The Business of Keeping It In the Family : Management: Many small firms struggle with strategic planning. Choosing an heir can also pose a problem.

Unlike most small-business owners who shy away from discussing succession issues, Clay “Hi” Kellogg faced his mortality head-on after a serious heart attack in 1976. Instead of pretending that nothing was wrong with his health, he later asked his wife to begin spending a few days a week in his office. She mainly watched him work and listened to what went on.

“ ‘When I die,’ he would say, ‘this is what you have to do,’ ” said Janice Kellogg.

A former elementary school teacher, Janice Kellogg now runs the family’s 64-year-old fertilizer business with her grown son and daughter. Instead of faltering after Clay Kellogg’s death two years ago, the company and its 75 employees have flourished, in part because of Kellogg’s insistence on planning.

A week before he died, Kellogg interviewed management consultants to help guide the $10-million-a-year Carson-based enterprise. The consultant that Janice Kellogg selected still visits the company each week to offer advice and support.

Kellogg’s efforts to prepare his family for his passing are atypical, according to family business experts and consultants. In fact, fewer than half of the country’s family-owned firms have established a clear successor, according to a recent study by the accounting firm of Laventhol and Horwath.

Because of this lack of candor and planning, fewer than 10% of family-owned businesses make it to the third generation and only 30% last to the second generation.

“A family business owner typically says, ‘if I were to die,’ as if he had a choice,” said Francois de Visscher, managing director of Smith Barney’s Family Business Group. In addition to feeling immortal, most family business owners avoid talking about succession issues because they are afraid to rock the boat, de Visscher said.

Until recently, little media attention has been paid to family-owned firms because most are fiercely private about their finances and internal conflicts. A few major battles, such as the one involving the dozen sons and daughters fighting over control of the U-Haul company, have been publicized, but most family feuds take place behind closed doors.

Yet family businesses have an enormous impact on the U.S. economy, contributing about half of the gross national product and employing some 40 million workers.

In recent years, graduate business schools around the country have established family business courses, and a new “Family Business” magazine is due to debut this month. Family business seminars sponsored by accounting firms and consultants such as Dr. Leon Danco of the Center for Family Business in Cleveland are frequently sold out.

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Interest in family business is growing because the hundreds of thousands of men who started new businesses after World War II are reaching retirement age and preparing to pass along control to their grown children. And, in some cases, establishing the next generation of ownership becomes a nightmare. Smith Barney, for instance, is working with a real estate company belonging to 64 cousins.

In the past, it was traditional for the oldest son to fill his father’s shoes, but today it may be the daughter.

Without proper planning, a plethora of conflicts, both financial and emotional, can arise.

“Chief executives don’t like to talk about succession because they are reluctant to admit they will die and the business could go on without them,” said John Kobacker, a family business consultant for the Marlenko Group in Columbus, Ohio.

Although every family business operates with a different set of dynamics, there are common threads among them. Most families say their biggest problem is being unable to separate the business from the family to be objective when making decisions.

Kobacker and other experts say business owners who would never hire an outsider with no experience frequently turn over decision-making power to an inexperienced son or daughter. Based on his dealings with clients, he strongly suggests that parents insist their children go elsewhere to gain experience before joining the family firm.

But even those family firms headed by experienced business people can falter without a strategic plan.

“About one-third of family businesses use a written strategic plan and only two-thirds have written budgets,” said Kobacker, who served as chief operating officer of his family’s retail shoe and clothing company for several years before a competing family member blocked his succession to chief executive.

To alleviate the pressure of making difficult decisions, family business experts advocate the appointment of outside directors. Yet, the Laventhol & Horwath study found that fewer than 10% of family-owned businesses have outside board members, perhaps because the family is fearful of losing control.

Kellogg Supply has no outside directors, but its general manager, Larry Bowdle, is not a family member. Still Bowdle, who has been with the company 30 years, is as close to being family as you can get.

“I knew what Hi was going to say before he said it,” said Bowdle. “He knew how to make the company go, and it was always ‘how can we do it,’ not ‘how can I .’ ”

Although they were all well-prepared to take over, the Kelloggs admit that it has been difficult to follow in the family patriarch’s footsteps.

“The hardest thing was to get rid of the feeling of what would my father have done in this case?” said Kathryn Kellogg, 26, who serves as corporate secretary and is responsible for community and government matters.

Her brother, Hap, 28, oversees the company’s sales and marketing efforts. After his father died, Kellogg said he tried to make all the decisions, frequently getting in the way of other employees.

“I wanted to do everything,” said Hap Kellogg. “Finally, my wife told me I was impossible to live with and that I should relax and try to enjoy life a little bit.”

Although Kellogg studied agricultural business at the University of Wyoming and worked as a salesman for Kellogg Supply, his dream was a career as a rodeo cowboy.

Kathryn Kellogg, a USC graduate, was working for a major insurance company when her father died. She planned to help her mother and brother just long enough to settle various tax and probate matters. But she soon realized that working in the family business was much more rewarding than working for a giant corporation.

Today she deals with various environmental issues surrounding the business. Each year, Kellogg buys 120,000 tons of dried sewage sludge from the Los Angeles County Sanitation District and mixes it with sawdust and other ingredients to produce a wide range of nursery and home gardening products.

The most traditional family business scenario is the sons taking over from the father. Mark and Doug Williams work with their father, David, at the family’s Williams Records Management Co. The company was founded in 1922 by their grandfather, John J. Williams, as a trucking and freight firm.

“It was almost like living on a family farm,” said David Williams, 60, chairman of the board. “You did what you had to do.” The eldest Williams son, Herb, who recently retired as president, remembers going to work with his father as a boy on Saturdays. When Herb returned from serving in the military during World War II, his father had an opportunity to sell the business and wanted to know whether he wanted to work with him.

Herb said yes and stayed with the company until he retired last January at age 66. He still visits the office several times a month. Both he and his brother, David, worked with their father until he died in 1980 at age 82.

Today, David’s sons are following in the brothers’ footsteps. Herb Williams said his three daughters “wanted to be housewives” and had no interest in the trucking business.

The best time for a family firm to draft a succession plan is when the leaders are 50 to 60 years old and the children are in their 20s or 30s, according to Peter Davis, director of family business studies at the University of Pennsylvania’s Wharton School.

Taking that advice, the Williamses are all very much involved in planning. The business has evolved from a trucking and freight company to one offering a software program for records management as well as storage space for business records.

To alleviate potential conflicts, the younger Williams brothers are paid the same and have equal shares of the business, which is still controlled by their father and uncle.

Unlike many families in which the children are turned off by the family business because they grew up hearing their father complaining about it, David Williams said he rarely brought his business problems home. He also tried to be neutral about his sons joining the firm.

“I didn’t want them to have the business--one guy wanted to be Gene Krupa and the other Edward R. Murrow,” said Williams with a laugh. Doug, 33, studied broadcast journalism and his brother, Mark, 35, was a drummer in a rock band before joining the company.

Although the senior Williams said he enjoys working with his sons, “it’s difficult to separate the father from the businessman, although we try.”

Williams said he also tries to avoid treating his grown sons “like kids.”

“But, I think they pull punches or hold back on certain things because I’m their father,” he said. Williams said he is beginning to pull back and spend a bit more time on the golf course. He’s not ready to retire, but he said his sons do discuss how they will run things without his daily involvement.

It wasn’t until about six months ago that the sons decided that they needed titles: Mark is president and Doug, vice president of operations.

The sons said they are not sure how they will deal with their own children and the family business. Doug Williams has two young daughters. Mark Williams has a daughter and a newborn son. Both said they wouldn’t press their children to join the family business, and their wives agree.

“The company is in such a state of change and reorganization now,” said Felice Williams, Doug’s wife. “I think everyone will be defining what they want to do in the next 10 years,” she said. “The changing of the guard is starting, and we haven’t looked to the next generation yet.”