Consorting with cousins

Thawing relationships

Richard A. Graeter
Graeter’s Manufacturing Co., Cincinnati

Titles don’t mean much to the three fourth-generation cousins who run Graeter’s Manufacturing Co., a dozen company-owned ice cream shops plus a franchise company with 26 locations. Executive vice president Richard A. Graeter, 42, explains that he and his two cousins—Chip, 43, vice president of sales, and Bob, 50, vice president of operations—are equal partners and have been working together for 15 years. But their co-management left something to be desired until about three years ago.

The family’s 136-year-old company came close to melting down between 1990 and 2004, as they grappled with how to transfer ownership to the three cousins from the three third-generation members. The problem centered on how shares should be divvied up. If they were distributed according to bloodlines, Richard’s father, Dick, would have transferred his one-third stake to Richard. Dick’s brother, Lou, would have divided his one-third between his two sons, Chip and Bob, and the company would have redeemed the remaining third owned by Dick and Lou’s sister, Kathy, who has no children. That would have left Richard with more shares than his cousins.

Lou, now 76, and Dick, 75, were ready think about retiring ten years ago. They each hired their own consultants to come up with a plan. Lou found an attorney; Chip brought in a management consultant. “He wanted us to form a family council,” Richard recalls, “but it doesn”t work if you’re not heart-and-soul committed to it.” An accountant and an insurance agent also came and went.

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“All those plans went nowhere,” says Richard. “We couldn’t all get behind them.”

Resentments over the languishing transition problems caused the business to suffer during what Richard calls “those dark days.” Efforts to improve production and cost accounting systems, or to plan new stores, “required a lot of cooperation that at the time we weren’t ready to give each other,” he explains.

Finally, they found a psychologist, who helped the cousins meet without the older generation to develop a plan. Off by themselves, without interference from their parents and aunt, they realized they’d been thinking more about their own interests, Richard reports.

The trio began to see “how important it was to put the interests of the business first and have complete faith in our partners,” recalls Richard. He says the meetings also enabled him to appreciate that “to run the business with partners you have to be equal. That’s how I made the jump from half to one-third.” A careful combination of share gifting and redemptions offset some of Richard’s financial sacrifice.

More important, Richard began to see that one-third of what they could create if they worked together well would amount to more than half the size the business was then. “Maybe we needed to suffer so long and struggle and almost tear our family apart to come up with a successful plan of transition,” he reflects.

Once they rallied around a common plan, they were able to look ahead and create a strategy for future growth. They took both plans to their elders, who were so impressed by the plans and the kids’ unity and shared passion that they bought right in. Implementation of the plan was completed nearly three years ago. The company’s annual sales grew from about $11.9 million in fiscal 2002 to $13.8 million in fiscal 2004.

The next challenge they need to lick? Creating formal rules of entry and a transfer plan for the fifth generation, which consists of Richard’s daughter and son, ages three and six; Chip’s boys, ages four, seven and eight; and Bob’s three daughters, one of whom is in college. When that crop gets a little older, Richard and his cousins plan “to engage and involve the incoming generation into the process of how we will transfer it to them,” he says. “We can’t just tell them and say, “end of story.” That’s what caused so much trouble for the fourth generation. It only worked after the three of us younger guys got together and proposed our plan to our parents.”

Shifting gears

Bonnie Halvorson
Baxter Auto Parts Inc., Portland, Ore.

Seven third-generation cousins who work at Baxter Auto Parts hope the four older-generation leaders will never retire. The family, which runs 21 retail auto-parts stores and four warehouses, has achieved a balance of power and harmony that the cousins fear might be upset when their parents leave, as they’ve been saying they’re ready to consider.

The cousins have no formal titles, but each has carved out an area of expertise. Bonnie Halvorson, 38, oversees public relations and advertising. She says management and 90% of (non-voting) ownership transferred to the younger generation five years ago, but the senior generation retains all the voting power and sits on the board. “We use them as mentors,” Bonnie says. “We like having them here. They’ve done a good job letting us make long-term directional decisions, but they’re our voice of reason at times.”

The elders—Skip Baxter, 61, president of the auto parts division; Lyle Moore, the founders’ son-in-law, 65, president of Performance Warehouse (the four wholesale distribution warehouses); and Bonnie’s father, John Baxter, 60, vice president and secretary of the warehouse division—won’t even hint at who should ultimately lead the cousins. “They say we’re the ones who have to live with it,” says Bonnie.

What does she think should happen? She leans toward eventually appointing a leader from outside the family, with the cousins serving on the board of directors. “It would be extremely hard for a family member in [Generation] 3 to act as CEO when we’ve all had equal authority and power,” she comments. But on the other hand, she acknowledges, one cousin in that role would understand how family members work as a company and individually. “Whatever we do impacts every other generation after this,” she says. “That’s why we haven’t made a concrete decision yet.”

That has not led to any conflict (at least not yet) among the cousins, who have developed ways to stave off most disputes at their company, which generates $50 million in annual revenues and employs 450 people, Bonnie says. They quickly nip disagreements in the bud by a majority vote. Another strategy involves asking each other, “What would Grandma do?” Grandmother Wilma Baxter ran the company for decades after the death of her husband and co-founder, Ray. Since she passed away in 2000, her memory still guides and motivates the cousins. Wilma’s nameplate remains on her office, which Bonnie now occupies.

The cousins have also learned to communicate well with each other, Bonnie reports. “If there’s a hairball once in a while, you sit down and work it out,” she says. “A lot of conflict is perceived,” rather than based on facts, she explains. “So as soon as you get rid of the false info, the conflict goes away.”

The cousins are all close in age and live similar lifestyles, factors that draw them together, she says. They can empathize and cover for each other when one of their children is sick. Plus, Bonnie notes, “We’re all good at what we do. If there was a slacker or animosity about work ethic, that would be different.”

Flying solo

David C. Southworth
Southworth Company, Agawam, Mass.

It must be lonely at the top for David Southworth, president of the 167-year-old premium paper manufacturing company that bears his name. Eighty or so relatives own shares of Southworth Company. But just three members of the clan serve on the board of directors: Jean Leness, a distant cousin from New York City, whose grandfather, Thomas Southworth, was president in the 1930s; William Anderson, a corporate attorney and son-in-law of Phelps Brown, who preceded David Southworth’s father, John, as president; and Robin Smith, another cousin-in-law, who has a marketing and advertising background.

David Southworth, 52, is the sole family member working at the fifth-generation company. And he’s worried. “It’s not clear I’ll be here in three or five years,” he says. “We’re in a mature, declining market segment.” Electronic-based office work has sliced paper sales at outlets he supplies, such as Staples, Office Max and Wal-Mart. “It’s not clear this will be a great place to work in 20 years,” he says. “It can happen, but I can’t show you which products or which customers [would spark a turnaround].”

The $30 million company hired a family business consultant about five years ago. The consultant was surprised, says David, that his company didn’t have many typical problems family businesses have. “He said he thought we had a pretty decent setup.”

The consultant suggested that Southworth engage an advisory board and helped the company find members. Today, the company’s advisory board consists of a banker who’s married to a cousin; an airline-pilot cousin with union negotiation and mediation skills; and two outsiders: the former head of an office products company who sells in the same market targeted by Southworth, and a turnaround consultant with good general business skills.

David Southworth admits his is not a close family. “I don’t even know a lot of the owners,” he says, noting that they are all disbursed around the country. There is no majority owner. David’s mother, Ann Q. Southworth, 74, owns the largest single block, a 20% stake. Counting his and his siblings’ shares, his branch holds 30%. Another branch owns 25%; a third branch retains 15%. Miscellaneous relatives and current and former employees own the remaining shares.

“Most of my family members have come to accept that this is an illiquid financial investment,” David says. They do receive modest dividends, which David acknowledges is a “simmering issue.” Some shareholders would like to sell, he adds. “Most likely, the corporation will retire their shares at some point, but there’s no plan now.”

David’s father was president of the company from 1974 through 1997. David says his siblings, Polly, 50, and Peter, 48, didn’t want careers at the company and were relieved when he joined the firm in 1978. Now no clear successor is apparent from within the family or the company’s 180 employees.

David says few family shareholders attend annual meetings—often, it’s just his mother and aunt. “But my relatives value the generational family connection even if their name is McCallister and they live in Iowa,” he says. “They feel proud to see the Southworth name on products at Staples. So there’s a lot of momentum to keep it profitable and keep it rolling. I’m very much aware I’m hired on behalf of the owners. Others may think I run the place like it’s mine—and I do&151;but it’s not mine.”

Playing as a team

Vicky Wuest
Badger Mining Corporation, Berlin, Wis.

At Badger Mining Corporation, run and/or owned by 13 third-generation cousins, “no one is boss,” says Vicky Wuest (pronounced “Weest”), who provides administrative support and is a board member. “People are responsible for a certain area or department, but we work in teams,” she explains. The company’s 180 employees in Wisconsin, Nevada and Poland manufacture industrial silica sand.

Even performance reviews are team-based. The company conducts “360-degree” evaluations, in which individuals are reviewed by peers, superiors and subordinates—family as well as non-family. If performance issues arise, the person in question works with his or her coach/supervisor and has six months to a year to turn the situation around. “Hopefully it never comes to that,” says Vicky, 50. “If it is a family member, we tend to work harder with that person to try to turn that around. We don’t want to have to let a family member go.”

But she admits that several years ago a member of her generation left the company. “He realized he’d been wrong,” Vicky says. “It was tough at first, but he’s probably in a better situation now, is happier and gets along well with the family.”

There are no formal rules of entry, but relatives must wait for an appropriate opening and go through the same interview process as non-family candidates do. Other things being equal, Vicky says, the family member gets hired. The cousins prefer that next-generation members work outside the company before applying, she adds.

The family’s two branches each own a combination of voting and non-voting shares. Vicky and her four siblings (including two who work in the company) own 50%. The other half is owned by her retired Uncle George Hess, her cousin Mike Hess (the company’s CEO), and Mike’s seven siblings (three of whom work at Badger). Vicky’s husband, Tim, 50 (the company’s president), two in-laws plus three full-time and two part-time fourth-generation members work for the company but do not own stock.

Badger’s board consists of one representative from each of the two family branches—Vicky and her Uncle George—plus two outsiders (an attorney and a past non-family CEO). Two other family representatives, one from each branch, sit in on board meetings. They have a voice, but no vote.

Vicky says the family avoids conflict and rivalries simply by holding regular meetings, apart from board meetings. At these gatherings, all relatives—active and inactive—share financial information. The family meetings used to be quarterly but now occur annually unless a new venture or other pressing issue requires the relatives to convene.

When the family faces major decisions, “We keep talking until we get to consensus,” Vicky says. “If the family can’t act as a team, we can’t expect other associates to do it.”

Preserving harmony

James R. Verdin
The Verdin Company, Cincinnati

The sudden death of Ralph Vernon at age 50 in 1959 left his brothers, Robert Sr. and Forrest, in charge of the church bell and carillon company founded by their great-grandfather, Francois de Sales Verdin, in 1842. After 11 years, though, they both wanted out.

At the time, Ralph’s son, Jim, was in the Army and hadn’t planned to enter the business. But Jim’s uncle Robert Sr., then the president, suggested he try it out. Robert Sr. had health problems of his own, and Forrest, then the vice president, was ready to retire.

The family company was small: It employed only 20 people, and its revenues languished at less than $1 million. Robert Sr. and Forrest didn’t have the energy to make the business grow, nor could they find an outside buyer.

When Jim, then in his 30s, got wind of his uncles’ desire to sell, he became interested in making a future at the company. He and his cousins—Robert Jr., then also in his 30s, and David, then in his early 20s—somehow cobbled together the financing to buy out the older generation.

But first they had to figure out what the company was worth. “We didn’t know what we were buying, and they didn’t know what they were selling,” recalls Jim, who is now the company’s president. “The inventory was obvious, but we had to throw in a goodwill factor,” which an accounting firm helped the family to calculate, he explains. “The biggest thing was to avoid arguing, so we paid an extra 5% or 10%,” Jim says. “We thought it was fair.”

Once on their own, the cousins faced a decade of recessions, which made growth impossible. They needed inventory, but financing was scarce. “We knew the market was there,” Jim recalls, “but we couldn’t get cash to grow as fast as we wanted.” They reinvested every penny into building a national sales force and developing new products, and by the late 1970s they had doubled sales.

Jim and his cousins had worked at the company many summers during their teens, and they understood how to build and install the bells. But they lacked a mentor to help them learn the business side. Robert Sr. died shortly after turning the reins over to the fifth generation, and Forrest “didn’t think the business was going to make it.”

All the cousins really had going for them was energy, Jim recalls. David, the youngest, was great at running the factory and turned out to be a tremendous asset, Jim says. Fear of potential conflict kept the trio’s egos and tempers in check, he reflects. “We just didn’t argue,” he says. “I’m not so sure we know why. Everyone has had a certain role, and everyone does it. Maybe when you’re doing better every year, that cuts down the arguments.”

Today each cousin has one grown child in the company. Jim and Robert—now 69 and 70, respectively—each own 40%, and David owns 20%. With the help of consultants and lawyers, they are trying to determine how to pass the company to the sixth generation. Robert III, 38, works in sales; David’s son Tim, 34, works in the factory; and Jim’s daughter, Jill, 38, manages the company’s property.

“It’s bigger today than when we took over, so we have to structure it so the stock will pass down within the families,” Jim says. Their main focus, though, is making sure everyone gets along. “We want to have turkey dinner together, so we have to act nice!” says Jim.

Jayne A. Pearl, a freelance writer, editor and speaker (www.jaynepearl.com), is the author of Kids and Money: Giving Them the Savvy to Succeed Financially and a workbook based on her seminar, How to Gimme-Proof Your Kids. She has been associated with Family Business since the magazine’s founding in 1989.

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