The Big Story: Sweet Succession
Passing the torch — It’s the story every jeweler is thinking about, but few want to tackle.
BY EILEEN McCLELLAND
Published in the March 2012 issue
THE BIG STAKE
Mark motes, COO Smyth Jewelers in Maryland, is in a peer group with 12 other jewelers and when they get together the subject of succession always comes up. “Everybody thinks they have some kind of succession plan, but when it comes down to it and you start asking about details and hitting them with reality, no one really does.
Motes says he doesn’t, either. If one of the owners of Smyth wants to retire, his stock will go to his immediate family. Smyth has a board set up that would take over in an emergency. But as far as long-term plans for succession, “I really don’t even have a prediction on it,” Motes says.
According to Family Business Succession: The Final Test of Greatness, by Craig E. Aronoff, Stephen L. McLure and John L. Ward (reviewed on page 89), many family business owners find ambiguity preferable to making tough decisions. Who wants to consider their own death or disability, make choices among children, or let go of a secure position for an uncertain future?
But avoid the subject at your own risk because a poorly planned succession can be costly, taking a toll on assets, employees and family harmony. According to the Family Business Institute only about 30 percent of family businesses successfully transition to the second generation, 12 percent to the third and 3 percent to the fourth.
“I wholeheartedly recommend finding a succession planning consultant, someone you really trust who can guide you through that process and help you through those conversations that are sometimes difficult to have. In those difficult conversations is where the family peace will be established,” says Jennifer Gandia, second generation co-owner of Greenwich Jewelers in New York City.
“I THINK the biggest reason businesses have difficulty making the transition is lack of planning,” says Kate Peterson of Performance Concepts. “Most people learned everything they know about the business from their parent before them, who learned it from their parent, or learned by the seat of their pants. Nowhere in that informal training were there provisions for how to pass it on.”
Another obstacle, Peterson believes, is denial. “We start in this business and sustain in this business as salespeople, and salespeople have the nasty habit of thinking they are invincible,” she says. “I fight with salespeople all the time about turning over the sale, but they have a total lack of awareness about that. They don’t think about turning over the business, because they don’t want to deal with the fact that they are going to have to.
“Once that hits them, though, they start to step back a little.”
Bill Sustachek, former CEO of Rasmussen Diamonds in Racine, WI, began getting more serious about turning over the business to sonin-law Joel Hassler when he survived a “widow maker” of a heart attack. At Jack Lewis Jewelers, in Bloomington, IL, CEO John Wohlwend stepped up his transition to protégé John Carter after a back injury sidelined him for the Christmas season.
Even if the “kids” are well qualified, totally prepared and well into their 40s, parents may still fear letting go, Peterson says. “When you’re talking about a business in which you’ve invested years or even generations to build, there’s a lot at stake. It’s like giving the kids the keys to the car for the first time.”
TAKE an objective look at the next generation. Are they interested, qualified and willing to work?
Joseph Romano of consulting firm Scull and Company says it’s important to make sure the successor is accepting the position for the right reason. “To accept without the passion for the business and passion to drive the business to the next level will result in caretaking, which leads to mediocre results,” says Romano, who worked with Greenwich Jewelers’ transition.
At Smyth, family members who want to join the business start at the same level and salary as any other employee. They are interviewed by the HR department, and if they move up, it’s on their own merit, Motes says.
Motes has watched fellow retailers mismanage the next generation to the point they sabotage the business. “One big problem is that you bring in four or five family members, and put them in top positions, and they can’t handle it. A lot of people would be much better off to pay the family members to stay home and put someone qualified into the job.”
Patrick Pugh says before he became CEO of Pugh’s Diamond Jewelers in Zanesville, OH, he and his brothers wrestled with the issue of whether their kids could come into the business, buy in or get shares of stock.
“Be sure you know how you feel about the other person’s kids, because you may not want to be partners with them,” Pugh says. “It was written up so that the kids were able to come in and work and if they worked here they could own stock. Eventually we cleaned it up and said, ‘no kids,’ but that was only after my siblings knew their kids didn’t want to be in the business.”
David Brown of the Edge Retail Academy has seen his share of businesses struggle with the issue of transition as well.
“Part of it is a generational thing. The next generation wants to double the business overnight and make a fortune, but they don’t have the professional skills they need in this environment. Today, you just can’t get by with a gemological degree.”
Brown says transitions are most likely to work if family members are required to have a university education appropriate to the business, and are subject to firing.
If more than one family member will join the business, decide who is going to be in charge and set up clear lines of authority and responsibility, Peterson says.
Finally, as Sustachek puts it, know when it’s time to be hands-off. “If you know you are selling the business to the right person, you need to trust the process. Get professional help. Then get out of the way and let the magic happen.”
SUCCESSION POINTS TO CONSIDER
- AN OWNER MUST BE ABLE TO ANSWER TWO QUESTIONS: When do you plan to retire? and How much money do you need to do so? — David Brown, Edge Retail Academy
- UNSURE ABOUT A SUCCESSION CANDIATE? A licensed industrial psychologist can identify strengths and weaknesses. — Joseph Romano, president of Scull and Company.
- AN OWNER and successor should discuss succession annually. “Build in performance milestones and accountability into the succession plan for both of you.” — Lauren Owen, principal, Redpoint Succession and Leadership Coaching
- INTERFAMILY INTEREST transactions enable the next generation to take ownership of a business while paying the parents money to live on. The rate that interfamily members must charge one another is as low as 1.5 percent for a nine-year loan. — Randy Waesche, president and CEO of Resource Management Inc.
- AN IMPARTIAL THIRD PARTY can help facilitate discussion. The family banker or family lawyer might be well meaning but could have a vested interest in how things turn out. They might be seen as “Dad’s” or “Mom’s” person. A good facilitator is there for the good of the entire family and will not be afraid to call people out if they are not being forthright.— Owen
- IF YOU PLAN A RETIREMENT SALE, consider letting it run in December and January to stagger the resultant income taxes over two years. — Josh Hayes, Wilkerson & Associates
- AFTER THE RETIREMENT SALE, send out a mailer to everyone on the mailing list — with a photo of the old and new owner shaking hands — making it clear the business has transitioned and is still around. — Hayes
CHOOSE AN EXIT PATH.
LAST JULY, the Gordon Co. helped Rasmussen Diamonds through a retirement sale for Sustachek. “We sold two years’ worth of jewelry in 90 days,” Hassler says. “It made the transition easier from an inventory and accounting standpoint.” It also helped him to determine which styles and price points were popular. “I could start with whatever I wanted in terms of an inventory mix.”
Wilkerson & Associates also runs retirement sales for businesses in transition, raising cash to buy out the CEO. “You have to get your money out of it if you intend on retiring,” says Josh Hayes, business analyst with Wilkerson & Associates. “If you really care about the person you’re selling it to, you can’t just float a number out there that’s unrealistic. The old owner can’t just walk into the store and say, I’m going to sell it to you for $400,000. You don’t want to saddle them with debt and set them up for failure. If they take out a line of credit for that amount, the store’s cash flow is not likely to support that level of debt.”
The value of a store can be found in furniture, fixtures, equipment, the mailing list and the inventory. “Once the sale is complete, the new owner has lower inventory, minimal debt and can usually get some consignment inventory from vendors they know, and build up the store in the direction they intend to take it,” Hayes says.
Pugh, who bought out his brother Dan three years ago from Pugh’s Diamond Jewelers says it’s vital to have a buy-sell agreement in writing.
Agree on a formula to evaluate the business and how it will be paid for. The Pughs’ agreement allowed Patrick to pay for the business in installments or to ask the bank for cash. Patrick opted to go to the bank and Dan agreed to a cash price that saved Patrick $25,000.
Another alternative is the more gradual transition chosen by brothers Chris and Mark Coleman, co-owners of Nelson Coleman Jewelers in Baltimore, MD.
When Amanda, Chris’ daughter, expressed an interest in the family business and pursued relevant education, Mark and Chris realized they had found their successor. She worked her way up to general manager at 29. They plan to begin selling their stock to her in 2013.
While some retailers think it’s smarter to pass the torch in their wills, the Colemans wanted to ensure Amanda’s success. “We chose to start the transition while we’re still healthy and do everything in our power to make sure the business is financially stable,” Chris says.
But the plan wasn’t without a measure of angst. “These were hard decisions for me because my children chose not to go into the business,” Mark says. “I’ll be selling my 50 percent of the business to the person who will carry on the tradition.”
LYLE Husar’s “retirement” in January was the culmination of an organized, five-year plan that led to his son Craig succeeding him as second-generation CEO. But he’s been reluctant to let his position as “micromanager” slip away completely.
“It’s hard for me to pass the torch,” Lyle admits. “It’s working, but it doesn’t happen overnight. I think Craig wants me to stick around. He says he still has a few things to learn.”
So far, retirement has meant he works 40 to 45 hours a week, four days a week as a certified master watchmaker, a jeweler and a salesman. Before, he often worked 50 to 60 hours a week, or as many as 70. His 70th birthday last September and his wife, Alice’s, bout with cancer last year were wakeup calls to the fact it might be time to take a step back, pursue hobbies and do some traveling. CFO Alice Husar has declared her own retirement. “She says, ‘That’s it, she’s not coming back,’” her husband says.
Lyle advises families to start planning for succession early. “It’s not an overnight project,” he says. “Don’t be afraid to communicate with your children and your advisers, attorneys and CPAs.”
Lyle encouraged Craig, now in his early 40s, to explore the world outside of the family business, and to learn what it’s like to work for someone else. “He went to California for his GIA training, got his GG and came back — seven years later. I have to tell people that’s not because he’s slow,” Lyle jokes. “Craig fell in love with California.”
Craig taught for the GIA, worked for Alan Friedman in Beverly Hills and went on the road with Mel Fisher’s exhibition, “Treasures of the Atocha,” which allowed him to visit jewelry stores all over the country and return with a broad knowledge about everything from store design to gemology.
“I think my father was wise to push me away from the business in 1991,” Craig says. “A common trait I see among successful secondgeneration owners is that they’ve left the business for a while and now have a deeper appreciation for what it takes to run a successful business.”
By his 30s, he had decided to return with a vision of growing the family business into one of the leading stores in Milwaukee.
Craig’s focus gradually changed from a concentration on individual interactions with customers to a much broader picture — an understanding of how every single thing impacts the business. “There used to be almost a blissful ignorance where it was fun to chat with customers all day and sell jewelry,” Craig says. “Now it’s become much more demanding and the stakes are higher than ever.”
As the years went by, he needed to cultivate patience to understand his father’s reluctance to let go of the business. “My father has invested his life in building this business and passing the torch is not an easy thing to do,” he says. “The failure rate is extremely high from first to second generation owners, and that is multiplied exponentially for the third generation. But I absolutely hope that one of my children succeeds me in the business, too.”
Craig’s daughter Becca, 24, has recently joined him in sales and marketing with a degree in graphic arts and a background in sales. Craig also works with his sister, Christine Husar Anderson, a custom-jewelry designer, inventory manager and new CFO.
Lyle says both Craig and Christine found their niches naturally. “I didn’t do a lot of prodding,” he says. “Craig was on the floor since he was 10 or 11. Little old ladies loved him.”
Lyle, formerly a machinist and a rock musician on the side, started his first business in 1968 with 400 square feet and $5,000 in savings. He sold and repaired clocks and watches. Now, with the store at 5,000 square feet and 12 employees, he barely recognizes the business as the one he founded. “The goal was to be my own boss and I think I succeeded. I had no idea there were that many hats to wear when running a business. But my wife had a business background. She took care of bookkeeping and I took care of making the money.”
Lyle is making an effort to let go. Still, it can be tough, he says, watching Craig “make some of the same mistakes I made. It’s nothing major, but everything does seem to come full circle. All of a sudden I’ll come in and everything’s been remerchandised — just like it was 10 years ago.
“But if he makes a mistake, I just slap him around a little bit,” says Lyle with his wry humor. “Really, we sit down and discuss it. We have very good communication, and weekly family meetings, which we feel are very important.” Lyle’s next goal is to be able to do whatever he wants whenever he wants. “If I want to take a vacation, I’m going to go,” he says.
JOHN Wohlwend loves to tell the story of Jack Lewis Jewelers, a business he recently passed on to John Carter, a man who has been like a son to him. Carter represents the third generation of ownership, yet none of the three owners were related.
As a boy, Wohlwend had been groomed to succeed his own father, a Chrysler dealer in Illinois. But after college, where he studied finance, Wohlwend balked. “I didn’t want to be the boss’s kid. Dad was very, very successful as a car dealer and I didn’t know how I could ever climb out from under that.”
He landed a job with another family-owned business, Jack Lewis Jewelers. Lewis was 44 years Wohlwend’s senior, and ran the epitome of the old-fashioned downtown jewelry store. Wohlwend quickly moved up to manager and began growing the business.
When Wohlwend was 36 and Lewis 80 and still working, Wohlwend resigned to take a job with a vendor. The Lewis family panicked. “Nancy Lewis, Jack’s daughter, called me and said, ‘You can’t leave, the company will close if you leave.” The Lewises named him president, tripled his salary, and he ran it for the Lewis family trust. “Jack’s daughters had no interest whatsoever and none of the grandchildren did either,” Wohlwend says, which made running the business easier.
Wohlwend bought out Lewis, who was by then 89. In 1994, Wohlwend moved the business into a 5,300-square-foot space.
Enter John Carter, a kid Wohlwend hired the week he got his driver’s license. Carter says he fell in love with fine Swiss timepieces as a 16-year-old, devoured trade journals and dreamed of going to Basel. He took charge of the Jack Lewis watch department while studying marketing, and by the time he was 23, became regional sales manager for a Swiss watch company. “I would see him in Basel, see him at JCK, occasionally at the New York show,” Wohlwend says, wistfully. “He’s kind of the son we never had.”
In 2002, Wohlwend asked Carter if he knew of anyone who could step in as his eventual successor. Carter, who was living in Chicago and not quite 30, surprised him. Although Carter loved his job, he jumped at the chance to become a partner in the business he had grown up in. Wohlwend told his wife, Jan, “I’m going to bring Carter back into the company, make it the best we can — and he’s my ticket out of there. I’m still young enough to make it a 10-year plan.” Carter wanted to ensure that goal was formalized. “I wanted first right of refusal to buy the business.”
Wanting it in writing wasn’t due to a lack of trust. “It was because we were so close that we needed that. We both insisted on having everything done properly. That helped remove some of the emotion.”
Once buy-sell agreements were in place, the two met twice a month for eight years. There were, of course, plenty of differences of opinion along the way.
“For as close as we work together and the fact that John was my superior, through all the years I’ve known him — and I’ve know him over half my life — we’ve never had an argument. He had to let me learn, and on some points I had to acquiesce that he knew more than me.”
Wohlwend wanted to have an office outside of the jewelry store and a role as community liaison. “The staff did not need two bosses, and I didn’t want Carter to be stymied,” Wohlwend says. He moved himself out of the store three years ago.
Carter appreciated that. “As we were getting into the home stretch, we both knew that for my progression I needed to control the staff and the business. It was a real boost to my confidence and my career, but he was still around when I needed to ask a question.”
Wohlwend was glad he had planned ahead, when, in 2010 back surgery sidelined him for the Christmas season. “Had it not been for John Carter, my alternative would have been to close,” he says.
The injury caused him to step up the transition, completing the 10-year plan in 8-1/2, and making Carter CEO on March 17, 2011. Carter, 37, has a baby daughter, Lilah. “I would love for my children to be involved, but if they don’t want that, I don’t want them here,” he says.
“My goal would be to find someone similar to how I started, someone who started out taking in the mail, taking the trash out and sweeping the floors. That makes for the biggest success stories — when someone has a passion for that particular company. It would mean a lot to me to find a younger person, when I’m ready to retire, to pick up the torch.”
Carter has learned well the significance of being a mentor. “If someone had asked John when he hired me, ‘Do you think that kid will grow up and take over the business?’ he would have laughed at you. You just never know.”