The challenges with family-owned businesses
Specialty Fabrics Review | April 2010
By Kikuko Tagawa
In our industry, many businesses are family owned, regardless of where we are located and regardless of business size. In most of these family businesses, the issue of succession poses a big challenge.
Eventually, the principal owner or manager will retire, become disabled or pass on. When that happens, a business generally needs to take one of three options: transfer the business to a relative of the owner, transfer the business to a third party (nonfamily member or nonrelative) or close and discontinue the business. There has been an increasing number of family businesses that have had to discontinue because they do not have a successor. This results not only in a loss of employment but also the value of the business, and the culture and expertise the current owner and employees have built up over the years.
Bud and Carmen Weisbart at AR Tech, Fontana, Calif., shared their views on business succession at the IFAI Japan roundtable held on December 8, 2009. Each participant in the session shared their own views as well. The discussion focused on identifying what participants have done, are doing or are planning to do to conduct and manage this transition in their family-owned businesses.
In many or most cases, family businesses in our industry pass the company on to relatives—usually sons or daughters of the owners, but sometimes to wives or husbands.
That is the case with the Weisbarts, who are now transitioning their business to their son, Kenny. Bud Weisbart noted that compared to the option of selling a family-owned business to a third party, there are significant benefits (and challenges) in making the transition from the owners of businesses to their relatives, particularly to their sons or daughters.
Weisbart listed those benefits:
- > Keeping the wealth built up over the years within the family. If you sell to a third party, the business may be worth less to that buyer.
- > Ensuring loyalty and commitment to the business.
- > Ensuring that the preceding family member is available as a resource, which is not always the case when a business is sold to a third party. Weisbart said, “Carmen and I have worked in our company for 31 years, and if we sell to a third party, the experience will be neglected. That experience is the strength of your company.”
The need to carry forth the culture created by the parents to succeeding generations of owners was emphasized by both of the Weisbarts. “How we related to our employees, how we relate to customers and how we relate to vendors; that is the culture that we wish to carry on to the future in the company,” said Bud Weisbart.
Weisbart also pointed out potential problems or detriments that can occur when family members take over a family-owned business. Family members can bring their family problems into business decisions.
- > Parents and children have difficulty separating their roles in the family from their roles in the business.
- > It is hard for a parent to “let go” and let the new owner follow his or her own plans for the future of the business.
- > It is difficult for a parent, who is the authority in the family, to allow a child to be the authority in the business.
- > If more than one family member is involved in the succession, disagreements in the business decision making can destroy family relationships.
- > If more than one family member is involved in the new ownership, each may have a different idea of where the business should go and how it should get there.
- > If more than one family member is involved in the new ownership, each may have different personal needs he or she expects the business to address.
Weisbart said, “When we pass the business to a family member, the most important consideration is how we balance the relationship with business partners and with family members. Are we ready to step back and see our son take over the job, watching and telling him what to do? He’s younger than me and he has his own management style. His process is different from our process. The employee attitudes are different to me or Carmen than they are to him. He has been in the company for nine years; we have been in the company for 31 years. So, employees have different levels of respect for him and for us.”
Mr. Shinichiro Sanada of Tsuda Co. Ltd., whose father is an owner of the company, and has worked in his company for five years, agreed with the Weisbart’s concerns about transition, saying that if things continue as they have, he will be the successor in his father’s business. Sanada is committed to working in his company, but does have some opinions that differ from his father’s. But he believes he is still in the learning stage. People may fear the change, but should not fear growth, Weisbart added.
According to Carmen Weisbart, “When Bud and I purchased one-third of the shares of the company from his father and his partner, we knew how his father was going to do business, and how we’d be doing business differently.” Bud Weisbart noted that his father and he had very different ideas about the future: “My father was 66 years old and I was 38 years old. He wanted to be stable and avoid risk, while I wanted to grow and be bigger. When you want to grow and be bigger, you take risks. We had very different points of view.”
In 1990, Ralph Weisbart decided to retire; Bud and Carmen purchased his shares, and eventually the business started to grow. In 1999, the partner who owned one-third of the company retired. The company continued to grow. Weisbart said, “My father never wanted us to be involved in the aerospace business because of the risks. Right now, aerospace represents over 3 million dollars annually for us. So, it’s important that Carmen and I worked independently. Then Kenny started to work in the company nine years ago. Three years ago, he said “I want to become the owner of the company.” I was 67 years old at that time; I was like my father was many years ago. I wanted to keep things growing, but not aggressively. Our sales were $2.2 million, but Carmen and I had enough money and could visit our friends in Japan when we wanted. But when Kenny wanted to take over the business, we had to be more aggressive to increase sales. From 2007, our sales were $2.2 million dollars, and grew to just under $4 million in 2009. So we can even visit Japan more often,” he joked.
“The reason we’re growing as much as we are growing now is that we have built for the future of our son, and of the rest of our workers who are about our son’s age.”
Who takes over?
Participants at the IFAI Japan roundtable agreed that the most difficult thing was that several current owners have not or cannot decide who is to succeed in that company. What if an owner does not have any children? What if the children do not want to take over the business? What if the owner does not feel a child is qualified to run the business?
In a family-owned business in Japan, the owner must provide her or his entire personal assets as a personal guarantee to the bank. In most cases with family-owned businesses, that makes it difficult to sell to a third party, unless the business is in very good financial condition.
Ms. Junko Takai, president of Hivix, who succeeded her father in the company four years ago, has a daughter. She said that she considers the company to be an asset for everyone involved with the company, which may include all the employees, vendors, customers and local community. She wants her business to continue to contribute to and be supported by all of those constituencies—to be something transcending belonging just to a single person. At the moment, Ms. Takai does not feel that her daughter will become her successor, and she is open to having an employee, or a group of employees, succeed her at the business.
Mr. Toshio Katayama, vice president of Daiichi Hanpu Co. Ltd., feels that it is ideal to have the owner’s son be the successor. But he also feels that it is necessary to retain capable employees to support that young successor. “We may need to have a capable staff in between a current owner and a successor. Our sons are still young and we’ll have to wait to see … and there will be about 30 years of that … but so far, we try to develop the personnel in the company.”
Mr. Tetsuji Wakamura, president of Takara Co. Ltd., also has a daughter, and he does not expect her to follow him in his company, and is having a hard time deciding upon a successor. Weisbart said that to have a successor is actually an asset to a business. “If you have a successor, you, the current owner, become more aggressive to make the company more attractive or better for your successor.”
Regarding the financial side of succession agreements, the laws and tax systems are different country by country. In Japan, the evaluation of the share of a private company is much higher than the book value. The owner of the company must be very careful to plan to transfer shares to their successor, learning the related laws and various systems available and appropriate to each company. That should be planned well in advance—otherwise, the successor has to pay a big burden in taxes to take over the business. The inheritance tax (maximum of 50 percent) should be considered as well. (To receive the inheritance tax and/or gift tax exemption, we may have to create a political corporation that is exempted from them and transfer the money to the corporation.)
Some of the sons or daughters of a current business owner may take it for granted that he or she is to be the successor. Ms. Hiroko Kikuchi, president of the Kikuchi Sheet Co. Ltd., commented: “I do not want just to give the business to my daughter. I want her to take it from me. I want her to think it is only she that can do it, and that she wants to do it. In today’s dynamic and severe economic environment, running a family business is very difficult, and the successor should be prepared for it. She should have enough motivation to do business. My goal is to make my business interesting enough to motivate my daughter to take a step forward to take it from me.”
Mr. Nobuo Takeuchi, president of Yano Tent Co. Ltd., now has his son work for him. After five years of working for another company, his son told him that he would like to work for him. Takeuchi did not allow his son to work easy jobs, but held him in a nonmanagement and lower position in the company. He doesn’t want to treat his son as “the son of the president,” nor to be treated as such in turn. He told his son that he needs to be proficient as a businessman in the company to move up to the leadership position.
Each succession and succession plan was different at our roundtable discussion. There was no single clear answer that applied to everyone on this challenging issue. But one thing we all need to keep in mind is that we must think of the future of the business, and plan for the transition from several vantage points. A well-planned transition will increase the value of the company to ourselves, to the business, to our successors, and to our industry.