, but the year could not have been overcome without the dedication of team member and second cousin, Joshua Ridgon, along with our customer service and sales representatives, especially those with whom I was in more consistent communication, Bill Brown, Rob Ball and Jay Zeitler.I could not be more grateful for each of them.
“The last piece of the transition puzzle for me was the successful balancing of the store’s books for the 2016 season,” Beverly said. “Just numbers they are, but many of them there were, and an accomplishment to overcome, nonetheless.”
Advance planning and dedication to continuing the family heritage have helped assure that many different elements have fallen smoothly into place.
“There have been many bittersweet moments, such as contacting credit managers for the new year’s early-buy anticipation monies, a favorite task of Dad’s to get the year started. We’ve also had a wonderful answer to prayer in our new team member, Jordan Karim.
“We here at J.C. Swanson’s Fireplace & Patio are carrying forward the hard work, dedication and fun that my parents set as examples for us to follow. We should all be so fortunate.”