You've built your forklift business with your own blood, sweat, tears and lots of money. Inevitably, the time may come for you to relinquish control of what's closest to your heart. Your family members may want to become involved, or as it often happens, their talents and interests may lie in other areas. What do you do? Christine Liew investigates.


The backbone of economies

Family businesses around the world contribute much to the economy. Facts and figures from the Family Firm Institute show that, in US, family-owned businesses contribute 64 per cent of annual gross domestic product (GDP) or USD5.9 trillion, and employ 62 per cent of the workforce. In Canada, total annual sales for family-owned businesses are estimated at USD1.3 trillion. Export industries and small-to-medium sized family-owned businesses are said to be the twin pillars of the German economy, and by the end of 1999, family firms accounted for 79.7 per cent of all Finnish companies.

What happens when family-business owners want to retire or are faced with a personal crisis? Some forklift dealers say the independent family-owned forklift dealership will soon become extinct as owners reach retirement age and no family members show interest in continuing the business. Forklift dealership owners who want to retire or protect their assets need to think about succession planning.

David Griffith, president of the Material Handling Equipment Distributors Association (MHEDA) in US, told Forkliftaction.com News that forklift distributors were aware of succession planning.

"Over the past 10 to 15 years, succession planning has been given a lot of visibility in the US. The MHEDA has around 650 members and I think it's an issue people in this business prioritise. We are spending much of our time on succession planning and business transformation." Griffith said.

"Almost all larger OEMs have dealer development groups that address the issue. Succession planning even forms a condition of the contract with the dealer. Most dealer agreements require the OEM's approval of the new owner," he said.

Bill Pfleger, Yale Material Handling Corp (YMHC)'s dealer development director, said the support forklift manufacturers gave to dealers was important in succession planning. YMHC, which is a part of the NACCO Materials Handling Group (NMHG), is a forklift manufacturer based in Greenville, North Carolina, US.

"The manufacturer's focus revolves around maintaining the continuity and quality of its distribution system" Pfleger said.

"A part of the manufacturer's succession plan will include an evaluation of the future management team's qualification. If the manufacturer does not believe they are qualified enough to maintain a quality distribution system for its product, the manufacturer will work with the current owner to develop a plan so the necessary qualifications are in place."

"The support of the key manufacturer is a critical element in every distributor's succession plan. It is important that the manufacturer be brought into the planning process early on," he said.

The end of an era

Jane Hilburt-Davis

Jane Hilburt-Davis, founding principal of Key Resources, a family business consultancy based in Massachusetts, US, and co-author of Consulting to Family Businesses told Forkliftaction.com News the "right" time to think about succession planning was when a business owner knew the business was successful.

"The owner should [then] start asking 'where will the business go after I'm gone' and evaluate the succession plan every year or every three to four years," Hilburt-Davis said.

"I like to refer to the Prince Charles-Queen Elizabeth syndrome. He's in his 50s, poor thing. He doesn't know if she is going to turn over the throne or die with it but it's not fair to him. Maybe it's what she wants but did she ever think of succession planning?" she said.

Scott Swakow, vice president of sales from Scott Lift Truck, a Komatsu dealer in Illinois, US, which is currently setting its succession plan, said succession planning was not a pleasant subject. He is the youngest of three brothers who are in the family business. The eldest brother, who is president, will retire next year.

"It means the end of an era," he said poignantly.

Hilburt-Davis agrees. "People resist thinking about it because it brings up the issue of mortality - I'm going to die at one point. Oftentimes family business owners are very bright entrepreneurs. It is hard for them to think about this."

Geoff Kiel, professor of management at the University of Queensland, Australia, and former president of the Australian and New Zealand Academy of Management (ANZAM) said that while awareness of succession planning is high, it is something business owners "don't do at all or don't do well".

"I've seen situations where people work well into their 70s because they love the business. The business is their life and they keep on putting off thinking about the future. People should make plans but the reality is, especially for smaller businesses, they don't," Kiel said.

Business surveys in the US say around 30 per cent of family-owned businesses survive to the second generation, only 12 per cent survive to the third generation and 3 per cent will operate at the fourth generation level and beyond.

Many hats make planning difficult

Succession planning is such a complicated affair that the Family Firm Institute based in Massachusetts, US, has pioneered the Certificate in Family Business Advising. The course has been running for four years now and to be eligible, candidates need a professional qualification in one of four disciplines - behavioural science, financial, law, and management science. Consultants who advise on succession planning are usually professionals in those disciplines.

Hilburt-Davies who is the course's founding chair said it was important for family business owners to seek advice from someone who's trained in the complexities of family business.

"I do lots of speaking to lawyers and consultants who take care of the technical side. I ask them when does the technical side get in the way of succession planning? They say the policy/procedures and estate plan never get in the way. It's the complexities of family business that affects the success of the succession planning.

"[For example] when I'm asked to facilitate meetings between owners in a family business, it's complex. They are owners and they are blood related and they are vice president of sales or CEO. They're wearing many hats. One of our jobs is to draw clear boundaries.

"I put cards in front of them and ask, are you speaking as mum or CEO, or as son or director of sales?" Hilburt-Davis said.

Boundaries and clear-cut roles are also important when business owners have retired from the business.

"There must be boundaries and a clear role for the leaving founder where they still contribute but do not poke their nose in the business, letting their son or daughter do things their way," Hilburt-Davis said.

"They have to remember not to stay involved in the business. And if they've left the business to a non-family manager, they need to work out what their role is, and what the non-family manager's role is because no non-family manager is going to want to take over if the roles are not worked out."

Selling or getting outside help

As difficult as it is, succession planning must not be put off or severe financial hardship could befall a business owner and his family.

Hilburt-Davis said if the owners had no retirement fund, they better get a good estate planning lawyer and accountant to work at a succession plan so that not all their assets were in the company.

"The options are to sell the business or decide to still run the company by getting an outside non-family manager to run it. Selling the business is not that simple so it is better not to put off succession planning. Owners need to ask themselves what they want to do in terms of retirement," she said.

Geoff Kiel

Kiel said those options were also available to family business owners who did not have a capable, willing family member to take over.

"But you can't just suddenly walk away and say 'oh the professional manager will manage my business well'. There is also a role for a board of directors to oversee the professional manager who's running the business," he said.

Kiel recommends business owners with no family members to take over to get multiple advice.
"Talk to your lawyer, your accountant and other business advisers you use. Get a variety of viewpoints for what's best in your circumstances," he said.

"One option is to sell the business [if you can] and the benefit of that is, it diversifies your investment risk because that business represents a large part of your personal wealth. It's better financial planning."

Raising the potential

Succession planning includes identifying the leadership potential in family members who are involved in the business. These family members' skills and professional experience must be assessed and mentoring programs can be established to provide guidance for these future leaders.

A few basic questions that advisors ask are: Are there any family members who are interested in running it and do they have the skills to do so? Have they been brought up in the business? Do they have the training?

Louis Aldrovandi, founder of Liftking, a rough-terrain forklift manufacturer, based in Vaughan, Ontario, Canada had the foresight to groom his son Mark to take over his business. He shared his succession plan in an interview with Your Office, a Canadian small business magazine.

More than 30 years after founding Liftking, Aldrovandi had built his business into a thriving CAD30 million- (USD25.7 million) a-year global concern. His son Mark, general manager of Liftking, has a diploma in business from Ryerson Polytechnical Institute (now Ryerson Polytechnic University) in Toronto and has been working in the business since he was a kid.

"He started welding and working summers and over the years he's learned it all," Aldrovandi said.

Aldrovandi has designated Mark as his successor and will pass ownership of the business to Mark and his daughter Grace, a doctor living in the US. Grace will receive financial benefit from the business but will not actively work in it. By planning ahead and grooming Mark to succeed him, Aldrovandi's company becomes a legacy to his family.

The tax issue

Griffith, who is also president and CEO of Modern Group, a US forklift and materials handling equipment distributor, said his company's succession planning saw the company gain significant tax advantages and transfer ownership to its employees on its own timetable.

"We became a 100 per cent employee stock ownership program (ESOP) in October 2003 but have been an ESOP since 1984," he said.

Andrew Sherman says in his book Parting Company that selling outside the family to employees through an employee stock ownership program (ESOP) can also be a useful tool for increasing employee morale.

Most ESOPs use bank loans to buy stock from the company's owner which is then distributed to individual employees. The owner may use proceeds from the sale for business expansion or retirement savings. In the US, ESOP laws allow deferment of capital-gains taxes on the sale of stock to an ESOP, if the ESOP owns at least 30 per cent of the company after the sale and if the proceeds are invested in other securities like stocks and bonds.

When founder Joe McEwen (Griffith's father-in-law) decided to retire, Modern Group used several consultants but one in particular, Jim Steiker of SES Advisors, Pennsylvania, played an important role. It took the group 18 months to finalise the process, which involved getting board approval and agreements between shareholders and the company and its banks.

"We had an outside board, used outside consultants and advice, and had an excellent banking relationship with our lead banks and bank group," Griffith said.

"The law changed letting ESOPs own S-corporations and we needed to address some other shareholder concerns." (An S-corporation is a US business entity that can be taxed like a partnership or sole proprietorship rather than as a separate entity once it elects "S Corporation Status". )

In the US, estate tax is levied on an estate before it is transferred and alone can take 18 to 55 per cent of a taxable estate, causing successors to potentially take on huge debt just to keep the business running after the owner's death. Inheritance tax is also levied on individuals receiving property from the estate. Hence, these taxes provide incentive to transfer assets before death and at least address the tax issue.

Four areas to talk about

Hilburt-Davis shares the four areas in succession planning, which she discusses with her clients.
"The first thing I talk to a client about is that succession planning is a process not an event. It's a process that takes time. I have four areas, which I explore with them.

"The first is, what is the company's strategic plan? I want to know where it's heading. That helps to decide what kind of leader is needed. Different directions require different leaders.

"Then I talk to them about their personal financial plan. Is the owner's financial security tied to the success of the business? For the owner to step away, he or she first needs to secure his or her financial security outside of the business.

"Thirdly, is there a potential leader in the family? Has the family member with potential to lead worked outside the family firm? What promise has been made by the owner and is it a fair and realistic one?

"Lastly, I discuss the transfer of ownership of the business. How does the owner plan to transfer ownership and what is the plan?" she said.