September/October 2012
With a family-run business, handing control to the next generation can be tricky. Why do some transitions work and others go awry? These scrap companies say the outcome can depend on planning, personalities, and patience.
By Jim Fowler
Family is forever, but blood plus business isn’t always a recipe for success. The scrap industry—long a family-business stronghold—has seen many family-run firms collapse when the transfer of ownership and leadership from one generation to the next doesn’t go as planned. And that’s assuming the business had a plan at all. Representatives of several multigenerational scrap companies shared their transition plans, experiences, and advice with Scrap.
“If you don’t respect one another, you can’t operate a successful family business.”
Five generations of the Gordon family have worked in scrap, starting in the late 19th century. The family business, L. Gordon Iron & Metal Co. (Statesville, N.C.), now employs seven family members across three generations. The family works as a committee, says Chairman Saul Gordon. “There are very few unilateral decisions of any consequence made. Everyone works together.” Saul and his younger brother Kalman are the third generation of Gordons in the business; their nephews Barry and Richard and Kalman’s son, Louis, are the fourth generation; Barry’s sons, Zachary, 29, and Morrow, 26, are the fifth.
In the company, each family member has “defined areas of responsibility,” Saul says. “If a family member has a suggestion or a proposal, we discuss it completely. If the idea is acceptable by all, we will pursue it, but with one dissenting vote, the proposal is closed. You won’t believe how well we get along. No one has ever left angry [at another family member] at the end of the workday.” It’s a rule company founder Louis Gordon made years ago, and it’s one the family follows religiously. “If we have a problem, it’s resolved before we leave,” Saul says. “People ask how we get along so well, and we tell them it’s respect for each other,” he adds. “If you don’t respect one another, you can’t operate a successful family business.”
Louis Gordon also set the direction for successive generations of company ownership. He left his father’s scrap business in High Point, N.C., to start L. Gordon in Statesville in 1917. Within the same corporation, Louis also established a furniture business that employed two of his five sons. As his family grew, Louis strongly believed that all of his grandchildren should have a small, token ownership in the company. Thus, he issued each of them partial shares of stock. “Dad gave each of his nine grandchildren stock in the company,” Saul says. “He set it up that way—that’s how he wanted it.” Has this approach created any resentment from those who work in the business against those who do not? “No, absolutely not,” Saul asserts. “We’ve never had a problem with family members getting along. We love every minute of it.”
“We want to be attractive to our next generation.”
Abraham Grossman, who founded Grossman Iron & Steel Co. (St. Louis) in 1920, was only in his mid-50s when he died unexpectedly in 1943, without a transition plan in place. Left to run the business were Abe’s son Sidney, age 24; Abe’s brother-in-law, Isadore (Izzie) Rubin; and a close family friend, Meyer Golder, who had worked with Abe for 15 years. The three men agreed to a plan Sid put forth: He would assume the leadership role of company president, with Izzie handling administrative functions and Meyer taking care of yard operations. With Sid and his sister, Hattie, sharing equal ownership of Grossman Iron & Steel, the management structure and division of duties served the company well across 40 years of growth and evolution that included Sid’s sons, Cap and Skip, joining the firm in 1975 and 1978, respectively.
After Sid’s wife, Bette, died suddenly of cancer in 1979, their daughter, Ann, returned to live in St. Louis with her husband, who became the company’s financial officer in 1980. With this change in management, the family faced a new set of unexpected challenges on top of its grief. “It was a difficult situation for all of us on a number of fronts,” Cap recalls. “I am not so sure we worked things out very well.” Seeing little opportunity for himself within the company, Skip soon left for graduate school and, upon earning his MBA, he and his wife relocated to California.
In the 1980s, with Izzie looking to retire, Sid devised a way to purchase his sister’s share in the company, gaining sole ownership. Other longtime members of Sid’s management team followed Izzie into retirement, leaving many key positions vacant. As the decade drew to a close, Sid knew it was time for him to finalize his own retirement and succession plan for the company and the family, a task he found difficult. Family relationships were tested, becoming more and more strained as different business and succession plans, as well as exit strategies, were debated. At about the same time, environmental issues began to create serious expenses for the scrap industry, Cap explains, and the cost of compliance seemed like an insurmountable challenge for smaller scrap companies like Grossman Iron & Steel. In 1990, Sid finally decided the best business and estate-planning solution would be to sell the company and allow himself and the rest of the family to move on with their lives.
“It was my dad’s plan to resolve what had become a difficult family dynamic,” Cap says, “and it might have worked out well had it not been for the economic recession that hit late that year, putting an end to any potential dealmaking.” In early 1991, Sid headed to Florida to recharge his batteries and rethink his options, and his son-in-law permanently left the company soon thereafter, leaving Cap to contemplate a “very uncertain future,” not only for the company, but for himself and his new wife, Jennifer. Economic times were tough, resources were limited, and the only plan in place was survival.
It did not take long for Cap to ask his brother to leave California and return to the firm, which Skip did in 1994. “Skip took a lot of the heavy lifting off my shoulders,” Cap says, “especially while I served as ReMA president from 1994 to 1996. That’s when Pop really decided to retire because he knew what strong financial and executive skills Skip brought with him from his career in the real estate development business. Pop still maintained ownership of the company, but he began to take a much less significant role—more oversight than anything.”
In 1996, the brothers worked in earnest to plot out their business plan for the next five years, as well as their own succession plan. “We made some large capital investments to grow the company and also worked out a strategy to buy the company from Pop,” Cap says. “We began paying him off, and now we own the company as equal partners. It’s worked out really well: We get along great, and we have a good time together. Skip has been the perfect partner.”
Always thinking in terms of the company’s future, the brothers have continued to work hard on business, estate, and succession planning, having learned from their own history the importance of all of these facets in managing a family business. “Flexibility is one of the key elements of our current business strategy,” Cap explains, “as we always want to have the company in a state that is attractive and available to the marketplace. Having an exit strategy is just good business planning. We continue to invest a lot in human capital and in state-of-the-art equipment to remain efficient and competitive in order to be attractive to would-be suitors, but we also want to be attractive to our next generation” of Grossman family members, he says. “Who knows, they just might want to carry on the family legacy. Skip and I have worked hard to have things in place so they can follow us if they want to.”
“Giving up control … was extremely hard.”
Bruce Blue, chairman and CEO of Freedom Metals (Louisville, Ky.), grew up in his family’s business, Louisville Scrap Material Co., and when he graduated from college in 1968, he went to work full time with his father and older brother. Unfortunately, things didn’t go quite as planned. “My brother and I were complete opposites,” Bruce recalls, “and we didn’t get along.” In 1983, Bruce left and founded Freedom Metals. Despite starting “with zero at age 37,” he has gone on to achieve success on his own terms.
His younger son, Spencer, grew up working at Freedom Metals, but after college he pursued a finance career in New York. “I really didn’t love [finance], even though the career path was a prosperous one,” Spencer says. “I decided I’d be happier coming back and helping my dad grow the business.” Bruce says he wanted his older son to join Freedom Metals as well, but the relationship between the two siblings was contentious. “Although they get along outside the business, they don’t get along inside the business.” Seeing the family history repeat itself, he decided it would be best to not push the two to work together. (His third child, a daughter, has no interest in joining the company, he says.)
This year, Bruce, 66, named Spencer, 33, president and chief operating officer. Handing over the reins was not easy, Bruce admits. “Giving up control was the biggest thing for me,” he says. “I’ve backed away a little bit, and I’ll continue to back away, but that’s extremely hard for me to do.” To help ease the transition, he enlisted the help of family-business consultant Rachel Butler of Right Angle (Louisville, Ky.). An inability to let go is a common problem in succession planning, she says. To ease the transition at Freedom Metals, they made sure Bruce “has a pulse on the critical factors that are important to him.”
Butler says she worked to ensure that all parties involved in the transition can communicate and plan with one another effectively. “One of the big changes we’ve worked through is their being able to have meaningful conversations,” she says. “Sometimes that’s hard between generations.” The effort has paid off, Spencer says. “Rachel has helped us talk about things so that we both have an understanding as to how we operate,” he explains. “She has given [my father] confidence that the company can run without him controlling it. It has helped us get along better and run the business together.” For his part, he says, “it feels good that my dad is comfortable letting me assume the role of president—that he is comfortable saying, ‘Spencer is responsible enough and has learned enough, and I’m confident he can do this.’”
Butler helped the firm assemble a leadership team of Bruce, Spencer, and eight other company managers, with clearly defined roles for each person. “What I find in family-owned businesses is that people are wearing lots of different hats, and there’s lots of crossover,” she says. “That makes it hard to hold people accountable and hard to create succession planning.” Creating infrastructure such as a mission statement, organizational plan, and strategic plan also can help the second generation take over effectively, she says. Initially, Spencer says, he was skeptical. “Sometimes when you hear [about] that stuff, you think it’s just a waste of time. But in terms of the company having organization, it’s been great; we had been growing the business without structure.” Butler agrees: “They were growing and doing a lot of good things, but without the necessary infrastructure for long-term sustainability.”
Changing from a company that one person leads to a company with a leadership team had its challenges. “Family companies must have some transparency if they’re going to bring in non-family key leaders and have them engaged and held accountable,” Butler says. “Bruce resisted—it’s hard for a closely held business to share financial information [with outsiders]. But ultimately he agreed and has seen the value. It’s all a work in progress.”
A future transition for Freedom Metals and the Blues is company ownership. Bruce says he has worked hard—and spent a lot of money on lawyers and accountants—to make sure that after his death, each child will inherit equally. “It isn’t going to look that way,” he concedes, “but I’ve done the best I can to make it equal.” Spencer, who owns about half of the company, will inherit the majority of the business; the other two children will receive some land and small shares of the business. Bruce has set up a system he hopes will keep the peace among his children as much as possible: His will penalizes any heir who tries to challenge it or change its provisions. “I did that on purpose, and it has been heart-wrenching for me,” he says. Although he hopes the ends will justify the means, “making that decision is the worst experience I’ve ever been through.”
“If you trust each other … it’s heaven.”
Allied Scrap Processors (Lakeland, Fla.) is in its second generation of Giglia family leadership, with Frank Giglia Jr. and Rose Marie Giglia Mock sharing responsibility for running the company their parents, Lucille and Frank Giglia Sr., founded in 1956. The siblings say they make a good team. “Family businesses are heaven or hell,” Frank Jr. says. “If you trust each other, trust [other people] to know their strength and always yield to them when it’s their strength, and they always yield to you when it’s your strength, it’s heaven.” On the other side are family businesses with family members “who don’t trust each other—they’re fighting all the time.”
That trust had to extend to them from Frank Sr. when he was in the process of stepping back from leading the company. “The turnover from Dad was gradual, and it was planned,” Mock says. “Even as we took over more of the day-to-day operations, he was always there to say if we were doing something right or wrong—in his opinion—and to give his guidance.” That guidance continues today. Although his wife, Lucille, retired 20 years ago, Frank Sr., 90, still reports to work every day from 10 a.m. to 3 p.m.
Lucille and Frank Sr. had a rule for their children, Frank Jr. says: “If you wanted to own the company, you had to work here. That makes it all run more smoothly.” His parents knew by the time he was 25 that he was never going to leave the business, he says, and the same held true when Rose joined the firm, also at age 25. “They knew by the way we acted we were going to be here, and that’s when they began working on the transition plan. They had plenty of time,” Frank Jr. says. He and Rose, now 58 and 52, respectively, acquired Allied Scrap over many years with the help of many outside consultants. That time was useful for minimizing the tax consequences of the ownership transition, Rose says, but “in addition to the tax burden, my mother and father could not have handled it emotionally, doing it all at one time.”
Ownership of Allied Scrap continues to evolve. “Mom and Dad still own a tiny piece of the business because they want to be a part of it, but Frank Jr. and I essentially own it,” Rose says. Frank Sr. serves as a “paid consultant.” When their sister retired after 30 years with the company, the two younger siblings bought her out. “My parents believe that if you aren’t part of the business, you don’t get anything from the business,” Mock says—a position she agrees with entirely. At other family companies, she says, “it breaks my heart that children working in the business have to share with those who didn’t work to make the company successful. In my mind, that’s not right.”
Their concern now is the future of the company. Frank Jr.’s daughter has no interest in the firm; Rose has no children. “We have no clue what the next step is,” Frank Jr. says. “We’re trying to develop that now. We want the company to maintain its identity and go on without us, so we’re looking at our options.” They have time: Given their ages, Rose says, she and Frank Jr. aren’t planning on leaving any time soon.
“They had years of experience, and I needed to listen to them.”
In 1928, Harry Mallin left his father’s scrap business after the two had a difference in philosophy and started Mallin Junk Co. (Kansas City, Mo.). When his younger brother Joe joined the company in 1946, the firm became Mallin Brothers Co. In 1952, Harry’s son, Larry, joined the company as well. Despite the generational difference, the three worked as equals, Larry says. His father believed that when a family member joins the company full time, he or she gets an equal say in business matters as well as the same salary as the other partners. “It was great,” Larry recalls. “My father, uncle, and I got along famously.”
Larry’s son Jeffrey became the third generation to join the company in 1981, at age 22, as an equal partner. “I had to buy into the business financially,” Jeffrey says, “but when we had a meeting, I had one vote just as they did.” Still, not all partners are equal when one is just starting out. “I knew my place,” he says. “I realized they had years of experience, and I needed to listen to them. You mature and grow, and you learn and build confidence.” It helps that father and son have always gotten along and shared the same vision and direction for Mallin Brothers Co., he adds. “We may have disagreed on some things, but I can’t remember what they were, it’s been so long.”
One secret to the Mallins’ success in working across generations, Jeffrey says, is “we each had a niche. … Dad is the salesman, and I’m the detail person.” Those roles have changed over time, however. “As [Dad] has cut back—he says his role now is ‘senior adviser’—I have built our management team to help me with the administrative areas so I can spend more time in sales—and I like it.” Now 53 and company president, Jeffrey is essentially running the company today, but he notes that “Dad is absolutely part of the big decisions—investments in the business and strategy.”
What about the rest of the family? Jeffrey’s sister had no interest in the business, Larry says, and her husband worked there for a year but found he didn’t enjoy it, either, so they both pursued other careers. “My sister had an opportunity to join the business, as did her husband, but they chose not to,” Jeffrey says. Now Jeffrey is grooming his son Zach, 20, to step up as the fourth generation in the business. A college junior, Zach works summers at the firm and already knows he wants to join the company as a partner when he graduates. “There would be nothing better than to work with him,” Jeffrey says. “He’s mature beyond his years, and I’ve given him a lot of responsibility. The professional managers respect him and respond to him.”
“Dad is still running the company.”
Sometimes a patriarch isn’t ready to let go. Ed Arnold Jr., 49, vice president of Edward Arnold Scrap Processors (Corfu, N.Y.), has been working with his parents, Ed Sr. and Daryln, full time for about 31 years. His father talks about retirement, he says, but he hasn’t acted on it yet. “It’s always going to be ‘next year,’ but he just keeps on going. I hope it will change someday, but Dad is still running the company.”
Ed Sr., now 74, has been at it for 55 years. “I have to get 60 years in!” he says. “I plan to work five more years and then ease off a little.” His wife, Daryln, continues to work by his side as she has since nearly the beginning. “It’s unique that we could work together for 50 years and go home and have a relationship outside of the business,” Daryln says. “We get to work with two of our children and two of our grandchildren and have fun with them—it’s nice that we can do both.” Their daughter, Denise, who worked in the yard growing up, left a management position at another company to return to the family business. “I decided if I was going to work that hard, I’d rather work for my family,” she says, though “it was a good learning experience to see how others do things.” Ed Jr.’s son Brant, 24, started working at the yard when he was just 14 and became a full-time employee at age 18. “I’ve always loved everything we do here, so I wanted to stick with it. I plan to make it a career,” he says.
The biggest challenge for multiple generations working together, Denise says, is getting the older generations to accept fresh approaches the younger generations bring to the company. “Ed Jr. and I brought new ideas to Mom and Dad, and now Brant is taking us in a totally new direction, with computer and electronics recycling.”
Brant agrees that change can be a sticking point. “There are days when we all have different opinions on things, but at the end of the day, everything is done and we start the next day fresh and go from there.” When there’s a disagreement, who prevails? “Seventy-five percent of the time, my grandfather [Ed Sr.] wins,” Brant admits. “It doesn’t discourage me,” he says. “I implement what he wants to do and add something to it to make it even better.” Does that work for him? “Right now, it has to!” he says. “But sometimes I can get away with doing it my way. In the end, everything works out.”
It helps to have a strong bond, and that’s certainly true for Brant and his grandfather, Ed Jr. says. Their relationship might actually be better than his own relationship with his father when he entered the business. “When I came, it was a little more difficult—as you’re growing and the business is growing, you don’t always have as much freedom, and there is more pressure.” With time has come greater understanding, however. Also, “we’ve worked through some of the kinks, which makes it a bit easier” for the next generation, Ed Jr. says.
The newest member of the family team is 12-year-old Gabrielle, who reports to the office at 7 a.m. each day with her mother, Denise, and father, operations manager Chris Seelbinder. Before the school bus arrives at 8:15, Gabrielle answers the phone, helps customers weigh in and out on the scales, and pays them. She’s back in the office by 3:10 p.m. to help wherever she’s needed: answering phones, at the scale, helping customers, or doing computer work—after she finishes her homework. “I like working with my family—we get to bond better,” Gabrielle says. “It’s fun here, too. After college, I want to come back and help; I told my grandparents I’d be here working until I am as old as they are.” Ed Sr. couldn’t be prouder. “That’s all Mom and I work for—to have our children and grandchildren in the business.”
Jim Fowler is retired publisher and editorial director of Scrap.
Raising Awareness of Family Business Transaction Issues
In the 1970s, the Institute of Scrap Iron and Steel (Washington, D.C.), an ReMA predecessor, offered an annual seminar for members titled “The Family Corporation.” Covering estate planning and how to reduce estate taxes when transferring business ownership between family members, “it matched the mindset of the industry of the time,” recalls Paul Green, now president of Paul Green Enterprises (Montgomery Village, Md.), who staffed the program. “Transition issues revolved more around economic [and] tax liability issues than the future running of the business,” Green says.
That mindset started to change as business economics changed, and the seminar “became more about how to keep companies running from one generation to the next.” Family-run companies began to recognize that they needed to become more sophisticated in their management, especially when it came to relationships and responsibilities.
Not all company leaders came to that realization, though. “A lot of people didn’t want to admit they needed help,” Green says. “When they did show up, we realized there were some serious issues in their companies.” Conducted as an open forum, the seminar gave participants a friendly environment in which they could share their issues. Many in attendance had difficulty confronting the complex issues in their family businesses, so they ended up suffering in silence, Green says. “When they finally reached the breaking point, they would look for help,” he recalls. “It was not an easy thing for people to acknowledge.”
Green, who continues to consult with scrap companies, contends the success of a transition plan depends on dynamics within the business, including the flexibility of the patriarch or matriarch, and the various personalities involved. Perhaps Leon Danko, considered the grandfather of studies on family business, put it best: “Making a retirement plan is worse than euthanasia. But an entrepreneur who fails to do so will often destroy on the way down what he has built on the way up.”
Family Business Resources
A variety of companies, associations, books, and other media can help family businesses address issues of leadership and ownership transition, including the following:
CFG Business Solutions (Phoenix)
www.cfgllc.com
The Michaud Group (Elmhurst, Ill.)
www.lauramichaud.com
Family Firm Institute (Boston)
www.ffi.org
Loyola University Chicago Family
Business Center
www.luc.edu/fbc
The Family Business Consulting Group
(Chicago)
www.efamilybusiness.com
With a family-run business, handing control to the next generation can be tricky. Why do some transitions work and others go awry? These scrap companies say the outcome can depend on planning, personalities, and patience.