Family Businesses Hard to Pass On

Gerald R. "Skip" Daynes Jr. wanted to be a rancher. Instead, he rides herd over Daynes Music store, which Family Business magazine ranks among the oldest businesses in the United States.

By Kathy Gurchiek
The Salt Lake Tribune

Founded in 1862 by great-grandfather John Daynes, Daynes Music is the oldest music store west of the Mississippi, and the second oldest in the nation behind Steinert’s of Boston. As a fourth-generation family-owned business, it is in an elite club.

"Most companies of all types and sizes fail within 20 years of their birth," reports Family Business magazine in its spring 2003 issue. Fourteenth generation Zildjian Cymbal Co. is the great-great granddaddy among U.S. family-owned businesses — the Massachusetts company was founded in Constantinople in 1623.

"Even among family companies — a much hardier breed [than other companies] — less than 30 percent survive into the second generation, barely 10 percent make it to the third, and only about 4 percent to the fourth."

That’s no better or worse than any company, Family Business editor Dan Rottenberg pointed out. But a big challenge to a family business is selecting a successor to lead the company.

"For family businesses, the big challenge really is passing the traits and characteristics of the founder onto the second and third generation. It’s very difficult for parents to choose among their children. In any nonfamily company, somebody makes that decision [for a successor] . . . and then they go home at night. Whereas in a family-owned business . . . you have to live with these people," Rottenberg said. "In many cases, either the family gets wrecked or the business gets wrecked.

Daynes Music nearly sputtered to a stop during its second generation.

"My father didn’t want his children in the business because it was a difficult business. He would have been very glad to have just let it fade, and it almost did when it was 105 years old," Skip Daynes said.

Skip Daynes’ successor, by default, is daughter Tracy, who wants to carry on the family business when her 65-year-old father retires in two years. Son Todd is a physician and son Tim’s paralysis prevents him from taking an active role. Daynes said he would have been happy to sell the business to company vice president Kerwin Ipsen — whom he called a key player in the business’ success — if Ipsen had been interested. Daynes and Ipsen oversee four full-time and two part-time employees. A five-member board of directors made up of Daynes, three other family members and Ipsen meets annually. The board, which does not make company decisions, is unpaid but each member received one share of stock.

All the Daynes children have worked in the store, but Skip Daynes said he never imbued a "someday this all will be yours" sensibility.

"Those things that I brought home filtered into the children," Daynes said. Among the horror stories: a fire, a vandalism-prompted flood that destroyed 35 Steinway pianos and a drunk crashing through the window. "I don’t think any of them thought they would be chomping at the bit to get into dad’s successful business." But today his daughter is eager to lead the business for the next generation.

"She thinks she needs to carry on the tradition of the family. And she can do it," Daynes said.

Utah Woolen Mills Clothiers, founded in 1905 by great-grandfather Henry Stringham, is in its fourth-generation under company president Bart Stringham and Stringham’s father Briant, board chairman. The privately held company has a board made up of family members and Bart and Briant Stringham communicate on a daily basis about the business.

The challenge to family-owned businesses is to have the passion for it, Bart Stringham said, "not just do what was done in he past . . . but to see what the next step would be in our business."

Utah Woolen Mills Clothiers has no succession policy and Stringham said he would be OK if a family member did not step up to carry on the business. Bart Jr. first expressed an interest six months ago, Stringham said.

"The reason our business has survived is that it’s never been an understood thing that you’re a Stringham and you’re going to run Utah Woolen Mills. The interest has to be demonstrated," Bart Stringham said. His son, who graduated Saturday with a degree in business, joins a staff of nine that includes a sister and a great-uncle who work part-time.

Successful family-owned businesses plan for a smooth transition long before the owner dies or decides to sell, said David Ralston, managing partner of the 21-year-old Ralston Consulting Group, whose clients include family businesses. That can play into the issue of stock ownership as well.

"If the succussion plans have not been put in place . . . it gives greater likelihood that the individual needs [of family members] are going to get played out through coalitions and camps," Ralston said. "If the right things have been done along the way, including the succession plan . . . then ownership is less of an issue" because family members have dealt openly about the business.

Royal Daynes divided the stock among his son and three daughters.

"[My father] never had the control of the business," Skip Daynes said. "When he needed to make a decision, he had to call his three sisters and say ‘I need to sign papers because we’re getting new flooring, or the bank loan has to be renewed.’ " Daynes eventually bought his father’s stock and that of his aunts. When Tracy takes over, she will own all the company stock.

Perceived value of the business by those outside the immediate family can be another issue.

"Always in the family business, most of the family members think the business is worth more than it really is," said Skip Daynes, ". . . they all think I’m a millionaire. I’m not . . . I have $4 [million] or $5 million worth of assets but that doesn’t mean anything. I’m definitely not a millionaire," just debt-free, he said. That wasn’t always the case.

When Daynes took over in 1967, the store’s success was fading along with his father’s health. He sacrificed a lucrative management position at Sears for a $500 monthly salary as he tried to resuscitate the business.

"It was the oldest business in the state at the time and it had a reputation with Steinway as one of the premier Steinway dealers . . . our company name was a good name," Daynes said. It was a name he felt compelled to save. He drew on grandfather Royal Daynes’ guiding philosophy: "What do we have to do to make a profit?"

Skip Daynes bored into the challenge like a ranch hand digging post holes. In the late ’60s and early ’70s he learned, through the National Association of Music Merchants, about the advent of the electronic organ.

"I got the Kimball organ piano franchise. I think that’s what put us back on top," Daynes recalled. He started the now-defunct Inter-Mountain Guitar Society in 1970 and imported classical guitars from Spain. He began selling band instruments. He focused on expensive, more exclusive inventory. But Kimball organ sales paid the bills and put Daynes Music back into the black.

That willingness to do whatever is necessary is a common factor in successful family businesses, magazine editor Rottenberg said. As company president, Daynes’ duties extend to unboxing pianos, cleaning toilets, changing light bulbs and tuning the pianos.

"When you have a small operation, particularly if it’s a small family operation, everyone has a sense of ‘we have to keep this place alive,’ " Rottenberg observed. That is an ethic he said is shared by small companies in general.

"There is a sense that my name is on this company and I am the company; something has to get done here and if no one else will do it, I’ll do it."

It goes back to the succession issue and choosing a leader who knows he or she is required to perform.

Says Ralston, "You can’t just sit in your office and twiddle."

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Family business

* Family-owned businesses face challenges not encountered by nonfamily businesses, according to the U.S. Small Business Administration.

Among the owner’s concerns:

* Delegating power and leadership.

* Keeping the family functioning effectively.

* Defining the family’s future roles in the business.

* Providing strong leadership for the future.

* Retaining nonfamily employees.

Naming a successor can be dicey. The problem often is with an owner reluctant to step down, concerned the business will not continue as he/she wishes. In planning for a successor, the SBA suggests the following:

* Start early and develop a plan.

* The first step is understanding the critical aspects of such a decision — the owner’s vision for the business, the current manager’s capabilities and talents, external factors impacting the business, family and nonfamily concerns, the business culture and values, and the stage of growth the business is at.

* The second step is identifying qualities required in a successor.

* The third step is identifying the successor and beginning the necessary training; working outside the business initially often is beneficial, bringing fresh ideas and a different perspective.

The SBA notes that the other option is to sell the business. To determine the business’ worth, the SBA advises working up a financial analysis on its performance for the past three years and staying involved through the closing.

http://www.sltrib.com/2003/May/05042003/business/business.asp