Who’s next?

A few years ago, the owner of a thriving trucking company turned the reins over to his sons. Deciding to go it alone, they dismissed a key executive their father had hired to help with the transition. Before long, it was apparent that the next generation wasn’t prepared. The company’s financial position deteriorated, and ultimately the father had to step back into the business. That worked fairly well – until the father died suddenly. The company once again foundered, ending up in Chapter 11.

Stories like this are all too common in family-owned and privately held businesses. Incomplete training of successors and the sudden death of an owner are among the reasons that, according to popular estimates, only about a third of family-owned companies survive to the second generation and only about a third of those make it to the third. Often, owners are eager to cash in handsomely on assets and enterprise value they carefully constructed over decades. But many other companies end unhappily, bringing financial ruin and emotional pain to entire families.

It doesn’t have to be this way. A thoughtful transition plan with plenty of time to execute it will give you an excellent chance of continuing the business – if that’s what you want to do. Succession planning is a time-consuming, stressful and potentially painful process. But the consequences of doing nothing are far worse.

Getting started
For many owners, the most difficult aspect of succession planning is simply the decision to do it. Simply put, owners think they are going to live forever, says Kenneth DeWitt, a partner in DeWitt & Dyer, an accounting and financial planning firm that serves several trucking clients. Succession planning is an admission that you aren’t young forever, and “owners can become paralyzed by the fear.” An even larger issue for some owners is the recognition that the process can stir up some unpleasant emotions among family members – especially those who might be interested in running the company but don’t have the talent or temperament.

There is no universal solution to these barriers, but benchmarks can help. “Typically it’s the big decade birthdays,” DeWitt says. “If you reach age 40 and haven’t started putting in a management structure, then you are behind the curve. If at age 50, you don’t have a succession plan, you are starting to play with fire. If at age 60, you don’t have a plan, you really need to get on the stick.” Properly done, succession planning takes five to 10 years, in part because it’s difficult to train and plan while you also are running the business day to day. “It takes a great deal of time to drain the swamp when you are up to your nostrils in alligators,” DeWitt quips.

Andy Ahern agrees that owners should allocate 10 years – five at a minimum – to the process. “You need a 10-year plan, so if you want to retire at 50, you need to start at 40, says Ahern, founder of Ahern & Associates Ltd., a Phoenix-based management consulting firm that specializes in transportation.

If the realization of how much time succession will take doesn’t get you moving, realize that something will trigger succession in your company. It’s better that it be a birthday than a heart attack.

First things first
It’s a fair bet that most trucking company owners assume that one of their children will take over the business. But owners who begin by trying to decide who and when may be answering the wrong question. First, the owner should consider his own needs and wishes. If, for example, the owner needs a substantial cash-out, selling or gifting the company to family may not be the solution.

“When we’re approached about succession planning for a trucking company we tell people that there are several ways to transfer a business,” DeWitt says. “Your child is only one of those options.” Others include, of course, selling the company or its assets to an outside party, to partners through a buy-sell agreement or to employees through an employee stock ownership plan. And there is the possibility of going public, although that’s become quite rare in trucking. In addition to cashing out, owners typically want to rid themselves of personal guarantees owners often have to make on loans, DeWitt says.

The owner’s timeframe for transition is a crucial consideration as well. If an owner is eager to exit the business in two or three years, something has to give if no family members have significant management experience. The owner may have to delay or phase in his retirement plans, hire an interim CEO or COO to help bridge the generations or give up on keeping the business within the family.

“Give me your wish list,” Ahern directs his clients at the beginning of the process. “Maybe the dream is: ‘I want to be able to buy a 64-foot boat and come into the office twice a month.” If so, the succession plan starts there and works backwards, Ahern says. Then the owner can weigh compromises against this goal and decide whether his plans for a life of leisure and comfort are more important than keeping the business in the family.

The wishes of the younger generation come into play too. Parents and children can coast along for years without discussing their plans for the future. Then time comes for a sudden decision, and the generations realize they have different – and mutually exclusive – expectations.

Keith and Karen Weatherholt escaped that fate about three years ago. They had purchased Ona, W.Va.-based H&W Trucking, from Keith’s parents in 1987 and were beginning to think about transition. After attending a meeting on succession planning sponsored by the Truckload Carriers Association, the Weatherholts asked their two daughters whether they would be interested in taking over the company one day. They were not.

“Our goal at that point was at some point in the future to sell the company,” Keith says. As it turns out, an attractive opportunity to sell came along less than two years later, and the Weatherholts sold out. Without the earlier talk with their daughters, however, they may not have had such a clear picture of what they wanted to do with the company when opportunity knocked.

Developing successors
Assuming the owner has made the threshold decision to keep the business within the family, the real work begins. The owner may have a clear idea of who he wants as his successor; often it will be the family manager that thinks and acts most like him. But getting to the point of formalizing this selection can be treacherous business if the owner has more than one child. That’s all the more reason to start early so that family managers can develop separate roles and become comfortable with them.

Having multiple members of the same generation involved could have been a problem for San Antonio-based Earth Transport, but it hasn’t been, says Justin Poss, one of the company’s four owners. The owners are two sets of brothers. Justin, 27, and Jordan, 31, are sons of Joe Poss. Brent, 29, and Jentry, 22, are sons of Aubrey Poss, Joe’s brother. The four younger Posses formally took over the 90-truck carrier in August 2000, but the transition had been ongoing for several years.

Justin attributes a smooth transition to several factors, including an early start. The process formally began in 1996, but it informally started a couple of years earlier. Knowing that they were headed toward eventual ownership of the company, the Posses began working out roles. Nor did it hurt that the four brothers/cousins in 1996 started their own owner-operator-based trucking company as a side business, gaining valuable experience for their succession at Earth Transport.

One of the pitfalls in succession planning is the owner’s unwillingness to step away from the business. That wasn’t a problem at Earth Transport, Justin says. Indeed, Aubrey and Joe were leaving their sons in charge so often that the elder Posses weren’t always familiar enough with some situations to make informed decisions. That actually sped up the transition.
Many would-be successors aren’t so lucky, Ahern says. “It’s very important that successors assume their own identity,” he says. “Otherwise, it’s like having a ghost running the company.” Ahern recommends a succession plan that is executed in stages.

Start by agreeing on a firm retirement date and work back from there, Ahern advises. Then pick four or five significant turning points during that period. For example, in year five of a 10-year plan, the owner might take a three-week vacation. Or perhaps by year seven, the owner will cut down to a 25-hour work week. The goal is to ensure that the successor gradually takes on more responsibility and that the current executive gradually steps away.

It’s important, Ahern says, that both parties agree – in writing – that these milestones are firm and progressive. “Once you give control to the heir, you can’t take it back.”

But it’s not always the owner’s fault, Ahern says. “What we’re finding with younger people is that they are impatient.” They want the business handed to them on a silver plate. “In cases like that, we’re going to suggest that they get a job in another industry or at another trucking company.”

Another strategy some owners use to develop owners is bringing in an outsider to help train successors, DeWitt says. That’s one way of working around the natural resistance that sometimes develops between different generations of the same family. An outside consultant or manager may be especially appropriate at smaller carriers, he argues, because larger trucking companies tend to have more departments and divisions that give would-be successors opportunities to develop gradually.

A bridge or temporary CEO also may be a good solution when the current owner wants out now but the new leadership isn’t ready or hasn’t been identified. “My primary goal is to develop a win-win for the current owners and the new people coming in,” says F. Conner Burns, a management consultant and interim CEO who specializes in trucking.

Dealing with family
Aside from an owner’s doubts and unwillingness to release control, the stickiest issue in most management successions probably is the dynamics of family. If one sibling gets the opportunity to take over the business, that often brings cries of favoritism. Even if only one of several children is involved in the business, the others often feel they should get something.

One way companies address this issue is by bringing in an outside party to offer an independent assessment, Ahern says. That could mean hiring a consultant or establishing a board of directors. The latter was a key tool in the succession at Schneider National (See “Schneider succession bears fruit,” page 28).

“Most of the people who come to us are generating $5 million to $100 million,” Ahern says. “At that level you need some kind of outside influence.” Often, it’s impossible for a father or mother to be objective. “It’s a good buffer. Sometimes you don’t look at your children as they really are.”

There’s another reason for getting help from an outsider, although most owners probably wouldn’t admit to it. A third-party can take the heat for divisive decisions. “Dealing with the family fallout is one of my jobs, although we don’t advertise it,” says consultant Burns.

The challenge of separating business from family gets tougher, says DeWitt, when family members who don’t work in the business draw a salary. DeWitt & Dyer counsels against such arrangements, but DeWitt recognizes that they are common. “If you are serious about transferring your business to others, start a multi-year plan to deal with the family tentacles.”

Another complication arises when the owner is gifting stock. If the owner doesn’t want to discriminate among children, the best route is to gift stock to those involved in the business and cash to those who aren’t, says Bryan Finison, another partner in DeWitt & Dyer. Having too many inactive shareholders encourages conflicts of interest, Finison says.

Time is your ally in family issues as it is with other aspects of succession. Start early, be patient and don’t look back.

Schneider succession plan bears fruit
Lofgren is carrier’s third CEO

Key to success in a management transition is providing ample time to select and groom the

Christopher Lofgren (left) stood out because of his deep background in technology and passion his work, says Schneider National Chairman Don Schneider.

successor. By that measure, the succession plan at Schneider National, which began more than 14 years ago and continues today, is bound to be a winner.

The biggest step to date in Schneider National’s management succession occurred last month when the board of directors named Christopher Lofgren, 43, president and chief executive officer, succeeding Don Schneider, 66. Schneider remains chairman and will remain active in the company.

Lofgren, who has worked at Motorola and CAPS Logistics, left software developer Symantec Corp. in 1994 to join Schneider Logistics as a vice president. After joining the company in 1994, Lofgren went on to serve as chief information officer of Schneider National and headed the Schneider Logistics division. At Don Schneider’s recommendation, the board named Lofgren chief operating officer in 2000 – an indication that he had been selected as the heir apparent. Today, Lofgren is only the third person to serve as chief executive of the company, which was founded in 1935.

“Chris has a pretty unique education – a PhD in technology from Georgia Tech and a lot of experience in systems from software companies,” Schneider says. “We were looking for someone who had a technology background and has the kind of passion that is required for someone in this industry.” There’s one thing Lofgren is not. He is not related to Don Schneider. Schneider chuckles at the question of whether Lofgren is family. That’s because it’s Schneider National culture to consider all its associates part of the family.

“The outstanding performance over the past two years under Chris’ leadership as chief operating officer, including 13 percent growth this year, gives the board great confidence in Chris and his leadership team,” says Ernie Micek, a member of the Schneider national board since its creation. Micek, who retired in 2000 as chairman of Cargill Corp., was once in a similar situation as Lofgren. He led a large family-owned company even though he was not a member of the family.

Today, ownership of Schneider National is not solely in family hands, although Schneider says he is “probably the largest stock owner.” About 70 key managers own stock, which they must sell back to shareholders if they leave the company.

Up to the board
Succession really began at Schneider National in 1987 when Don Schneider created an independent board to focus on corporate governance and facilitate a transition. “One of my goals was to prevent the all-too-frequent occurrence where a privately-held company is unable to survive the inevitable departure of a long-term leader,” he says. “We remain firmly committed to keeping Schneider National a successful, privately-held company.”

The board consists of five outside board members and four family members. For a privately held company, creating an independent board of directors has some far-reaching implications. But in the mid-1980s, Schneider knew that it was a step he needed to take if Schneider National was to continue growing. “The important thing is that this company is well run,” Schneider says. “When you have an independent outside board that is capable, you have a lot more angles.”

The existence of a board also helps win the support of key business partners, Schneider says. “Certainly, our financial institutions get a lot of confidence from the fact that we run this with great corporate governance. They obviously want to have someone other than the president seeing that decisions are made well.”

Perhaps, but Schneider found that many CEOs of publicly held companies were astounded at the decision. “At one conference, I was sitting at a table with a bunch of presidents. One said, ‘You are lucky, you don’t have to deal with shareholders.’ When I explained how I structured the company, one of the guys looked at me and said, ‘You are nuts.”

To keep succession on track and to ensure strong management, the Schneider National board devotes a significant portion of its February meeting each year to a review of management performance – from Schneider himself down. “At that meeting, I give a performance appraisal of the leadership capabilities of people in the company,” Schneider says. “The board continues to press me on training plans and developmental work.” Those February meetings will continue, Micek says.

In the loop
Another element of the succession plan that was important was keeping customers informed. “Don has openly shared with us the structure he has put in place to assure the continuity of his organization,” says Steve Harmon, vice president of transportation for Kimberly Clark. “We’ve been working with this management team for a number of years, and we will continue to rely on them to deliver the outstanding service they provide.”

Schneider understands the desire of customers to stay in the loop. “Most of our well-run customers that have transportation or logistics managers want to know that the people they are relying on have things in place so they are not dependent on one particular person.”

Ongoing process
The succession process isn’t over with Lofgren’s appointment. “As in any transition, this is a work in progress,” Schneider says. “Over time, Chris will be involved in many of the things I have been involved in within the industry.” And Schneider plans to remain active in the business for some time. “I want to make sure there is adequate time for someone to become familiar with the responsibilities.”

Lofgren is pleased that Schneider isn’t just handing him the keys and walking out the door. “He has a personality and charisma that’s bigger than the entire fleet,” Lofgren says. “Don is a very prominent man, and I want to take advantage of the wisdom he has acquired and the perspectives.”

Lofgren says he can only speculate as to the reason why he stood out as a candidate for CEO. “I spent time talking with Don about the long-term positioning of companies,” he says. “I’m an asker of questions. Where are we vulnerable? What are the opportunities?” Also, Schneider wanted to see someone carry on with his policies. “A prerequisite for him was the undying commitment and stewardship for the values of the company,” Lofgren says. In the business arena, those values are that “market share and size creates opportunities,” and “you must have the lowest cost operating position,” Lofgren says.

The board of directors itself and the succession plan that came out of it are a great legacy for Don Schneider, Lofgren says. “At a time when you can look at all the things that have been wrong with corporate governance, this is a great story. He put his own needs second. He put in an independent board. I think that’s really an example for American business. Here’s a guy who didn’t have to do it, but he did it because it was in the best interest of the company.”