Why has my family’s company survived for five generations, when most family businesses in the U.S. don’t make it past the third?
I have often pondered this question along with my brother, Guy Renkert, who at 38 is three years younger than I am, and my father, 66-year-old Steve Renkert. We believe the success of our family company—Ironrock Inc., a ceramic tile manufacturer in Canton, Ohio, which generates about $15 million in annual revenues—stems from our dedication to sound business practices.
As is true of many American businesses, Ironrock’s history is intertwined with our family’s. The company was founded in the late 1800s by my great-great-grandfather, Jacob Renkert, an apprentice brickmaker. During World War I, under the leadership of Jacob’s son, Harry, the company went public and, through successive acquisitions and consolidations, became the largest manufacturer of paving brick in the world. Ironrock pavers can still be found on streets throughout the eastern U.S. They earned the Indianapolis speedway its nickname, “The Brickyard.”
Harry’s untimely death in his early 40s, coupled with the rise of new street paving materials during the Great Depression, forced the company to enter into new markets, like architectural face brick and glazed tile. The post-World War II era was especially difficult. New products and competitive markets challenged the company’s aging manufacturing plants, and confiscatory income tax rates soaked up earnings that otherwise might have been invested in new equipment. My grandfather, Donald Renkert, struggled to keep the business profitable.
When my father, Steve Renkert, joined the business in the early 1960s, Ironrock was losing money, and the company’s outside directors were arguing for liquidation. By selling off the old brick plants and investing in new split-tile technology, Steve and his brother, Hal, were able to build a new—albeit small, and sometimes struggling—business from the ashes of the old company. Ironrock, now focused squarely on the tile market, went private once again, and finally profits began to improve.
As so many family business owners and managers know firsthand, and as Ironrock witnessed with the untimely death of Harry Renkert in the 1920s, the fortunes of a business often depend on the health of its president. I left the practice of law and joined the business in 1990 when Steve’s rheumatoid arthritis became so severe that he could no longer manage the company’s day-to-day affairs. Over the next three years, Steve taught me the business. The process wasn’t easy. As two strong-willed individuals, we often disagreed quite loudly and at length about goals and strategies. We came to agree, however, that effective management—and management succession—were essential to the future of any family business.
After my “tutorial MBA” was complete, Steve retired, and I stepped up to the role of president. The next decade brought tremendous challenges to the business, as imports rose from 50% to 75% of the U.S. tile market and the “big box” stores created intense price competition. My brother, Guy Renkert, joined the business in 1995. After more than seven years of successful collaboration, I decided to return to the practice of law. I still participate in the business as a director and shareholder.
Steve, Guy and I have spent many hours discussing our ideas about how to successfully manage a family business. The following rules are a distillation of our discussions.
1. The family should treat the business as a challenging opportunity, not a haven with a guaranteed paycheck.
Successful family businesses train their employees and hold them to high standards—whether or not they’re family members. The quickest way to alienate your staff is to create a double standard for family and non-family employees. At Ironrock, relatives will not be considered for employment unless they have academic credentials (a graduate degree in business or, in some instances, law) and have received on-the-job training at another company. Once in the door, family members must perform—and our standards for family employees are generally higher than those for non-family employees.
2. Watch your debt, and don’t pledge any assets you aren’t prepared to lose.
The current recession trampled plenty of businesses with too much debt and high expenses. Ironrock has survived for five generations in large part because we try as much as possible to minimize risk to the overall business. We reinvest our cash and profits instead of paying them out, we keep our debt levels low and we don’t pledge non-business assets as security for company debt. For that matter, we try not to pledge all our business assets, either. In the last two years, we’ve watched a number of our compatriots in the tile industry go out of business. During that same time, we’ve steadily increased our profitability, even with relatively lackluster sales. More debt might enable us to grow faster and make our short-term financials look more exciting, but we feel that taking on more debt would expose us to more risk than we’re willing to tolerate as we begin to shape the business for the sixth generation.
3. When you leave, you leave. If someone asks for your advice, give it. If they don’t, shut up.
Steve Renkert and I both learned this lesson the hard way. When his health forced him to retire in 1997, he was only 60. He had a very clear vision for the future of the company, but his rheumatoid arthritis sapped his strength. I was a brazen lawyer with good planning and administrative skills but no operations experience. He tried to give me lots of advice. I argued with him or ignored him. It’s difficult for me to admit it even now, but he was right quite a bit of the time, especially on operations issues. If I could do it all over again, I’d ask more questions, and I’d listen more carefully to the answers. Steve says he would not be so quick to offer advice. I’ve tried to put Steve’s advice in practice when I talk with my brother, Guy, who took over the presidency from me when I returned to the practice of law last year. But old habits die hard.
4. Family members can make great hires, but employ your in-laws at your peril.
Nepotism has been good to Ironrock. In the plant and in the office, we have found that many of our best new hires are relatives of current employees. Our warehouse manager is the son of our now-retired chief of customer service. Our packaging manager’s sister is one of our best inspectors. But in general, we have avoided hiring in-laws, even though several people who have married into our family could have brought us very useful skills. Steve, Guy and I have never felt comfortable with the idea of managing a family member who didn’t grow up in our business culture—especially in the event of a divorce or other family problems.
5. Keep ownership in the manager’s family.
At Ironrock, our general rule over five generations has been to concentrate the company’s stock in the hands of current manager and his (or her) family. Every generation has seen a cross-purchase or a redemption, as non-managing owners were given an opportunity to sell their holdings and took advantage of it. We have found that keeping ownership of the company in the hands of those who run it avoids family conflict and enables us to continually reinvest our cash flow in the business rather than pay it out to shareholders. Two years ago, Guy and I continued this process by structuring a redemption of the company’s stock held by a trust for our brother. The trust now has cash to invest for the long-term benefit of our brother and his family, freeing them from the tether of the business. Guy and I are now considering how our relative stockholdings should change now that I’m no longer working for the business on a day-to-day basis.
6. Don’t let business conflicts damage the family’s relationships.
At Ironrock, we have tried to keep the business separate from the family—with varying degrees of success. When Steve, Guy and I were all working full-time for the business, family dinners could easily turn into strategy sessions, sometimes complete with major debates. My father and I often found it difficult to work together as peers, especially at first, because the parent-child relationship always lurked underneath the business discussion. Once I earned my father’s respect as a professional in my own right, our relationship improved. And while it can be tough for a child to hear constructive professional criticism from his or her parent, it can be even more difficult for the parent to hear it from the child. My father, my brother and I try always, above all, to be professional, and we try to understand what hats each of us may be wearing at any given time.
7. Think about what hat you’re wearing before you speak.
In any given family business situation, you may be acting as a manager, an owner, an expert, a parent or a child. Very often, your objectives will be in conflict. In a business succession, the conflicts are heightened. When I was in the process of passing the baton to Guy, I sometimes felt that I was four different people at management and directors’ meetings:
• The seasoned executive (and older sister) who wanted to say, “Here, just let me do it, I know how.”
• The manager who wanted to minimize the disruptions and costs of the succession to better position the business for financial success.
• The stockholder who wanted to ensure some degree of financial return and ongoing control for myself and my family.
• The child who wanted to hear that I had done a good job.
The trouble was that no one around me knew which hat I was wearing at any given moment, which led to some confusing and sometimes angry meetings. To be honest, I didn’t always know, either. Since that time, I’ve tried to be more explicit about what hat I’m wearing when I voice a concern or make a suggestion, and to ask my family the same question when the debate gets too emotional.
8. Businesses evolve over time.
One of the most difficult aspects of business succession for the manager who steps down is watching the business change without you. Once you’ve left the day-to-day operations behind, you quickly lose the pulse of the company and the market, and your knowledge of the forces affecting the business gets stale. You may seek to offer advice, only to find that your input is irrelevant in the current environment. This can be frustrating and even humiliating to a manager who was previously central to the operation of the business. After his retirement, my father struggled to find a role in which he could be relevant to the business. We often fought about changes I was making to the business model, especially when they overturned policies that he felt had been key to the success of the company under his management. I felt that the increasing market strength of new products had changed the marketplace and that our tile needed to be repositioned to compete effectively. When Steve attended the industry trade show after a four-year absence, he was startled by how much the market had changed, and he accepted many of our management ideas much more openly.
9. Make sure the business can operate without you.
When you’re simultaneously trying to close a major sale, make payroll and figure out why recoveries dropped by 10% on the last production run, business succession planning and estate planning seem like topics that can wait for tomorrow. But planning is essential if you want to pass the business to the next generation. Selling the company to pay estate taxes—or because the family finds that the management team can’t function without the chief executive—is the worst possible outcome when a family has poured all of its energies into the business. When Steve found himself unable to manage the business any longer, he had a well-thought-out plan for passing on ownership, but he wasn’t prepared yet to pass on the management responsibilities. We were lucky that time—he was well enough to teach me, and I was willing and able to leave my legal career to join the company. Going forward, though, we all recognize that we can’t count on being lucky again. Guy, with the support of the board of directors, is putting in place an interim management plan to ensure that Ironrock can move forward if he becomes incapacitated—even if there isn’t another Renkert trained and waiting in the wings.
10. Every business is different.
These “rules” have been distilled from five generations of family management at one business. Every single one of them has been modified—or flat-out ignored—by many, many other successful family businesses. The best rule is the one that makes sense for your family and your business over time. We wish you good luck.
Amelia Renkert-Thomas (amelia.renkert-thomas@withersworldwide.com) is an attorney with Withers Bergman LLP, an international tax, trust and estate planning law firm. Prior to joining the firm, she was the president and CEO of Ironrock Capital Inc. She was also the president of the board of directors of the Tile Council of America, the first and only woman to hold that position.