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Most small businesses in America will face a change in ownership by 2005. Is your business ready?

Jim Gibney, president of Warren Pike Associates, says he grew up in the business.

"I was always drawn to mechanical things," says Gibney, whose family-owned power transmission and motion control business is headquartered in Needham, Mass. "As a child, I became interested in the business. During the school vacations, I would go in to the business and help out. There I got to learn from one of the best salesmen there is, my father."

Gibney characterizes his father as a master salesman and as a leader. He recounts his father's career at Warner Electric before purchasing Warren Pike Associates followed by the purchases of W.M. Steele Co. and Cohen Machinery Co. to form J.G. Industries, Inc. Gibney says his siblings were drawn to other interests and have pursued other successful careers, but that he followed his fathers footsteps from the beginning. He says that wasn't always a simple path.

"My father was a hard worker and that was one of the values he instilled in me," says Gibney. "I worked my way up through the ranks. I've been in shipping and receiving, inside sales and outside sales before taking on a role in management."

His father still remains active in the company and retains the title of CEO, but after years of working hard for the company, he is able to work on something else -- his golf game down in Florida. Meanwhile, Gibney has taken on the role of president.

"It was an easy transition," says Gibney. "I have been in upper management for so long and was already very familiar with the business. My siblings had never been involved with the business, so they weren't concerned with the process of succession. My father and I had discussed it over the years and we knew I would take over when the time was right."

Gibney said they did very little in the way of formal succession planning.

"After some internal planning and adjustments," says Gibney, "we realized that the end of year 2000 would be the right time."

Gibney admits that part of the success of the transition relies upon keeping open channels of communication. While nothing was formalized in their planning, the details of succession were discussed and understood by all parties, including JG Industries' 17 employees.

"Communication is key," says Gibney. "We have a family atmosphere and we involve the employees in the business. People usually resist change and that can make succession difficult, but we involved them in the process. I think, by being included in this way, they are now excited by new opportunities in a rapidly changing industry."

Will his own children take over the family business? Gibney says his children are between the ages of seven and 13, so it is a little to soon to tell if they will be involved.

"Perhaps, down the road," speculates Gibney.

Seeking outside help

Not all children grow into their parents' roles and not all successions occur so simply and with such positive results, points out Robert Middleton, a partner with the Chicago law firm of Nisen & Elliot.

"In most cases there are some hard truths," says Middleton. "Many entrepreneurs spend their entire lives sacrificing time and energy only to have the whole organization fall apart and maybe tear the family apart in the process."

Marc Silverman, president of Providence R.I.-based consulting firm Strategic Initiatives Inc., says that when he counsels a family business, the first thing is to try to separate the family from the business.

"Then we can decide what we want for the family and what we want for the business," says Silverman. "By looking at the family and the business we can determine what they both need to be successful."

Silverman advises a team approach by getting all of the family involved. He suggests a family council to assist in planning for the business' future and in choosing a leader that will be best suited to the business -- as well as resolving issues of the siblings that are not groomed for succession.

Outsiders can be an enormous amount of help, says Silverman, though he admits that can be difficult for entrepreneurs who are used to doing things in an autocratic style. It is hard to be objective and many of these issues are closely tied to the psychological issues of aging. He suggests bringing in a consultant early in the process if any obstacles develop.

"It is like tooth decay," says Silverman. "The problem gets bigger the longer you wait."

Jefferey Gallant, a partner with Goodkind, Labaton, Rudoff & Sucharow, also suggests that businesses have an advisory board. It may be made up of family members, management, or outside professionals. Gallant says a board can decide on the important issues of who should lead and what their services are worth.

Gallant says he is usually brought in for estate planning and has to bring up the topic of succession. He helps decide what makes the most sense as far as tax options and retirement, as well as for the business.

"The next step is to get all the parties involved to buy in to it," says Gallant. "It is so much easier when the owner is involved rather than handling these issues as part of an estate."

Making succession work

The succession at Beerman Precision, Inc., a New Orleans-based distributor specializing in hydraulic, pneumatic and electric tools and parts, is an example of thorough planning. President Marc Beerman says succession planning began in 1992.

"We worked with an attorney that is a specialist in estate and succession planning to plan for the estate transfer," says Beerman. "My goal was to gain voting control of the company's stock over time."

Beerman explains that his siblings have never been involved in the company. While he wants to be fair to his siblings with regard to his parents' estate, he wants to be able to retain the value that his own hard work has added to the company. He said that without formal planning, his siblings might not understand the needs of the fifth-generation business.

"It must be determined by the owner, who should derive the benefit from growth," says Beerman. "In this case, we decided since I was working at making that growth happen, I should gain the benefits of that growth."

Beerman says he was also concerned that his siblings received a fair share of their parents' estate when the time comes. With 50 employees and three locations, Beerman Precision, Inc., makes up a considerable part of that estate.

"When we started the planning, we brought in a firm to assess the value," says Beerman. "After setting the value at that 1992 level, plus a goodwill factor, that value will be divided."

Beerman said the pay-out of that value would be over a 20-year period. He says his siblings see this as positive because it means they will receive a cash flow from the business that their father worked hard and made sacrifices for, without putting the business in jeopardy.

Ralph Beerman remains active in the company and is chairman of the board, but at 89 is not involved in day-to-day operations.

"Often older owners don't know when to give up the reins," says Beerman. "I credit my father with great forethought. He stepped aside after 35 years of sweat equity and sacrifice to give me a chance. I still rely on his experience to guide the company, but I have also taken the company in new directions to better utilize new technologies."

The right people

There aren't always people in the next generation to take on the mantle of authority in a small business. This doesn't have to spell the end for the business, however.

"Don't be afraid to hire the very best talent," says Amy Schumann, an associate with The Family Business Consulting Group, Inc. "Many small firms fear that great executives aren't interested in small businesses."

She says non-family member executives can be a great boon to a company as well as a wonderful opportunity for the executive. She also says non-family executives can bring a valuable outside perspective to the business. They can often act as mentors to the next generation or become the choice for succession.

"It's actually very attractive because they can have a greater role in the decision making process and there is less bureaucracy," says Schumann. "It is worth it to pay for big talent, even in n small firm. It can be a great relationship."

J. Royal is a company that has now gone through two successions outside of the family. Norm Jalbert has been with J. Royal in Barrington, R.I., for 31 of the company's 50 years. In 1990, when he assumed leadership of the specialty sealing distributorship, he realized that his three children, all successful professionals, would have no interest in taking over the company. He began planning his exit strategy in February 1990.

"I think succession planning begins the moment that you gain ownership," says Jalbert. "It took a lot of thought and planning and it has worked out well."

Jalbert said he was concerned that the company keep growing and looked into all of the options, including mergers, acquisitions and buyouts by larger firms. In the course of business he met Russell Vroom, who was in the same business.

"I came to know his philosophy and work ethic," says Jalbert. "I knew that together we could take the business to a new level. When he came on board we doubled the company in three years."

Jalbert says finding the right individual is key. He says it requires having knowledge, confidence and faith in the successor.

In their case, Jalbert and Vroom did most of the succession planning themselves. They laid out the basic structure and valuations and then went to their lawyers and banker with the plan.

"In our case, it was a natural fit. They were surprised at how little there was to do," says Jalbert. "In fact, [Vroom] told his lawyer not to do some of the paperwork because he felt that would be too restrictive. That is the level of trust we have on both sides of this relationship."

Jalbert is still active in the firm and is developing a new sales territory. He retains the title of president, at Vroom's request, while Vroom is now CEO.

Realizing that someone will take over your role is a maturing process that many people start too late, says Middleton. It requires a lot of energy to run a business and the plan should be made early while the owner still has that energy and can choose the best strategy for themselves and the business.

Whatever form succession may take for your business, all of the experts agree that planning should begin early and that communication between all parties is key. That way, obstacles can be dealt with before becoming problems.

The most important thing is that a business owner doesn't need to face the issue of succession alone. There are programs like the Family Firm Institute to refer consultants and experts of all kinds and there are over 100 family business centers associated with colleges across the country.

Some family business statistics

• Over 90% of all business enterprises in North America are family owned.
  
• Nearly 35% of Fortune 500 companies are family firms.
  
• In the U.S., family businesses account for 78% of all new job creation, 60% of the nation's employment, and 50% of the GDP.
  
• More than 30% of all family-owned businesses survive into the second generation. 12% will still be viable into the third generation, with 3% of all family businesses operating at fourth-generation level and beyond.
  
• Succession planning is a growing problem for family businesses due to demographics. Post WWII entrepreneurs, who created the world's greatest wealth, are now reaching the age when they must decide how to pass on the wealth secured primarily in their family business.
  
• In the next five years, 39% of family-owned firms will experience a change in leadership due to retirement or semi-retirement.

Source: The Family Firm Institute, Inc.

COPYRIGHT 2001 Cahners Business Information in association with The Gale Group and LookSmart.