Succeeding With Succession

A large number of GAWDA members are family-owned companies. In this part of Welding & Gases Today’s series on family businesses, ten distributors talk about the challenges they face, the things they learned from the previous generation and what—and how—they are passing it on.

 


 

It’s Not What You’re Given, It’s What You Do With It

“I’m not ready to run the company,” Richard J. Smith told his mother when he learned that his father’s illness would prevent him from running his family’s 23-year-old business. Smith was 29 years old and working at the company for two years. His mother responded with: “Son, you have two choices: we sell the company, or you run it.”  “Well,” said Smith, “I guess I’m going to try to run it.”

Thirty-seven years later, Richard Smith, now chairman and CEO of S.J. Smith Company, headquartered in Davenport, Iowa, has a good handle on succession. As a second-generation owner, he planned for the day when he would no longer be running the family business.

No one wants to talk about their demise,” Smith says. “To sit in a room with your consiglieres and talk about your death is extremely difficult, but if you don’t, the consequences will be dire down the road. The fact is that you are going to die, and it is extremely unfair to your children to allow them to spend 10, 15, 20 years working in a business and then end up having to sell it, even though it’s successful, because you would not make a plan. Having your kids operating the business is a wonderful thing, but if you leave this earth and now they’re running a multimillion dollar business and they have to sell it because they have to pay the taxes, that’s pretty unfair to them.”

(from right) S.J. Smith Company Chairman and CEO Richard J. Smith with Christopher, Richelle and Eric

(from right) S.J. Smith Company Chairman and CEO Richard J. Smith with Christopher, Richelle and Eric

Smith feels so strongly about estate planning that he began almost 20 years ago to make sure S.J. Smith Company has a clear plan for transfer of ownership. Working with accountants, lawyers, an estate planner, family members and current president and COO John Hanlon, he estimates that he spent 20 percent of his time on the project when he first started. Today S.J. Smith keeps an estate planner on retainer, and Smith advises that the one you hire should be more than an insurance salesperson who “does” estate planning. The individual should have a track record and references. Smith meets with the estate planner every six months to deal with issues that come up. “Estate planning,” he says, “is a moving target.”

Smith says that one of the challenges of a family business is being honest with your children. “As a parent, you want to protect your children, and you don’t want them to get hurt. But you have to share the good and the bad, and you can’t sugarcoat the challenges.”

After looking at all the options, the family decided that oldest child Richelle Smith-Brecht would be the best choice to become president and COO, a position she will assume in November. Sons Eric and Christopher will have roles in Operations and Purchasing. Smith’s words to his daughter were: “Your responsibility is to treat employees and customers fairly and then make lots of money,” and he repeated what his father told him so many years ago: “Remember, you can’t know everything. And when you don’t know something, find someone who does and hire that person.”

When Smith took over the company, he forced his parents to make an estate plan. And while Smith Sr. was not thrilled with the idea, he came around when he realized that the company could be sold out from under his son because of tax payments.

In the end, Smith’s parents gave him a small share of the business so he could afford to borrow the money to purchase the rest. He will give his children shares of the company so they will not have a bank payment. One son told Smith that he was uncomfortable having the business given to him. “I responded, ‘It’s not what you’re given, it’s what you do with it.’” He adds, “You must have faith in your children. Trust that you’ve taught them well and that they’re going to run the company well, because you sure don’t want to find out after you’ve left that it’s near bankruptcy!”

 

Higher Expectations for Next Generation

Bob Thornton Jr. worked for his father’s companies, South Jersey Welding Supply and Pennsylvania Welding Supply for five years before he and his father broached the topic of succession. “He wanted to test my commitment,” Thornton recalls, who describes his father as “obsessed with estate planning.” Prior to his death in 2003, the elder Thornton began in the early 1990s to move company stock to Bob and his brother Dave, who also worked for the business. “This gave him control of the process at his pace.”

Three generations of Thorntons: (from right) Bob Thornton Sr., Andy Thornton, Bob Thornton Jr. and Dave Thornton

Three Generations of Thorntons: (from left) Dave Thornton Jr., Bob Thornton Jr., Andy Thornton, Matt Thornton and Dave Thornton

Thornton is grateful for his father’s attention to estate and succession planning. “My father taught me to work hard. He said that if I learned my craft and put in the time, things would work out to the plus.” Thornton Sr. set an example for his sons by his actions. Bob explains. “He told us that if we want to be successful, we had to do what he was doing. Anything less was not good enough.”

Bob’s two sons, Andy and Matt, work in the business, along with Dave’s son, Dave Jr. Thornton sums up one of the many challenges for this third generation: expectations. “Children who work in the family business can’t be average employees. They have to be above average. We place higher expectations on our own children.”

The pressure on the next generation is often not spoken, but it is there. And it comes not only from family, but from other employees. Thornton describes an example. “When the sons and daughters of owners do something good, it often is not acknowledged or even seen by others. But the minute they do something that is not right or negative, it becomes magnified.” “But,” he adds, “working in a family business means longer hours and a lot of pressure. And with that comes the freedom to move quickly, make decisions smartly, and be proud of and accountable for the growth of your family business.”

 

Local Promotion

Russell Strate established Strate Welding Supply Co. in 1949 in Buffalo, New York. His son, Russell Strate Jr., joined the company, he says, at “three years old.” Now president, Strate Jr. is proud of what his father and he have achieved. In addition to the Buffalo headquarters, there are 14 other locations throughout New York, Pennsylvania, Florida and Georgia.

“My father taught me the importance of loyalty,” says Strate. “Loyalty to the people who are part of the business, whether they are employees or long-time vendors.” Being a family-owned business is something that Strate promotes to potential customers. “In our proposals, we mention that we are family-owned, and that we are involved in the local economy. The money we earn and spend stays local, rather than go to some large, out-of-the-area national company.” This means a lot to customers struggling to keep a local economy on track.

Strate’s cousin also works for the business, but currently there is no third generation. Strate describes the challenges of running a family business as no different from the challenges any business has. “You must work hard and take care of your customers.”


Worthwhile Commitment

David Melo, president of Melo’s Gas & Gear of Bakersfield, California, founded his company in 1999. His son Brady joined the company six weeks after the doors opened, and is now the company’s operations manager. Brady was working as a machinist and when he learned his dad was starting the company, he offered to help. “I thought he meant just helping out a little, but when he expressed interest in working full time with me, I hired him as a truck driver and sent him off to get his license,” David Melo says.

David Melo (left) and Brady Melo of Melo’s Gas & Gear

David Melo (left) and Brady Melo of Melo’s Gas & Gear

Melo knows that as business owners age, their customers and vendors often wonder whether or not their companies will be sold as the owners near retirement. “As they work with me and my son, they see the continuity, and they see the commitment we have to the future.” This continuity does not go unnoticed by employees, who know that competitors are selling off. Says Melo, “Employees, as well as customers and suppliers, know that if I got hit by a bus tomorrow, the business will go forward. This continuity gives Melo’s Gas & Gear a huge advantage.”

It’s not unusual for business owners to ask themselves why they continue to put up with the tough side of running a business—the taxes, the regulations, the worries. Melo is no exception. “Having someone to pass the company on to motivates me to deal with all the negative things. It keeps me in the game and motivates me to grow the business. Having a son to pass it to makes it all worth it.”


Continuity of Ownership

Vern Lewis, president of Vern Lewis Welding Supply, opened his first store in Phoenix, Arizona, in 1969. Lewis’ wife Bernie is an artist whose skill is put to good use on company signage. Of their three children, one works full time in the business. Stacy Lewis-Shelton returned to the company four years ago to work alongside her father. She brought with her a wealth of business knowledge gained from running a travel agency. A son works as a fitter for a construction company, and can be counted on for real world experience and advice.

Lewis finalized a succession plan in 2009. Should something happen to him, the business reverts to his wife, then to his three children in trusts. He knows that continuity of ownership is very important to customers, and cites an example of a local chain store that expressed some reluctance to give his company an account because Lewis is near retirement age. When the potential customer learned there was a succession plan in place, Vern Lewis Welding Supply won the account.

President Vern Lewis (center) with daughter Stacy Lewis-Shelton and grandson Jeremy Shelton

President Vern Lewis (center) with daughter Stacy Lewis-Shelton and grandson Jeremy Shelton

Stacy Lewis-Shelton is working hard to learn all areas of the business. She’s been involved in several acquisitions over the past few years, helping ease the transition for employees and overseeing the administrative duties. She also has run one of the company’s four branch stores. Her 22-year-old son Jeremy oversees the fill plant, carrying the company into the third generation.

“Customers want to know that someone will be there for them,” Vern Lewis points out, “and continuity of ownership is not to be taken lightly.” He also points out, however, that he treats all of his employees like family. “I tell customers that I have 40-some kids. We will be there for them.”

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Control Your Own Destiny

Abbott Welding Supply  Chairman Joe Higgins (right) and his son, Mike Higgins

Abbott Welding Supply Chairman Joe Higgins (right) and his son, Mike Higgins

Abbott Welding Supply traces its roots to a company named Abbott, founded in 1875 in Olean, New York, a city located in western New York, not far from the Pennsylvania border. Ninety-nine years later, in 1974, Joe Higgins purchased the business and transformed it into a full-service distributorship. Joe’s son Mike had no intentions of working in his father’s company…for one reason: Mike thought he wanted to live in a larger city. While attending college majoring in mechanical engineering, though, Mike gained an appreciation and respect for what his father was doing. After graduation, he worked at Lincoln Electric for two years and came to the surprise realization that he missed the region where he grew up.

“I loved the area and wanted to come back. I also learned how great a small business can be, and I came to a better understanding of all the benefits of working in a family-owned company. We control our own destiny, we appreciate the fruits of our labor, and we put energy back into the local community.” Higgins believes that it makes a difference if the business has a stake in the region, especially in the face of Walmart and other national companies.

Today, Joe Higgins serves as chairman of the company. Mike, now president, is in awe of what his father has accomplished, and he makes sure to continue the lessons he taught him. “Customers come in who talked with my dad 20 years ago and remember how knowledgeable he is. He taught me to learn all I can about the industry and the products we sell. He showed me that spending time with customers and being knowledgeable about our business would develop into quality relationships that would serve the company well. He was right.”


Give More Responsibility and Get Out of the Way

Carr DuPuy talks a lot about trust as one of the benefits of working in a family-owned business. The vice president of Waco, Texas-based DuPuy Oxygen & Supply Company and his brother Cary, vice president, work alongside their mother, Virginia DuPuy, in the business founded by her and her husband Leslie in 1954.

DuPuy Oxygen & Supply Company President Virginia Dupuy and her sons Cary (left) and Carr

DuPuy Oxygen & Supply Company President Virginia Dupuy and her sons Cary (left) and Carr

“I trust my family to let me know what’s going on,” Carr says, “and we trust each other to do the right thing.” A high level of trust translates into the ability to make quick decisions, flexibility and a competitive advantage.

Company President Virginia DuPuy decided a few years ago that she had to delegate to her two sons if they were to eventually take over the business and continue to grow it. “I had to learn to hire well, delegate effectively, and turn over the keys,” she says. As her sons took on more responsibility, DuPuy got out of their way.

But she gave them a critical lesson. “Without the customer,” says Carr, “Nothing else happens here. There are a lot of other places for people to buy what we offer. She showed us the importance of taking care of the customer and how to maintain the relationship.” This is a lesson repeated every day by Virginia DuPuy’s two sons across the company’s seven Texas stores.


Adjust to Meet Changes

Herbert Weiler’s legacy lives on in the company he founded 90 years ago in Dayton, Ohio, Weiler Welding Company. His son, Herbert Weiler Jr., continues to work in the business at the age of 75, along with his sons, VP of Operations Herbert Weiler III, VP of Materials & Service James Weiler, and daughter Janet Ferguson, who runs the company’s balloon division.

Herbert G. Weiler Jr., president of Weiler Welding Company with sons James (right) and Herbert, stand in front of a picture of company founder Herbert Weiler Sr.

Herbert G. Weiler Jr., president of Weiler Welding Company with sons James (right) and Herbert, stand in front of a picture of company founder Herbert Weiler Sr.

Weiler describes his father as “an old-time businessman,” whom he admires for his strength and foresight. “When he started this company in 1920 in the midst of the Great Depression, he had to be strong. If you didn’t do your job, you didn’t stay around very long.” A tough management style was not uncommon for those times. Says Weiler, “He didn’t believe in having coffee at your desk. Coffee was something you could drink at lunch, and you drank it for breakfast at home, not at your desk. Employees were to be working, not drinking coffee.” Weiler is proud that his father was tough and strong and adjusted company policies as the needs of the times changed. “You couldn’t run a business today not allowing people to have coffee.”

While the policies have changed over the years, recognition of family is constant. This, according to Weiler, is one of the advantages of a family business. “Customers know who they are dealing with, and no matter what the issue, they can get in touch with the top person. Much of our company’s success is based on this.”

Today, the company has six locations, plus a division devoted solely to the large-scale sale of helium and balloons. Weiler attributes much of the company’s success to his father’s lessons in conservative spending, taking care of the customer, adjusting as needs arise, and working for the better of the business and industry—lessons he has given to his own children. (Ed. Note: Herbert Weiler Sr. is one of the four distributors who, in 1945, developed the plan that created the National Welding Supply Association, now GAWDA. In fact, it was his idea to come together in an effort to change the then-hostile relationship between distributors and suppliers. The first mailing address of association headquarters was Weiler Welding Company in Dayton. Sixty-five years later, the GAWDA family of distributors and suppliers is grateful to this visionary man.)


Answering to Ourselves

In 1962, Betty Root and her husband purchased Capitol Welders Supply Company in Baton Rouge, Louisiana, when the company was just a few years old. Today, Terry and Kelly Root work alongside their mother to grow the business. Terry heads up operations; Kelly manages sales.

Betty Root does not have a succession plan in place, but she currently is working with a tax advisor to create one. She enjoys the challenges and opportunities of working with her sons. “The opportunities to be innovative are endless, and we can respond quickly to customers’ needs. Together we make decisions that become reality much faster than a company with several layers of administration. There is no one to answer to but ourselves.” Plus, the money that is earned goes right back into the company, making it better and stronger for the next generation.


Spell It All Out

Now into its fourth generation, Indiana Oxygen Company, headquartered in Indianapolis, epitomizes the phrase “family business.” Founded in 1915 by Walter L. Brant and his brother John, the grandfather and great uncle of current president Wally Brant, IOC has a clear and definite path for succession. Each of the first-generation brothers had a son who received ownership of half the company at their father’s death. This second generation was then to pass ownership on to their children. However, John R. Brant Jr. had no children, and the 50/50 agreement with his cousin Robert P. Brant handcuffed the business for two generations.

Wally Brant is very proud of his father, Robert, for bringing his three children together and saying, “We’re going to settle our part of the estate while your mom and I are still alive.” Wally eventually purchased the company and took it into its greatest growth period. But it wasn’t easy or simple.

The process was long and arduous, and today Indiana Oxygen Company has a policy manual that outlines every scenario the family might face: forced or leveraged buyouts, stock value, sweat equity. It describes how salaries are set (board decides) as well as how much stock a family member receives when fully engaged in the business. There is a policy against hiring the spouses of stockholders.

Indiana Oxygen Company founder Walter L. Brant (left) and his son Robert P. Brant.

Indiana Oxygen Company founder Walter L. Brant (left) and his son Robert P. Brant.

President Walter L. Brant and his children Anne and Jay

President Walter L. Brant and his children Anne and Jay

Brant says the single biggest mistake in family businesses is not discussing all of the important issues before joining the family business. He points to a few: Is there a stock acquisition plan in writing? Can I buy it or do I earn it? How will my salary be determined? My sibling’s salary? How will the successor be chosen? Is there any chance the business will be sold before a relative can acquire it, or take over the company? Are spouses, children or in-laws allowed to join the company, or is there a policy preventing it? What if I work in the business and my sibling doesn’t? Do they still get half of the business?
“These are tough questions and ones that often are avoided because they are uncomfortable or the answer may not be popular. Yet they must be addressed,” Brant advises.

Today, Brant’s children represent the fourth generation. Anne Brant Hayes joined the company as corporate counsel and HR director. On January 1, 2011, she will become chief financial officer. Son Jay is IOC’s southern territory manager. A niece works part time and a nephew is currently an intern.

From a young age, the children learned that IOC was an interesting place to work. At his wife’s suggestion, Brant shared some of the events of his day when he came home from work. He used daily experiences as teaching moments, piquing his children’s curiosity and interest in the company.

Asked what his grandfather would be surprised to learn about the business today, Brant answered that he’d be surprised that some uses of gases are still the same as they were in 1918. And without hesitating, he adds, “Walter would also be shocked to learn that some of the prices he charged in 1918 are still the same being charged in 2010!”

But that’s another story.

If You’re Planning On Dying, 2010 Might Be a Good Year to Go

The IRS describes the Estate Tax as “a federal tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.” The Estate Tax, aka the “death tax,” has been the topic of conversation on the Hill this past summer. In late July, the Senate rejected a measure that would have permitted a vote on a proposal to permanently eliminate the Estate Tax. The latest proposal was but one of several introduced and dismissed over the past few months.

In 2001, Congress reduced the Estate Tax rate to 45 percent from its rate of 55 percent, gradually increasing the exemption from $675,000 in 2001 to $3.5 million in 2009. The tax was eliminated for 2010, but will return to the pre-2001 rate of 55 percent and a $1 million exemption at the beginning of 2011.

Consider this. When he died on July 13, 2010, Yankees owner George Steinbrenner left his heirs an estate worth an estimated $1.1 billion. His death came in a year with no Estate Tax. If Steinbrenner had died in 2009, when the tax was 45 percent with a $3.5 million per-person exemption, his estate could have faced federal taxes of almost $500 million, depending on how the estate was structured. If Steinbrenner died at midnight on January 1, 2011, his estate would have paid almost $600 million in federal taxes. By dying in 2010, his wealth avoids the Estate Tax.

”If you’re super-wealthy, 2010 is a good year to die,” Jack Nuckolls, a lawyer and estate planner with the accounting firm BDO Seidman,” told the Associated Press. “Is Congress incentivizing death?” asked the Wall Street Journal. “Because of the huge chasm separating 2010’s zero tax rate from 2011’s 55 percent rate, some fear that Congress has provided the wealthy with an incentive for dying—or their relatives with an incentive for making sure they die—before the clock strikes midnight on December 31, 2010.”

It is uncertain whether Congress will be able to address the situation this year. Some point to the expense of the wars in Iraq and Afghanistan, the bailout of the automotive and banking industries, the oil spill in the Gulf and the November elections as reasons for the topic to be tabled.

What is clear is that Congress must work toward a solution to end the uncertainty surrounding this tax.

Gases and Welding Distributors Association