Posted 02.05.2010

Succession in a Recession

Downturn has slowed sales to third parties, but a revenue dip could be a family value for company heirs

By Mike Taylor

Competition Headwear clan: owner Larry Polner and wife June, along with children Michael and Rachel

Editor’s note: see the complete list of Top 50 Family-Owned Businesses here.

On April 25, 2006, Michael Van Gilder took over as CEO of Van Gilder Insurance Corp. In doing so, he succeeded his father, who succeeded Michael’s grandfather, who succeeded Michael’s great-grandfather, who started the Denver firm back in 1905.

Michael Van Gilder, 42, has seen the studies and appreciates how rare this is. Fewer than 30 percent of family businesses make it to the second generation, and only 10 percent survive to the third, according to Family Business magazine. The ColoradoBiz Top 50 Family-Owned Companies list is exceptional in that regard, as nearly a quarter of the firms (12) have made it to a third generation, and six – including Van Gilder Insurance Corp. – are into their fourth-generation.

Ned Minor, a longtime Denver transaction attorney in the field of mergers and acquisitions and author of the book, “Deciding to Sell Your Business: The Key to Wealth and Freedom,” cites a survey by Mass Mutual in which 80 percent of business owners said they wanted to ultimately sell or transfer their business to key employees or family members.

The same survey, he says, showed that happens less than 20 percent of the time.

“Why? Because for the vast majority of business owners, their business is their largest asset,” Brown says, “and it’s only when they sell that asset and trigger a liquidity event and go from paper wealth to cash do they really achieve their definition of wealth and financial independence.”

While the recession has had the predictable effect of slowing sales of businesses to third parties as lowered valuations have made selling an unappealing option for owners, the same downturn has made this an advantageous time for transferring ownership shares within families.

“Two factors are converging in this market to create a tax-planning opportunity and a transition opportunity for family-owned businesses,” says Tony King, also with Minor & Brown P.C., where he is a partner. “When the value of the business is down, you have an opportunity to transfer more value to a daughter or a son or a family member. Second, the tax law – at least for now – allows you to take discounts on interest transferred to family members. So that represents more value that you can transfer to a family member without paying taxes on it.”

Still, there’s one other obstacle to turning over a business to the next generation: The would-be successor – “Junior,” as Ned Minor calls the would-be heir – isn’t so keen on taking over the business. Especially after he or she often has grown up watching mom or dad toil so hard to sustain that business.

Terry Drahota launched the general contracting firm Drahota Commercial LLC in Fort Collins 37 years ago and has grown its annual revenues to $70 million. Now 62, he says the future of his company “is something that is always on my mind.” He accepts that the company’s future might not rest with his two sons, one of whom is a 24-year-old professional golfer with eyes on making the PGA tour, the other a 21-year-old junior at the University of Northern Colorado.

“I don’t know how much interest there is in the family, to be honest with you,” Drahota says. “I would say not very much.”

Commercial real estate has taken a horrific beating of late – Drahota says his revenues were down 50 percent in 2009 – making this an inopportune time to think much about selling.
“The most logical way for a business transition seems to be through employee participation in the purchase,” Drahota says. “That’s something I will be investigating. Right now, just the way the economy’s going, I’m really concentrating on other things besides the succession plan.”

When that ownership transition does occur, Drahota is concerned that the reputation he’s spent 37 years building remains intact.

“My name will always be on the door,” he says. “So the logical thing to do whenever we find a purchaser is probably for me to stay involved as a consultant and maybe continue a little marketing until I totally phase out. I’m really concerned about that.”

Laurence Polner, 64, has spent the past 18 years building Marner Inc., a manufacturer and embroiderer of baseball-style caps for corporations and for big events like 2004 and 2008 Democratic and Republican national conventions.

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Last updated on Feb 05, 2010 at 10:36 AM

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