Leadership Training for the Real World
Terry Conway shares his advice for operating a generational business.
Today’s post is by Terry Conway, author of Business is Simple: From A Family Cottage Business to World Processing and Markets.
I’ve always admired generational companies. There is a certain bond among the family shareholders; they pull together to preserve family values. Family shareholders have a certain enthusiasm about caring for their enterprise and seem determined to continue its success. In a word, they are proud. I thought to myself, “If ever own a business, it will focus on longevity.” Before that dream day comes, I need to figure out what it takes to make a generational company work.
Whenever an opportunity existed, I asked, “How did your family make it work for generations? What problems were overcome? What advice do you have?” Proven leaders had won the battle for generations. Their advice was pragmatic with clear dos and don’ts.
The ownership did come, and on the first day I assembled my curious associates. My presentation was short – I’m all about trust as the cornerstone of everything we will do, and our overriding principle is longevity. I’m in it for the long haul. There will be no shortcuts. We will be the best no matter how long it takes!
Now was the time to make a generational plan work.
1. Protect against estate tax shock
One advisor had some strong words. “Why let your life’s work be gobbled up by onerous estate taxes? There is no guarantee that your family will have the funds to pay estate taxes. Without planning a sale will be inevitable and could result in just a few dollars left over for the family. You must make plans now before your enterprise gets too valuable. Procrastinating could evaporate most of what you’ve worked for.
My tax advisor suggested a variety of plans including gifting non-voting shares to so called “100-year irrevocable trusts” where the estate tax would not become due until existing generations has passed on, approximately 100 years, and keep the percentage of voting shares low as they would be subject to estate tax. There were other suggestions such gift programs, preferred stock, and life insurance.
2. Restrict ownership to family bloodlines
Every generational owner emphatically gave me the same advice – whatever you do “restrict ownership exclusively to the bloodlines of the original owners.” Bloodlines in this context means limit stock ownership and subsequent sales to direct decedents of the founding generation. No wives or husbands of direct descendants. No family members outside the bloodlines who had become company executives. No adopted family members. No exceptions.
That policy seemed harsh at first. The advice was “you’ve got to protect yourself.” Divorces and poor performing executives outside the bloodlines can create costly and unusually long delays to resolve. Price per share is almost always in contention when the board seeks an involuntary buyback from shareholders outside the bloodlines. “A divorce brought our company to the brink of bankruptcy,” one owner told me.
3. Focus on business first
“Business first” is the battle that must be won every day. One saying I heard was, “When business is first there’s enough for all family shareholders; when the business is not first there is never enough for any shareholder.” It did not make sense at first until I understood that some families have long-term financial needs. Who decides the necessity for some and not others? My solution was a shareholder redemption plan, subject to board and lender approvals, that allows for redemptions in exchange for dilution of ownership.
I noted that every generational change needs a well-regarded leader to operate the business as a professional enterprise, keep the family focused on business first, and balance family needs with a board approved dividend program. The board, as part of its responsibility for succession planning, needs to develop such leaders.
4. Governance
To keep “business first,” I started with a combination of outside board and family members, including an all-important compensation committee. I kept hearing that directors prefer small boards because they want a chance to engage in meaningful discussions with management and family owners. “Limit your board to five members with two insiders who are working in the business and three outsiders.” Another advisor added, “I like outside directors to be active or retired CEOs with experience in your industry. They have the best perspective.”
5. Share the vision
How does a multi-generational vacation or family camp fit into a company’s longevity plan? It provides a relaxed environment that fosters communication among stockholders in a fun-filled environment, develops more interest in the progress and prosperity of the family enterprise, and, most importantly, builds relationships of trust that every family and family company will need someday.
6. Plan early
Early planning provides a generational enterprise with a better chance of working. Later, it may not be the best option for the family to continue, but it’s an option that may be the best choice.
Looking back after 25 years
The early plans worked out. We’re still enjoying the benefits of a generational company.
Terry Conway acquired sole ownership of Handy Seafood in 1981 and built the small cottage business into a prominent multinational brand with sales reaching $60 million in 2024. He has been Executive Chairman since 2016, when he transferred voting control to his five adult children. He lives in Salisbury, Maryland, on the Eastern Shore with his wife of 63 years. Since his recent retirement, he is Executive Consultant to the Board. For more information, please visit www.terryconway-bis.com.
Did you enjoy this post? If so, I highly encourage you to take about 30 seconds to become a regular subscriber to this blog. It’s free, fun, practical, and only a few emails a week (I promise!). SIGN UP HERE to get the thoughtLEADERS blog conveniently delivered right to your inbox!
