Alex Lepe
Bob Johns and daughter Jennifer Johns, at the Fort Worth showroom of their company, The Kitchen Source.
Bob Johns called the meeting seven years ago. He was 55, had spent years building custom kitchens through a business called The Kitchen Source, and was finally contemplating succession. None of his three daughters were in the business, so he gathered them when they were all home during the holidays. “If any of you want to do this, I’d like you to be here by the time I turn 60,” he told them. That would ensure ample time – several years – for transition. “If you’re not going to do it, I need to make other plans.”Johns didn’t think any of his daughters would bite. One, Jennifer, lived in Austin and had an established, lucrative career in information technology for Motorola. A second, Jessica, was also established as an actuary, a good-paying job for a strong organization, USAA, in San Antonio. “They were both making more money than they could ever make running a small business,” Johns says.
At first nobody did bite, then Jennifer Johns changed jobs, moved to Dallas, and took a post working a minimum 60 hours a week, much of it on the road. Then her mother – Bob Johns’ wife – died in 2013. Bob Johns took a sabbatical at a home in Colorado the family has owned since the 1940s. “I was coming out of the fog,” he says.
Jennifer Johns checked in on the kitchen business, which her father founded in 1991 and now has showrooms in Fort Worth and Arlington, every few weeks. “I could see they needed leadership; it was only going to sustain itself for another five years,” she says. That’s when she decided to give up her career, come off the road, and go into the family business, travelling to Colorado to give her father the message and finally arriving on board in October 2014.
Bob Johns, now 62, still owns 100 percent of the company in a Subchapter S corporation, but, with the agreement of his daughters, he’s laid out a plan for inheritance. The company will be split evenly three ways, regardless of whether the children enter the business, with an agreement in place that has Jennifer Johns paid to run it. Bob and Jennifer Johns split profit-sharing evenly. His other daughter, Judith, who has a young child, has come into the company part-time and helps with special projects and events.
If Bob Johns retires, the family would likely tweak the management agreement to give Jennifer Johns, 39, a greater share of the profit bonus to run the company. That would help fill in the earnings gap; she says she’s making less than a third of what she used to make. “But there’s no reason to do it now,” she says. “And I don’t want to make a lot of changes and me not like it.”
That Bob Johns moved to set up a succession plan and executed on it puts The Kitchen Source in a league apart from many other family-owned businesses, where the owner doesn’t pull the trigger in time to ensure a good transition. If the owner dies unexpectedly without having set up a plan, that often thrusts the business into a leadership vacuum and family friction, says Marvin Blum, a Fort Worth lawyer who specializes in succession and estate planning. Unnecessary extra estate tax, forced fire sales and closures, throwing employees out of work, can result, he says.
Alex Lepe
Attorney Marvin Blum, in his downtown Fort Worth law offices.
Not knowing where to start, procrastination, and ignoring planning because they think they’ll work for many more years and are indispensable in any case are big mistakes that business owners often make, Blum says. He cites Small Business Administration statistics showing that half of U.S. small business owners are 50 and older to demonstrate the magnitude of the oncoming transitions that will occur in Baby Boomer-owned companies between now and 2029. “Most are not set up,” Blum says.
Blum likes to use a football analogy when he talks to business owners about estate planning and succession, comparing the owner to a quarterback. “The quarterback is on the field," Blum says. "The kids are standing at the other end of the field not knowing what to do with the football that’s coming at them. It’s time for you to move from being the quarterback to being the coach and training a new quarterback. That’s really the guts of succession planning.”
Blum has a client, the founder and owner of an oil and gas company, who decided to take up succession and looked first at family members. “He identified a son-in-law who had the best skillset (and capability) of stepping into the business,” Blum says. The owner convinced the son-in-law, who already had a career in a technology business, to come into the oil and gas business. For five years, the son-in-law shadowed the owner, who then died unexpectedly in an accident.
“Today the business is thriving under the direction of the son-in-law,” Blum says. The business is owned evenly by the founder’s four children, none of whom is in the business. The son-in-law, married to one of the children, runs the company and is paid a salary. The company has strong cash flow, allowing such a structure, Blum says.
Without a succession and estate plan in place, a typical scenario plays out when the founder dies, Blum says.
“If this transfer of control hadn’t happened, the estate executor typically handles the business,” Blum says. “Normally, it’s the widow who, very frequently, has had little exposure (to the business). She either has to run it or sell it. If they have to sell it, they sell it under high-pressure circumstances.”
Another scenario that often plays out in family-owned companies is when the founder and spouse both die with no plan and children in the business continue to receive a salary, while other siblings not in the business don’t get a salary. “It leads to resentment,” Blum says. “You can set up an estate plan where one of the children buys the business. Or the siblings (not in the business) get something else, like life insurance.”
Even a founder who decides it’s time to pursue a succession plan might discover what he doesn’t want to hear: that there is no logical family successor, Blum says. “Sometimes, a sale is the only solution,” he says. “That is a dagger in the heart to a lot of founders. But if you want to save the company, you sell the business to an outsider or employees.”
When do you know it’s the right time to put together a succession and estate plan? “The critical time is when the owner gets offers, when the market is right to sell,” Blum says. “When a company is thriving is the best time to do this. That’s when you’re going to get your best price.”
Blum recommends a 10-step process to building a plan, typically ending with establishing business succession. It starts with identifying psychological barriers. The process requires building a team, including a member who has a good relationship with the founder. “The likelihood is no one is going to be completely happy with the outcome,” Blum says. “That’s the way this works.” The ideal team should also have a leader, such as an attorney, certified public accountant, or business consultant who keeps the process moving from meeting to meeting, Blum says.
Fear of loss of control and expense of putting together a plan are typical barriers, Blum says. But a good plan can be designed that means the founder doesn’t lose control, he says. “Give the founder something to do and somewhere to go,” if the founder is ready to move on from daily leadership, he says. That can mean management of family investments, philanthropy, or special company projects. And if they’re worried about costs, business owners have to weigh those against the potential expense of doing nothing, he says.
“It’s not cheap,” he says. “When I’m talking about putting together a planning team, everybody at the table is going to get paid. But the cost of not doing it is much more expensive.”
Alex Lepe
Becky, Doug and James Renfro, at Renfro Foods' Fort Worth plant.
Renfro Foods: Food company has a plan Fort Worth’s Renfro Foods is one company that’s gone through such a process. The third-generation food business, now in its 76th year, has 10 owners, including the founders’ sons, Bill and Jack Renfro, and their adult children – Doug Renfro, Becky Renfro and James Renfro. The latter three run the company, which has $20 million in sales and 40 employees today, making its own products and ones for others.
Bill and Jack Renfro have agreed to changes over the years that have helped put a succession plan in place. That included giving their voting stock to Doug, Becky and James Renfro. Doug Renfro, the company president, has 42 percent of the voting stock, and Becky and James Renfro – siblings - have 21 percent apiece. Doug Renfro persuaded his dad to give up voting stock five years ago; Becky and James Renfro then talked their father into the same. “We were running the business and had zero votes,” Doug Renfro says. The five-member management team splits the company's profit bonus evenly.
The family also is putting a new buy-sell agreement into place covering ownership and voting stock that ensures the siblings won't be in business with each other’s spouses in event of a death. Without the buy-sell, for example, if any of the three Renfros died, their spouse would inherit, diffusing ownership and complicating management. “Spouses tend to be where most problems come in” with succession, Doug Renfro says. The new buy-sell agreement addresses their generation and the next one, which now includes five children, two who are working in the company in blue-collar jobs.
The Renfros sought the advice of an attorney in putting the buy-sell together, a process that took as many as 20 hours of meetings over two years, Doug Renfro says. The buy-sell agreement will even take the pressure of business travel plans. “Becky and I try to fly an hour apart” from each other when heading to the same destination, Doug Renfro says.
Doug, Becky and James Renfro all have defined roles. Doug Renfro handles new product development; Becky Renfro, a vice president, handles the company’s international business, accounts, freight, insurance, and customer service; and James Renfro, also a vice president, handles production, warehouse, shipping, and receiving.
The company has also put into place expectations for family members want to enter the business. “Every best practice you look at says you have to go to college and get a real job,” says Doug Renfro, who has an MBA. He worked at EDS before joining Renfro Foods, 26 years ago. Becky Renfro was a land analyst at an oil and gas firm before jumping to the family business, 30 years ago. James Renfro came into the business, 36 years ago, immediately after high school.
The Renfros wanted to avoid problems with succession they’ve seen in other firms, Doug Renfro says. “I’ve seen companies implode,” Doug Renfro says.
Alex Lepe
Reggi and Larry Kemp, of Kemp & Sons, on the downtown campus of client Tarrant County College.
Kemp & Sons: Coming to grips with succession Kemp & Sons, a Fort Worth janitorial services company founded in 1972, that’s now owned and run by the founder’s son, Larry Kemp, and wife Reggi, has put together a succession plan in recent years. The couple’s daughter, now 23, has a college degree in international business and works for a company in Manchester, England, doing digital marketing.
“My goal is to have her take over the company at her own pace,” Larry Kemp, now 59, says. He and Reggi Kemp, 51, both work in the business. Their daughter is interested, he says. Larry Kemp graduated from the University of Texas at Arlington in 1980 and took a job at IBM, working there until leaving and joining his dad’s janitorial business in 1998. Once at Kemp & Sons, he began marketing it. The firm has gone from $250,000 in contracts and $100,000 in annual sales to $5-$6 million in annual sales and $22 million in generally city, state and federal contracts that are currently in place. It has 200 employees and offices in Fort Worth and Huntsville, Alabama. It’s also getting ready to break ground on a 13,000-square-foot facility, east of Interstate 35 close to downtown, to handle growth.
The Kemps, like the Renfros, also sought the advice of their attorney in putting together a succession plan two years ago. If the Kemps both died today, the company would go to their daughter and the two young children of their son, a junior high school coach. That’s regardless of whether they’re working in the company. A sister-in-law, now in the business and running quality control, would run it.
Talking succession has opened the Kemps’ eyes to the possibility that somebody who isn’t a family member may end up running it, Larry Kemp says. “We are looking at people who may not own the company, but can run the company,” he says. “I was not comfortable with that for a long time.”
He says he has one employee he can see in a top management position. “Everybody is not built to run and own a business," he says. “Owners take it more personally. I can’t fail. I have to succeed.”
At The Kitchen Source, Jennifer Johns dove into the kitchen design business after she arrived on board.
All of the company’s cabinets are custom-built in the United States by Wood-Mode, itself long family-held. The Kitchen Source has 20 employees today and will do $5-$6 million in sales this year. Jennifer Johns isn’t the designer, but the company has those people on board.
“Always surround yourself with people smarter than yourself,” she says. “I have people who are the experts. I don’t want to be an expert. If I’m the expert, the company’s in trouble.”
Business Succession in 10 (Not-So-Easy) Steps
Haven’t talked about succession and estate planning in your family-owned business yet? Marvin Blum, a Fort Worth attorney who specializes in succession and estate planning, has a 10-step process he uses to work with clients on succession.
Start the process. Identify psychological barriers and work through denial and “planning paralysis.”
Create an Action List. Tackle tasks by priority, start with the ones that are easiest to complete, and keep in mind that business succession is usually the last step.
Form a Planning Team. The team can include your lawyer, CPA, and a business consultant. It must include somebody who has a relationship with the business owner. And it must include a leader – Blum calls this person the “quarterback” – who keeps the process moving from meeting to meeting.
Manage Expectations. There’s no perfect solution that gives every stakeholder what he or she wants, the process will likely change over time, and there will be multiple meetings.
Identify the Issues. Interview key stakeholders, including the founder, founder’s spouse, children, in-laws, and key employees. No two solutions will be alike.
Define the Desired Outcome. Many effective succession plans contain some combination of these facets: business is managed by people with the right skills and it generates good cash flow, an exit strategy is place for shareholders who want to exit, the business represents a reasonable portion of each owner’s net worth, and a sale may offer the best chance of success.
Search for a Solution. Three primary choices are transferring the business to a family member or members, selling it to people inside the business, and selling it to an outside party. Does the business have assets that can be divided and distributed to the owners? For example, does it own real estate that can be put into a separate entity that generates cash flow for family members who aren’t in the business? Look to publicly traded companies for ideas. Identify who will serve on your company’s board of directors, identify who will choose the directors and consider classes of voting and nonvoting stock, and consider leaving the stock in a trust with a trustee who’ll do what’s best for the business.
Get Buy-In from Key Stakeholders. Get buy-in from all stakeholders, starting with the founder. Conduct a family meeting to educate and collect consensus. Consider hiring a facilitator for this meeting.
Address the Challenges. Confront the founder’s fears of loss of control, and address conflicting goals among family members. Focus on “commonalities.”
Implement the Solution. This could take several years. Start training your successor, or prepare the business for a sale.