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Sunday, 28 September 2014 22:00

Preparing for Transition: Small business owners need to plan ahead to ensure smooth leadership transition

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Marcia and Al Elgersma, the owners of Hamilton-based Al’s Excavating, were typical of many small family-owned business owners in that they lacked a formal succession plan to transition to the next generation of leadership. After a failed attempt to develop a plan, the company tapped a team of local advisers to develop a leadership strategy and succession plan that it plans to launch Dec. 1. Marcia and Al Elgersma, the owners of Hamilton-based Al’s Excavating, were typical of many small family-owned business owners in that they lacked a formal succession plan to transition to the next generation of leadership. After a failed attempt to develop a plan, the company tapped a team of local advisers to develop a leadership strategy and succession plan that it plans to launch Dec. 1. PHOTO: KATY BATDORFF

For small family-owned businesses, getting the right succession plan in place can be a long, drawn-out undertaking.

Just ask Marcia Elgersma.

She and her husband, Al Elgersma, realized more than a decade ago that they needed to figure out a succession plan for Al’s Excavating Inc., the nearly four-decade-old small business they co-own in Hamilton, Mich., about 10 miles southeast of Holland. At the time, they wanted to outline the roles their children would take on in the excavating company going forward.

But that was in the year 2000 and despite their best intentions, the planning process ultimately ended unsuccessfully.

“It just didn’t work at all,” said Elgersma, the company’s secretary and treasurer. “We didn’t understand the processes and we didn’t know how to determine who was capable of leading.”

In the meantime, the Elgersmas found it was easier to grow their company to $6 million in annual sales than it was to figure out the transition plan, she said. After their failed try at succession planning, the business went back to its old model and the owners “just hunkered in.”

It wasn’t until more than a decade later and based on a referral from a friend that the owners of Al’s Excavating met with business consultants and did a deep dive into the makeup of the family and analyzed which members were qualified to hold the various leadership positions.

Such delays in putting together a formal plan of succession are not uncommon among small and middle-market companies, experts say. In West Michigan, 81 percent of family-owned businesses lack a formal succession plan, according to the results of a study conducted by the Family Owned Business Institute (FOBI), a joint project of the Grand Valley State University Seidman College of Business and Western Michigan University’s Haworth College of Business.

Simply having a succession plan in place is not really enough for most companies, sources said. Rather, families and other shareholders in the business should do a thorough analysis of the company itself and the different people who could take on leadership roles, said Kirk Koeman, a partner at DWH LLC, a Grand Rapids-based business consulting firm.

Koeman was one of a handful of people to advise the Elgersmas as they put their plan together.

“In the case of Al’s Excavating, it took two years to make changes in the company,” Koeman told MiBiz. “Typically, there is a mindset that the owners’ sons will just take over. In many middle-market companies, that’s not always feasible, and you don’t really know that until someone from the outside talks with people in the company. … These people can still be owners, but they don’t have to be managers.”

During the two-year analysis of Al’s Excavating — during which time DWH served as general manager of the company so it could continue operating during a busy construction period — the research showed that members of the Elgersma family from both the second and third generation had the skills suited for the company’s different management areas, as did a key non-family member employee.

The formal leadership transition at the company, which it expected to launch on Dec. 1, will result in the Elgersmas’ granddaughter, Jennifer Den Besten, serving as president and CFO. Son Steven Mulder will transition to the role of secretary and treasurer, while another son, Scott Mulder, will serve as a company agent and job supervisor. Grandson Jeff Mulder, who currently works as a foreman, will become a company agent and job supervisor.

Ted Carpenter, a key employee, will serve as chief operating officer in charge of production operations and estimating.

Getting Carpenter, a non-family member who had become increasingly crucial to the business, into an ownership role was a key outcome from the family’s work with the consultants, Elgersma said.

Aside from Koeman at DWH, the company also worked with Nicholas Reister, a Grand Rapids-based attorney at Smith Haughey Rice & Roegge PC, and Dr. Joseph Horak, formerly an independent consultant for family businesses and now the director of GVSU’s Family Owned Business Institute.

There could be myriad reasons why so many companies don’t have these formal succession plans in place, but it often stems from the trials and tribulations of simply running a business on a daily basis, sources said.

“(Succession talks) just feel so daunting that you don’t even try,” Reister said. “It feels like such a huge goal. There are complexities and tax considerations, so everything has to be fluid. But it all starts with a conversation. If you’re the owner,

it’s about imagining what life is like after the business.”

In the absence of hard-and-fast rules for succession planning, there is an ideal time to start having the conversation about how to put a plan together. The crucial period for a family-owned business to plan for future generations typically starts when the owners reach the age of 55 to 65, said Mark Harder, a partner at Warner Norcross & Judd LLP’s Holland office.

That’s the age when the owner’s heirs will be at a time in their lives when they have a good idea of what they want to do in their careers, Harder said. Starting the planning process when they’re much younger than that usually means that the children will be fairly fresh out of college and perhaps unsure of whether they want to enter the family business, he said.

Importantly, companies need to have completed the planning process by the time the owner reaches the age of 70, Harder said. In many instances, he has seen children just decide to set out on their own career path because their parents haven’t had these conversations. But there are other considerations as well, he said.

“If it isn’t done by 70, chances are good that it won’t get done,” Harder said. “It will be dealt with post some kind of emotionally wrenching event, (like) mom or dad’s disability or death.”

In that case, the principals of Al’s Excavating — Al Elgersma is 76 and Marcia Elgersma is 70 — are the exception to that succession planning timeline. But now that the planning is done, Marcia Elgersma said she is comfortable with the plan they are putting into action.

The important part for the shareholders is that they are in roles within the organization that are suited for their particular skillset.

“I’m not dying to force my son to be a businessman when he’s a great job supervisor,” Elgersma said.

Elgersma, who has previously been the company’s business manager, will move into an advisory capacity once the transition is complete. She and her husband, along with Den Besten and Koeman, will sit on an advisory board that will need to approve any major business decisions the new owners may undertake.

Establishing this type of outside board of directors is considered a crucial best practice for family-owned businesses, according to many academics studying the field.

At Al’s Excavating, the Elgersmas say they’re not retiring just yet, despite taking on significantly decreased roles within the company they have grown to 45 employees and between $6-8 million in annual sales. The couple also have an involvement in a real estate deal that they plan to spend some time on for the foreseeable future.

“Our plan is to try and sell our real estate investment,” Elgersma said. “Then we can ride off into the sunset.” 

Sidebar: Succession planning how-to

With more baby boomers approaching retirement age and as survey results show family-owned businesses typically put off transition planning, academics and business consultants alike are stressing the need for business owners to tackle thorough succession plans. Area experts have a number of ways to help small and middle-market companies find a plan that works.

  1. Start early enough. Simply taking the first step of thinking about a plan is important. Business owners should plan to do this around age 55-65, when the next generation typically has a solid grasp of their career plans. Owners who wait until after age 70 to start planning typically run into problems — or don’t complete the plan at all.
  2. Inventory the business. Executives looking to come up with a transition plan are encouraged to undertake a thorough analysis of the business to determine exactly what they plan to pass along to the next generation of leadership.
  3. Analyze who has the necessary skills to lead. Simply appointing the next generation to take over the family business is not enough. Owners should look closely at who in the family is fit to lead. Some members may be fine as owners, but not as managers.
  4. Identify key employees. The best leaders in the company may not be family members. Sometimes, it’s best for the family business to bring those key employees into an ownership role in the company.
  5. Hire consultants. Good advisers can not only assist with the inventory and analysis of the business, but they can also help with day-to-day management of the company during what can be a lengthy planning process.
  6. Bring on non-family board members. Research suggests that establishing a board of directors with outsiders can be key to the ongoing success of any family-owned business, particularly in times of transition. An outside advisory board can also assist the new management in making major decisions.


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