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Succession Planning Case Study
Note: All names have been changed for privacy reasons.
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Background
The Paramount Plastics Company was taken over by Stanley Pendleton when he was 32 years old. His father had founded a small company in the 1950’s, making plastic valves for aerosol cans and, when he suddenly died in 1972, Stanley had to step up and take over a business he hardly knew.
The Family Members
Stanley's wife, Joan, ran the office and took care of their two sons and daughter. Stanley worked all the time. He learned the business, learned sales and marketing, hired technical personnel, and, by 2005, when he was 65, the company produced many different plastic products and had a gross revenue of $16 million.
All three children worked in the business on school vacation and knew it quite well. When they finished college, each of them asked Stanley for a job at the plant and, in 2005, they all worked there.
Roy, the oldest, was 40, married, and had two sons aged 17 and 15.
Sarah was 37 and divorced, and she had a 7 year old.
Barry was 30 and single.
Getting Help and Guidance
Stanley’s business attorney put him in touch with a local family business consulting firm that specialized in succession. He knew that he wanted to leave the business and enjoy some years of leisure with Joan, but he had no idea how to handle all the issues that loomed in front of him like a mountain that he needed to climb.
The Consultant's Process-Gathering Information and What Family Members Want
Peter, the consultant, met with each member of the family individually in order to learn what each of them wanted in the coming years.
Roy told him that he had a stable marriage and that he worked hard at Paramount as chief of operations. He had an engineering degree and was very good at solving technical problems. He knew that he did his job well, and he always expected that his parents would make him the successor and would have confidence that he could run the business successfully after their retirement.
He was, after all, the oldest and the most stable. He told Peter that he had already told his father that he had this expectation. In addition, he explained to his parents that he needed to know what his future held in terms of management position, ownership, and compensation. He had to plan his life. His wife complained frequently that they had no assurance they would be able to pay college tuitions, and she wanted to know when the business would provide some luxuries and security for them. Stanley never really responded, because he didn’t know what to do.
In the course of the interviews, Peter learned that Stanley and Joan still owned 100% of the business and had no succession plan. Moreover, Stan saw Roy as steady but unimaginative, not aggressive, and quite shy. He could not imagine his running the business but couldn’t tell him that.
Barry was a hard worker and a hard player. He loved to spend money. He had a series of girlfriends and took lavish vacations. It was hard for Stanley to watch him spend money, when he had been so careful all his life, but Barry knew how to have fun, and everyone loved him. Stanley was also drawn to him and admired his love of life. Moreover, everything he touched turned to gold. His ideas for the business generally worked and made a lot of money. When he dealt with customers, he usually made the sale. He was creative, innovative, popular, and charismatic.
Stanley and Joan had reservations about his lifestyle, but both of them thought he should be the successor. They never said a word to him but Stanley knew this needed to get resolved. They didn’t know whether he was interested in running the business or not.
Peter also learned that Sarah had the most education, graduating college with high honors and going on to earn an MBA at a prestigious university. Her marriage turned out badly, and they divorced when the baby was two. Sarah ran the office with great professionalism, but she couldn’t do much more than that since she was raising her daughter alone.
The board of directors was comprised of the parents and three children, but when Sarah voiced an opinion, they all listened. Sarah also wanted to run the company and felt bitter about the conflict in her life.
Getting Unstuck
The family was stuck, because they couldn’t talk honestly. The succession consultant met with each of them, made a helping relationship with all of them, and asked them what they each wanted – all 5 of them. He helped them to become open and communicate honestly at family meetings. He made sure they all heard each other in a caring way, with full explanations of why they felt the way they did – both positive and negative. He then met with them in smaller groups – husband and wife, two brothers, Sarah with her parents and Sarah with her brothers.
He got them to commit to crafting a succession plan, with the help of other professionals, a plan that included designation of a successor, the transfer of some ownership, and the retirement of Stanley – with a time line, at least 2 years.
He told them they would need to create a buy-sell agreement, and an estate plan with the help of their attorney, as well as other things the attorney might suggest. He continued to work with them through the implementation.
The consultant offered to help them enlarge the board to include three independent directors. He explained that this was important so that difficult topics were not avoided and so that the family dynamics did not rule the boardroom. It made everyone accountable and, in the long run, the board could decide who would be the best CEO.
The consultant remained in ongoing consulting to help them get on track and implement the plan.
They followed Peter’s guidance, and, at 67, Stanley and Joan were living alongside a golf course in Florida, while the business remained safe and successful in the hands of the next generation. |
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