Return to Virginia Business - August 2004

Keeping it in the family
Passing on the family business gets tougher every generation

Related story:
- Nurturing family farms

by Garry Kranz
Virginia Business
August 2004

Few family companies in Virginia can equal the longevity of Siewers Lumber & Millwork Inc. Reconstruction in Richmond was at its height when R.A. Siewers, a German-born architect and builder, launched the company at Canal and Belvidere streets in 1884. Four generations later, the company still is going strong.

Siewers Lumber survived the Great Depression, two world wars and the emergence of a more global modern economy. Outside forces don’t pose the biggest threat to its survival, though. Deciding which family members are fit to carry the company forward presents its own special challenges.

The fifth generation of the Siewers clan is being groomed to take over. “We have about 15 or 20 children who are growing up, so it’s complicated,” says Fred Siewers III, 45, who runs the company with his two brothers and a cousin. Generation Y family members are encouraged to make their own decisions on joining the company, which provides doors, windows, custom moldings, lumber and other building products for renovated homes and businesses. The company runs a lumberyard, planing mill warehouse and showroom on its five-acre site.

Pursuing college courses, volunteering at local summer camps, or working outside the business are among the recommended proving grounds. “We don’t know how many of them will want to come into the business,” Siewers says, “but we want to prepare those that do to take over when we get ready to retire.”

Siewers Lumber’s longevity defies national statistics. Doomed by lack of planning, most family-run businesses in the U.S. don’t make it past a second or third generation, studies show. Barely 3 percent of family businesses continue to a fourth generation, according to the Family Firms Institute of Boston.

What’s more, the coming wave of retiring baby boomers could push the crisis to epidemic proportions. Nearly 39 percent of family-run firms will undergo leadership changes within five years, either due to the death or retirement of their founders. That’s according to a 2003 study of 1,000 family businesses by MassMutual Financial Group and Arthur Andersen.

Many just don’t make a succession plan. Aside from perhaps preparing a will, most business owners fail to take steps to adequately transfer their assets to sons, daughters or other family members, says Lou Mezzullo, a Virginia lawyer with McGuireWoods, who specializes in succession planning. “The impetus for planning usually comes from the offspring, who will prompt their parents to do some planning before they die or become incapacitated,” he says.

Some simply can’t let go. Ceding control to children is a tough hurdle for entrepreneurs who have spent their lives creating a business. Other business owners put off deciding which of their offspring should take over. “Relinquishing the reins is tough enough. But it’s another matter when you have to decide between Billy and Bobby,” says George Rimler, who directs the Virginia Family Business Forum at Virginia Commonwealth University in Richmond, a privately funded group that provides training and other services to family-run firms.

In truth, most U.S. companies are family-owned, say experts. Many have grown from small operations into huge conglomerates. Family businesses make up about 30 percent of all companies listed on the New York Stock Exchange. There aren’t statistics on the number of family-owned businesses in Virginia, but experts say the state mirrors other states in the number of businesses that make it from one generation to the next. Family firms combine to produce as much as 64 percent of the U.S. gross domestic product, or about $5.9 trillion, according to researchers at Kennesaw State University near Atlanta. They employ nearly 82 million workers.

Two of the 100 largest family businesses are based in Virginia, according to Family Business magazine. McLean-based Mars Inc., which makes candy and other food products, generates nearly $16 billion of annual revenue. The Mars family has controlled the company since its inception in 1918. Falls Church-based General Dynamics, a huge aerospace and defense contractor, was founded by the Crown family in 1962. It since has grown to a company with $9 billion in revenue.

Nevertheless, mom-and-pop shops dominate. Many business owners mistakenly try to evenly divide their assets among their children. Friction often ensues, especially if children have different views regarding their importance to the company. “It’s a train with no other choice but collision. It’s preferable to give someone a provision to buy out the others,” says George Shepherd, a Richmond lawyer who advises Virginia family companies on estate planning, business succession and tax issues.

To avoid conflicts, Hubbard’s Peanuts in Sedley drafted a succession plan to go along with a corporate mission statement. The company started 50 years ago when schoolteacher Dorothy “Dot” Hubbard started cooking batches of peanuts for friends and family in 1954. Soon she was inundated with requests for more orders. From there, the business took off.

Its president, Lynne H. Rabil, is the only one of Dot and H.J. “Hub” Hubbard’s four children actively involved in running the peanut company. Her three siblings, while not working for the company, sit on the company’s board of directors. Each owns an equal share. Production takes place on the same property where the four children grew up in rural Southampton County. Rabil’s office, in fact, was her childhood bedroom.

Maintaining that legacy required planning for succession. Equally important, though, is a “family mission statement” that spells out what is expected of relatives who enter the business. Favoritism is out; merit is in.

Rabil’s son is set to graduate from college this year. Her daughter is gaining work experience with a local caterer. Neither child is guaranteed a job with the company. “They both understand that they can’t just come back here and expect to have a job. First we have to have an opening. But they’ll also have to be qualified,” says Rabil.

Family councils and strategic boards of directors enable business owners to wrestle with tough decisions. One child may be equipped to manage the firm, while another may lack managerial skills but possess other leadership qualities. “Companies that go beyond a third generation have owners that know not to use the business to equalize differences in the family,” says Rimler. “Many successful family firms also have no problem hiring outside the family” if that’s what’s needed.

Tax issues, not surprisingly, complicate planning. Business owners are permitted to give away up to $1.5 million during their lifetime to their heirs and don’t have to pay taxes on that money. Married couples can exempt up to $3 million. Changes could be afoot, however. President George W. Bush’s 2001 tax package eliminates federal estate taxes by 2010, although Congress could vote to restore them.

Even so, tax and estate planning take a backseat to frank discussion. “We know it’s unpleasant to talk about our fathers not being here,” says Michael Siewers, a vice president with Siewers Lumber and Fred Siewers’ youngest son. “But we have a heritage to carry on.” That’s sound advice for other companies seeking to preserve what previous generations have started.

Return to Virginia Business - August 2004