For Paula Marshall-Chapman, 47, CEO of the Bama Companies, a $140 million Tulsa, Okla., frozen-dough-and-pie concern that started in her grandmother's kitchen in 1927, the road to success has been studded with familial potholes. When Marshall-Chapman took over from her father in 1984, her two brothers were furious that they would not be involved in running the show. The business was changed from a corporation to a partnership, with Marshall-Chapman named general partner. Her parents Lilah and Paul Marshall took their equity out of the business to live on. The structure of the general partnership left the business strapped for cash, and for the first time, Bama was forced to take on debt and cut back on its distribution network.
"My father saw me as the most likely person to take over the business," says Marshall-Chapman, and she hasn't done badly at all. Bama employs 750 people and has about a 10% annual growth in revenues. But she acknowledges that "my brothers were shocked that they weren't going to be as involved in the business. If we had all just sat down and discussed everyone's needs and expectations, we might have been able to structure things differently and without such hurt feelings." Marshall-Chapman is in the process of buying out the minority shares of one of her brothers, and time has healed some of the wounds in the family.
For Marshall-Chapman and the other owners of nearly 13 million family-owned businesses in the U.S., the decision about how to pass the corporate torch gracefully to the next generation is an exercise in reason over emotion, usually coupled with legal wrangling and considerable financial finesse. From the elder generation's point of view, you want to make sure you will be taken care of in your golden years. At the same time, the business must be passed on in a way that helps ensure both its continued success and the financial welfare of the younger generations who rely on the venture to pay the bills. The longer a business stays in a family, the harder this becomes. Companies passed on from the first to the second generation have a 40% chance of surviving, second to third generation have a 15% survival rate, and the number dwindles down to 1% from third to fourth generation, says John Messervey, principal consultant with the National Family Business Council, a consulting-and-research group in Lake Forest, Ill. Compounding all this is the fact that as many as 25% of senior family-business shareholders do not complete any estate planning other than writing a will, according to the Family Firm Institute www.ffi.org) a Boston-based association of family-business consultants, financial planners and lawyers.
The most important missing ingredient is usually a strategy. "An entrepreneur needs to figure out years in advance to whom in the family a business will be passed down and why--a major decision that can have so many mixed emotions and feelings attached to it," Messervey says. "Had we known my brothers' feelings more about the business, we might have avoided having their feelings hurt," says Marshall-Chapman. "These are very sensitive issues for families."