Family Matters

Insights into Family Business Planning

Suzanne H. Northington

August 6, 2007

Truett Cathy was facing one of his toughest business decisions. It was 1970, and the founding father of Chick-fil-A was grappling with a bid by Morrison’s Cafeteria to buy out his company.

For Cathy, the consequences of the offer were staggering. Should he stick to his original dream of creating a multigenerational family business, or reap the financial rewards of cashing out? The offer was tempting, but was it the right decision? Unsure of his direction, the deeply religious Cathy turned to his teenage sons, Dan and Don (“Bubba”) for their help.

Dan, then 15 years old, remembers the day vividly. “I remember my Dad asking Bubba and me to get on our knees and pray about whether or not we should sell the business.” And pray they did, night after night, until they believed that God had vetoed the idea of a Morrison’s buyout.

The incident proved to be a pivotal event for the future executive. “It had an enormous impact on me,” says Dan, “that my father thought so much of me, a young kid, that he would ask me to be involved in his business.”

For Dan, who today serves as its president and chief operating officer, this was an early lesson in how God, family and Chick-fil-A would become inextricably linked. “It left an indelible memory for me as a kid and made me realize that this business could be my life, my passion, God’s calling in my life,” he recalls.
Truett and Dan Cathy

The idea of bringing children into the family business at a tender age is an old-fashioned idea straight out of the early 20th century. Most family businesses today see such practices as out-of-step with contemporary mores. But for the Cathy family, early indoctrination in the family business — “from the sandbox to the boardroom” as Dan likes to say — is a cornerstone of their succession planning strategy.  For them, Chick fil-A’s very survival as a family business rests on this idea.

Some 30 years later, Dan Cathy gave his own two sons the same early training in executive leadership. “When my boys were in high school, I went to them and said, ‘Guys, we have the opportunity to expand in Indonesia, where it might not be popular for us to be closed on Sunday. I need your counsel as to what we should do.’ ” Thus, the Cathy teenagers functioned as consultants to their father on whether to uphold Chick-fil-A’s now famous closed-on-Sunday policy, or risk a culture clash in the predominantly Muslim country.

To be sure, succession planning is very serious business at Chick-fil-A, a company that the Cathy family is committed to own and control indefinitely and where selling out is not an option. But Dan believes that permanent Cathy ownership will not be possible without rigorous and disciplined succession planning. “The whole subject of succession is vital to the long-term success of our company. If a business cannot successfully transition into the next generation, then the whole company can fall apart, like a house of cards.”

A research study led by Dr. Joseph H. Astrachan, executive director of Kennesaw State University’s Cox Family Enterprise Center, lends credence to this idea. According to the 2003 American Family Business Survey, about 70 percent of family businesses fail to survive to the second generation. The reasons for this phenomenon are complex, but the failure to successfully execute a transition to the next generation is clearly a major factor.

At Chick-fil-A, it all begins and ends with the family itself. The family business is only as good as the family that underlies it. That’s why the Cathy family places a strong emphasis on teaching the younger generations to get along with each other, since these same kids will one day be business partners, managing a huge corporation. “If they don’t get along as playmates in the sandbox,” says Dan Cathy, “they won’t get along 40 years later in the boardroom.”

In an effort to foster leadership and communication skills in the latest generation of Cathys —the grandchildren of Truett Cathy — the family has developed special groups, which are dubbed Gen I, Gen I Plus, Gen II, Gen II Plus, Gen III, and you guessed it, Gen III Plus. This curious shorthand represents successive generations of Cathy family members (the “Plus” is a designation for spouses), who meet regularly for work and play. Gen III even has its own password- protected private Web site — no parents allowed — where it can freely network, e-mail and blog each other. Says Dan of this highly organized childhood business training, “We didn’t want to leave it to chance that this next generation would figure all these things out.”


The family biz isn’t for everybody

But while a structured program of childhood involvement in the business works well for the Cathy family and is even a model revered by other family businesses, it is increasingly less common among family businesses today. Changing child-rearing practices since the ’60s have placed greater value on letting children decide their own futures. Some parents even see forcing a child into the family business as psychologically harmful.

Jean Mori, founder and chief executive officer of Mori Luggage & Gifts, did not groom his children in the family business. “I never wanted my children to think they would work for Daddy when they got out of college,” he says. “Nor did I have a vision in them working in our stores.”

Instead, Mori encouraged his children to pursue their own independent path. “Children should first have successful job experience elsewhere to give them confidence that they can succeed in the family business. They need to feel that they’re not dependent on Daddy, but can make it on their own.”

Dan Cathy agrees children need to first accrue some non-family business experience. “Let them grow up and make their mistakes elsewhere,” he chuckles.

Mori successfully transitioned the family business to his son, John Mori, in 1999. But John, now the president and chief operating officer, came to this role almost by default. In fact, the oldest daughter, Liz, was expected to take over Mori Luggage & Gifts. But in the Mori family, nothing about succession was preordained from birth. Jean and his wife Betty, both Emory University graduates, believed in letting their children decide for themselves. When Liz opted instead for Harvard Business School and a career at Price Waterhouse, John decided to take a shot at learning the family business. The Emory MBA–graduate had several years of management experience from Proctor & Gamble.

But he didn’t start at the top. Instead, John served a 10-year apprenticeship at the stores, learning the retail business from the ground up. Jean Mori says, “We felt it was very important for him to work his way up through the ranks, proving himself at each point.”

Chick fil-A follows many of the same practices. Gen III members of the Cathy family are expected to start at the bottom — in customerfacing jobs right in the stores. For example, Andrew Cathy, son of Dan, first worked outside the family business as a high school teacher, before becoming a franchise operator at a Chick-fil-A store in St. Petersburg, Fla.





                                       Jean, John and Betty MorI
 



                                                                                                                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                                                                                                                                




Complex family, complex transitions

How a family chooses to transition to the next generation can be as complex as the family itself. No one knows that better than H. Inman Allen, chairman of the board of Ivan Allen Workspace LLC, and now the 67-year-old patriarch of one of Atlanta’s oldest family businesses. The business is now in its fourth generation of family leadership, starting with Ivan Allen Sr., the salesman who co-founded the office supply house in 1902; to Ivan Allen Jr., the legendary Atlanta mayor; to Ivan Allen III, a major Carter Center fundraiser, who led the business through a period of strong growth only to pass away unexpectedly at age 53; to his brother, Inman Allen, the accidental CEO who led the company through a major transformation to an office furniture and technical services company; and, finally, to Louise Allen, 33-year-old daughter of Inman and current president.

Inman Allen says the successions from Ivan I to II to III proceeded smoothly, reflecting the common practice of the times, whereby the first or only son was groomed to take over the family business. When Ivan III, oldest son of Mayor Allen, came along, there was no question that he would become the leader.

“It was a foregone conclusion that my brother would go into the business,” says Inman. “He was groomed from an early age as the successor. But that wasn’t true of my younger brother and me. We had no childhood experience in the business. Neither of us every really thought about working for it.”

But unexpected events changed this simple succession plan. Ivan III’s sudden death in 1992 took the family by surprise. “My family frankly did not know what to do with the business at that point,” Inman says. “We were like a deer caught in the headlights, and were seriously considering selling it. But after a few years of deliberation, my father, who was still the patriarch at that point, decided I would run the business.” Thus, the son who was never groomed for it and who had never thought of working for it, became its CEO in 1995.

The story of the Allen family is typical of many family businesses, which must alter their succession plans in the face of unforeseen events. Most importantly, it underscores how important it is for families to have a plan B for succession. Whether or not the family business survives a succession crisis depends largely on the underlying strength of the family itself. In the case of the Allens, the family had both strong family bonds and the leadership skills of Inman Allen from which to forge a new path for the company.

As the 20th century drew to a close, the need for change at the old Atlanta company was evident. In a new age of warehouse stores and big-box retailers, Staples and Office Depot had emerged as powerful competitors. By 1998, the Ivan Allen Furniture Co. was forced to sell off its supply business to Staples. The son once presumed to be the next heir apparent, Ivan IV, left his family’s business to work for Staples. By the early 21st century, and with no clear successor to him, Inman Allen was toying once again with the idea of selling the family business.

Fortunately, for the future of Ivan Allen, Inman’s daughter returned to Atlanta from New York at an opportune moment, and agreed to assume leadership of the business. What makes Louise’s succession noteworthy is how this great-granddaughter of the founder has emerged as the sole-remaining Allen owner after buying out her siblings’ interests.

“Family businesses can run into problems if they get too widely disbursed among too many different branches of a family, and I recognized that,” says Inman.


Control issues

The Allen family has also made a concerted effort to place ownership control only in the hands of the participating family member. The problems associated with non-participatory children having ownership control are well known. Benton Express Inc., a 73-year-old Georgia family trucking business, is currently grappling with this issue. The business assets were bequeathed equally to Herbert “Chip” Matthews, its president, and his sister from their grandparents through a generation-skipping trust.

But while this arrangement may have been beneficial from an estate tax perspective, it has generated conflict in the family. That’s because the sister has no management role in the company, but equal ownership. According to Chip, she disagrees with him on the future of Benton Express, and like many non-participatory owners, would benefit more from selling it than keeping it.








Herbert "Chip" Matthews



Not surprisingly, Chip Matthews sees greater value in keeping it. And from this experience, he has learned a hard lesson in succession planning. “When it’s time to pass the business on to my three children, I will never split a business asset among them, especially if one of them is not actively involved in the business.” He now believes in the old estate-planning adage to hand down one asset per child.

Many family business executives share this view. But Jean Mori has approached the issue in a different way. Believing that participatory offspring should have greater ownership shares than non-participatory, but that the latter may have a legitimate interest in exiting the business at some point, Mori has a buy-sell agreement in place. “It has provisions that allow John’s (non-participatory) siblings to cash out their ownership in the future, if they want to use the money for some other purpose.” The agreement is also for the purpose of preventing gradual dilution of family ownership via small stock sales to outsiders, but if Mori’s heirs do decide to sell, it gives them a way to do it.

Each succession story is as unique as the families themselves. The way a family chooses to pass on a business invariably reflects their own unique family values. According to Dr. Astrachan’s research, the data shows that rapid turnovers are as successful as long drawn-out ones.

But regardless of how succession  is done — and there are no wrong ways to do it — it is almost always a mistake not to plan at all. Most consultants recommend that family businesses should have a succession plan in place by the time the current owners are in their early 50s. Considering how high the stakes are, no family business can afford to ignore this advice.