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Family business no guarantee of success

Published in the Toronto Star
Saturday, September 25, 2004, p. D22

Family business no guarantee of success

Sharda Prashad
Special to The Star

There might be something to be said for keeping it all in the family. More than a third of Standard & Poor's 500 companies are family-controlled and 37 per cent of last year's Fortune 500 companies were family-owned businesses.

Mark Samuel, vice-chairman of Samuel, Son & Co. Ltd., a Mississauga-based metals processing and distribution company, is part of a fifth-generation family-owned business. The company was launched in 1855 and Samuel partially attributes its longevity to the small number of family members in each generation.

The more shareholders a company has, the more the company becomes diluted," says Samuel. "The fortunate thing is that (there is) centralization of control."

In 149 years of operation, the company has only experienced two years of losses.

Despite the success of businesses like Samuel's, keeping a family-owned business alive beyond a generation is tough.

In a survey conducted by consulting firm Grant Thornton LLP, nearly 70 per cent of family-owned businesses fail to reach the second generation and 90 per cent do not reach the third generation.

Donald Emerson, a partner at Grant Thornton in Toronto, helps family-owned businesses develop succession plans. He says failures of family-owned businesses beyond the first generation can be attributed to lifestyle differences between generations.

"There's the expression: from rags to riches to rags," says Emerson. "The first generation starts with nothing and they're frugal."

He explains that the second and third generation are accustomed to greater wealth and may not have the same work ethic and mindset as the first generation. But the greater problem is often one of communication.

Emerson says it's not unusual for first-generation clients to come to his office and not know whether their children want to own the business.

"There's a number of situations where (the second generation) has no interest," says Emerson. "But, if they don't have the skill-set, that can be overcome."

Emerson says that bringing in a professional manager while the second generation receives the necessary external training is one option. Another is having the second generation working alongside the first.

Such was the case for Paula Cook. Now president of Cook Fasteners Inc. - a Mississauga-based importer and distributor of nuts, bolts, screws and other fasteners - she worked in the family business during the summers of high school and her undergraduate degree.

Her father, Dick, says Paula received the "best training."

"Paula worked hard," he remembers. Dick says his only child worked in all aspects of the business, from working in finance to the warehouse.

He says he never pressured his daughter to take over the family business and would have sold it if she were not interested in running it.

Paula agrees the choice to work in the family business was hers alone.

"I fell in love with it - with the action," says Paula Cook.

Emerson says it is critical for owners to allow their children to decide whether they want to work in the business.

"Trying to force a reluctant child to work in the family-owned business is never going to work," he says.

Paula succeeded her father as president of the family-owned business in 1998. And since then, her father has stayed away from the daily operations, saying that when he gave his daughter the business, he gave her all of it.

"I don't worry about the day-to-day," says Dick Cook.

"It's her bailiwick."

That's not to say Paula doesn't still rely on her father's expertise.

"He's my teacher, mentor. ... I use his wisdom."

Dick drops by the office once per week in his capacity as chairman of the board. He says the two might discuss high-level strategies, but that's all, and that he tries not to talk about business outside of the office.

Terri Heggum-Allen, national executive director of the Canadian Association of Family Enterprise, agrees with this tactic. She encourages her members to establish boundaries about when and where they will talk about business with their family members.

"It's not uncommon to be talking about the business over Thanksgiving dinner."

However, this doesn't mean communication isn't important.

Heggum-Allen advises her members to think about communication at three levels: family, business and owner. Heggum-Allen recommends all family members, including in-laws, talk about the business three or four times per year. Issues such as how family members enter and leave the business should be discussed. Heggum-Allen says the family meetings should not include making business decisions - that's for a different group.

Key business leaders, including family members and non-family members, should meet on a regular basis to make business decisions. Heggum-Allen says family-owned businesses have to be clear on what constitutes a business decision versus one in which all family members have a say.

In the second and future generations, the owners of the company have to meet on a regular basis to ensure that the owners understand each other's objectives. For instance, in the case where all family members own shares, but only one works in the business, there can be disagreement about reinvesting money into the business versus paying it out in dividends.

Communicating and understanding the different perspectives family members have are key.

Now 34, Paula Cook says that during her first few years as president she held the company's strategy status quo. But then, as she became more comfortable in her new role, she started to make changes, including changing the name of the business from Bell Fasteners Inc. to Cook Fasteners Inc.

Cook says one of the great things about the business is that it is hers, but even with all the benefits of working in the family business, such as "the independence, not having a boss, working my own hours and the flexibility," she says that doesn't mean she will necessarily pass on the family business if and when she decides to have a family.

"I've seen situations where kids want to ride on (their parents') coattails," says Cook. "Just like an employee, a child would have to show some initiative."

And her father is just fine with that. "It's her problem, not mine," he laughs.

Written by Sharda Prashadfor the Toronto Star

Paula Cook took over the family business from her father, Dick. But, although she's now president of Cook Fasteners Inc., she still relies on her dad's wisdom.

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