Do I Give the Business to My Children or Sell Out?

Sumner Redstone may have been a brilliant businessman. After all, he used his privately held firm, National Amusements, to acquire controlling stakes in both Viacom and CBS, a media empire valued at more than $40 billion. His personal wealth has been pegged at $5 billion. But Redstone flunked the fundamental test of when and how to make an exit.

At age 93, with his mental and physical competence in question, his daughter, granddaughter, former live-in girlfriends, directors of Redstone’s private trust and other participants are engaged in a nasty multi-sided fight for control of his assets. Lawsuits costing millions of dollars are under way, and billions of dollars of market value are at risk.

Redstone is not a Baby Boomer, but his predicament should serve as a wake-up call to millions of CEOs in the demographic bulge in the snake’s neck, meaning those born between 1946 and 1964. The leading edge of the generation that popularized the hula hoop, rock music, marijuana and the sit-in protest has been turning 70 all this year. They may have inherited closely held businesses from their parents of the World War II generation, or they may have started the businesses themselves.

“Founders are great at running a business but terrible at letting go of authority.

Either way, it’s high time to figure out how to retire. But only 37% of them have a formal plan for orderly succession, according to a survey by U.S. Trust, a unit of Bank of America. And there are many permutations as to what can go wrong.

As in Redstone’s case, CEOs can reach a point that they either die or become enfeebled without leaving a succession plan in place. Others find themselves locked in struggles with children inside the business, who are eager to take it over and push the parent out. If the parent is pushed out of the CEO’s slot and takes a position on the board, what happens if that parent looks to intervene in management?

“Founders are great at running a business but terrible at letting go of authority,” says Leslie Dashew, president of the Human Side of Enterprise consultancy in Scottsdale, Arizona. “A lot of times, they will make someone president but won’t let him make any decisions.”

In other cases, the kids are in the business but aren’t interested in—or perhaps not capable of—running the company. Faced with that scenario, a founding CEO may be tempted to sell the business to either a strategic investor or a financial investor—running the risk that the company could be consolidated or flipped, with both children and long-term employees losing their livelihoods.

“I think for almost all the privately owned or family-owned businesses that don’t make it to the second or third generation, the reason is poor succession planning or no succession planning,” says Warren Stephens, a second-generation CEO of Stephens, an investment bank and financial services firm based in Little Rock, Arkansas.

Take It to Your Team
Employee Stock Ownership Plans (ESOPs) offer one solution to difficult succession issues. That’s the tool that Achyut “Doc” Setlur used. Setlur, who immigrated from India more than half a century ago, spent two decades working for Fluor, a big engineering company in the nuclear power plant business.

In 1990, he decided to go out on his own by creating a one-man consulting firm called Automated Engineering Services. The business grew rapidly. At age 68, Setlur started thinking about how to make an exit. He and his wife, also an engineer, had one son, who was studying to get a Ph.D. in material sciences, an unrelated field.

“My business was very different; he was just not into it,” Setlur recalls. “I was quite respectful of his decision to continue his research because that was what excited him. I wanted to keep the company in the family and continue the legacy, but that was not to be.”

“I was quite respectful of [my son’s] decision to continue his research because that was what excited him. I wanted to keep the company in the family and continue the legacy, but that was not to be.

That’s a powerful word—“legacy”—that many CEOs talk about in facing the decision regarding how and when to step aside. Setlur did not want to sell out to a larger company that might fire or demote trusted long-term employees. Instead, in 2006, he consulted with his financial advisor at Merrill Lynch, Sharon Oberlander and other experts and opted to create an ESOP.

There are many different variations of ESOPs, but this type did not require that employees invest any of their own money or borrow from a bank. It was internally funded. “Maybe Doc left something on the table,” Oberlander says. “But he left money for others.”

As a result, each employee now had skin in the game and the company grew even more rapidly. By 2013, it had 220 employees and five district offices around the U.S. Setlur left in 2014, but the story doesn’t end there. A British nuclear engineering firm looking to expand into the U.S. agreed to buy Automated Engineering later that year. Setlur and his former employees were able to sell their shares at high valuations with all the top employees remaining in place. Now 78, Setlur lives in Naperville, Illinois, and his son remains happy in his research role.

An Early Start
One takeaway from Setlur’s experience is that CEOs need to have candid conversations with their families early and often. “You can’t assume your children will want to go into the business if they are not already,” says Oberlander. “Or, if they want to do so, that creates other issues that should be on the table. Who is in the business and who isn’t in the business? That affects everybody.”

She argues that families need to include non-family members in their discussions at some point because those outsiders bring a certain measure of objectivity. “If you go into these family meetings, you can quickly see that the kids are very different people,” she says. “One daughter is a risk-taker. Another daughter is extremely conservative. The son is totally disinterested. That’s not a recipe for three people to work together.”

One of the lessons of successful transitions to children is that they should, by design, take a long time. CEOs who wake up at age 65 and start trying to figure out how to retire are at a severe disadvantage.

Chris Cardillo Jr. and Nick Cardillo, of Castle Windows

Chris Cardillo, who worked 364 days a year for many years to build Mount Laurel, New Jersey-based Castle Windows, has two sons, an older one also named Chris and a younger one, Nick. Chris junior started working for the company in high school during summers, unloading trucks in the warehouse, and continued part-time during four years of college. Mom took care of the bookkeeping. The younger brother went to art school. The elder son shadowed his father’s movements for years. Meanwhile, his younger brother started to transition into the business to take the mother’s role.

“He is an extremely detailed individual. He knew exactly what he was preparing me for from the day I graduated from college. It was a process he had in his mind.

Then, one day in 2001, the father decided it was time to test his sons. The company decided to move into the market for windows in New York State, where it did not operate.

“My father said, ‘You’re basically going to run this New York market,’” Chris recalls. “It was a testing ground for whether we could handle the business.” The sons passed the test and the father sold them the business in 2005 when he was 52 and they were 29 and 27, respectively. “My father is a planner,” Chris says. “He is an extremely detailed individual. He knew exactly what he was preparing me for from the day I graduated from college. It was a process he had in his mind.”

The sons have expanded the business from $14 million in annual sales to $75 million. The elder Cardillo has remained engaged in the business from the sidelines, offering advice and helping manage important business relationships. The sons are just fine with that. “Children have a natural tendency to not want to listen, but ultimately, you know you have an individual there who knows what to do,” Chris says. “You’d be foolish not to listen.”

Consider Your Second Act
Figuring out what you want to do next is one of the biggest challenges of any business owner’s exit strategy, experts agree. Jean-Marc Laouchez, who advises companies on behalf of the Korn Ferry Hay Group, says it’s relatively easy to figure out how to transition ownership of a company and the management of it. But the emotional piece is toughest.

“It’s something called ego,” Laouchez says. “Founders have been very successful. It’s not easy to give it away to a successor. They believe they are the only ones who can do it. Letting go is admitting that we can die. Many owners hate that idea.”

Often, the best transitions happen when departing CEOs feel they are developing a new legacy. CEOs who pursue these new legacies may think, “even though as a person I may not be around in however many years, part of me will still be around,” explains Laouchez. “I’ll be leaving my name, my business, my foundation, my philanthropic projects, my children. I’m going to hand down something that is valuable.”

It’s almost preparing for death as if it were a new entrepreneurial project. The bottom line? Baby Boomer CEOs need to decide what their own goals are with their businesses and undertake long-term planning with both family members and outsiders to come up with a viable exit strategy.

Sidebar: Warren Stephens Talks about a Successful Next-Generation Succession

" William J. Holstein : William J. Holstein is a journalist, consultant and speaker. He is the author of, "The Next American Economy: Blueprint For A Sustainable Recovery." For more of his work, visit www.williamjholstein.com.."