Case Study Part 2: Where There is Smoke, There Is Usually Fire

In Part 1 of this series titled ‘Arnold & Bonnie’s Succession Dilemma’ we introduced Arnold and Bonnie Kettle (‘A&B’), owners of Ma & Pa’s, a successful retail housewares business. After 25 years they are now giving thought to having their two children take over the business. But then just last Friday their General Manager, Erica, shocked them by demanding she be offered ownership in Ma & Pa’s, or else she would leave to start a competing business. Losing her would be a setback to the business, and to A&B’s retirement plans. Erica’s ultimatum had moved succession planning squarely onto the front burner.

A&B’s children, Charlie (25) and Diane (22), have worked in the business over the years, but succession has never been explored in any detail. Diane just graduated with a retail management degree and will pursue a career at Ma & Pa’s. Meanwhile, Charlie is intent on pursuing a career as a music producer and opening his own studio. What is not clear to A&B is how they are going to fund their retirement given their kids ambitions and given that most of their wealth is tied up in the business.

The Family Dinner

It is the Sunday following Erica’s lunchtime ultimatum. As is tradition, the four members of the Kettle family gather for dinner. Arnie has burnt the steak again, and the smoke detectors are wailing. It seems someone got caught up watching the football game instead of the barbecue. As he uses his napkin to fan away the billows, Arnie announces “Tonight, let’s talk about succession at Ma & Pa’s.” Charlie and Diane exchange shocked glances. Like deer in the headlights, they had no idea what was coming next.

Arnie continued. “Time is right for mother and me to start stepping back and make plans to retire, and so…” but before he could finish, Bonnie  chimed in to complete the sentence “…so wouldn’t it be great if the two of you could run it together!” With that the room fell silent and they sat staring at each other through the smoky haze of charred beef, like some scene from a spaghetti western moments before the big showdown.

Charlie was miffed. Walking the aisles at Ma & Pa’s wasn’t exactly on his bucket list. He wanted to be clear: “Dad, my ambitions don’t involve working in the business long term. But I sure don’t want to get short changed because I choose a career outside of Ma & Pa’s”. He looked at his sister: “Nothing personal sis but I am more qualified to run the business than you. I mean I’ve heard horror stories about kids taking over and running the business into the ground. It is my inheritance we are talking about!”

Diane felt annoyed. After all, she was the one who had studied retail management at the local college so she could help out in the business while getting her degree. Charlie’s bon vivant life style irked her, as did his sense of entitlement. This had led to some heated arguments in the store and at home but mum always managed to act as go between in making peace. Still, it was clear that the two were at odds on some fundamental principles. Sensing her moment Diane spoke. “So then how will it work? Charlie wants a career in the music business, not selling pots and pans. How could I ever run the business if he owns half of it and is second guessing my decisions? Giving him an equal say in the business just wouldn’t be fair.” Diane wasn’t finished. “And another thing, now that I am full time in the business, Erica seems to be giving me the cold shoulder. What is up with her, anyway? Sometimes it’s like she thinks she owns the business”.

Arnie’s ears perked up given Erica’s demands to be made a share owner. He then reminded Diane how Erica had played a big part in opening their second store and launching their online business. Diane didn’t hesitate: ‘Erica is old school! I know more about particle theory than she does about social media. We need to rethink our online approach and get Ma & Pa’s out of the dark ages. Sure, Erica helped get us where we are, but I can take us where retail is going”.

It was beginning to dawn on Arnold & Bonnie that the succession horse was out of the barn and it was up to them to rein it in. They sure had their work cut out for them.

The Kettle Family Has Homework

Succession planning is often thought to begin and end with the development of sound tax, estate and legal structures. These technical elements are an essential ingredient in succession planning but absent the proper context they are by no means sufficient. For the Kettle’s it was time to establish a shared future vision that melds their desires as a family, as business owners and as co-workers; and that enables them to resolve conflicts that arise due to their competing agendas.

Once born into a family, love and acceptance is unconditional. But the same values that make a family strong can be detrimental to building a strong business. Now is the time for the Kettle family to decide how to balance priorities and make decisions about:

Family Communication: basic rules on communication and information exchange are needed. If there are some elephants in the pantry they should be called out sooner rather than later. Bonnie can no longer play the role of peace maker when issues between Charlie and Diane arise. The family needs to routinely set time aside to explore issues openly, and thereby avoid ambushes like we witnessed at Sunday dinner.

Ownership Structure: The family needs to decide on the future course of ownership at Ma & Pa’s. Will the two kids share ownership as Bonnie envisions? Would that really be fair to Diane when Charlie has a career outside the business? Would it be best to eventually put control in Diane’s hands, and equalize with Charlie in some other way? Should the General Manager (Erica) be invited into the ownership circle?

Leadership & Governance: What objective standards will be set for Diane to be proven capable of assuming leadership? How does Erica factor in to this equation, given Diane’s lack of skill and experience at this point? If Charlie remains an owner rules need to be set that will govern his interaction with Diane and the business to avoid meddling and disruption.

Wealth & Inheritance: Charlie hopes to draw on his future inheritance to fund the purchase of a music studio. Diane is hoping that the ownership of Ma & Pa’s will be gifted to her. Is this realistic having regard for Arnold & Bonnie’s retirement needs? Or is it better if the kids are treated on an arm’s length basis and pay a market price for their ownership stake? Arnold & Bonnie are relatively young so they need to be explicit about how they will fund retirement since the business represents most of their wealth.

Business succession has multiple dimensions. Families have to figure out what works for them taking into account family norms, and the unique cultural dimensions of their business. While there are accepted best practices, there is no standard playbook. And that is why a close examination of the qualitative, interpersonal dimensions is needed in order to choose the best route when plotting your succession roadmap. It is tempting to avoid making the difficult choices about things such as who in the family will run the business, and who will play a supporting role. But beware the potholes and hidden intersections that await those who take short cuts or who ignore the elephant in the pantry.

In the Next Installment

In the third and final part of this series we will explore some practical approaches to funding Arnold & Bonnie’s retirement, accommodating the needs of their two children, and offering some ideas on how to keep Erica at Ma & Pa’s for the long haul given Diane’s competing career ambitions.

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