How family businesses survive when next generation takes charge

The Fresno BeeJanuary 10, 2014 

When Jeff Tanielian, co-founder of a successful Fresno sign company, died last summer in a motorcycle crash in Monterey County, his widow and son found themselves thrust into an unwanted challenge — grieving their loss while carrying on the business, Commercial Neon Inc., without him.

Floyd Johnston's family found themselves in the same situation when the prominent Clovis contractor and owner of Floyd Johnston Construction was killed after his small airplane crashed in early 2013.

Today, both companies continue to soldier on, determined to buck the odds against the survival of family-owned companies after the unexpected death of the founder.

Family-owned businesses account for nine out of every 10 businesses in the U.S., and enterprises with fewer than 100 employees accounted for more than 53,000 businesses in Fresno County. Many of them, like Tanielian's Commercial Neon or Floyd Johnston Construction in Clovis, represent the epitome of the "self-made" man or woman who seems inseparable from the company itself.

But nationwide research suggests that in about 70% of cases in which the founder — the name and face of the business — dies, the family-owned business dies with him. The Family Business Institute, a North Carolina-based consulting firm, reports that "only about 30% of family businesses survive into the second generation."

The institute's report blames "an unfortunate lack of family business succession planning" as a major factor in the dismal survival rate.

"For a family business or a small business, it's critical to think about succession planning, about 'What's going to happen when I'm no longer here,' " said Carl Refuerzo, managing partner at the Fresno law firm of Baker, Manock & Jensen and a specialist in business law. "If you don't do it, then you haven't given anyone any direction as to how the business is going to be run into the future."

A touchy subject

It's uncomfortable, however, for a business owner to confront the "what if" prospect of his or her own death. "It's difficult to get someone to focus on that, especially longtime business owners," Refuerzo said. "It's like estate planning; they tend to put it off and put it off."

Susan Martin-Tanielian said that while she and her husband didn't have a formal succession plan in place, Jeff Tanielian was well aware of the low life-expectancy of family-owned businesses.

"We'd had that conversation, and he was already concerned about the business going on," she said. "We had talked about things. We have a son who loves the business, and my husband was starting to groom him in regards to learning the business."

Even with those conversations, however, coming to terms with his sudden death wasn't easy. "It's like you've been hit with a freight train, but you get up and you've got a lot to think about, and you don't know everything that you have to think about," Martin-Tanielian said.

From the beginning, Tanielian and his wife were a team, co-founders and co-operators of the company. Tanielian "was the face of the business, he was the dreamer, the entrepreneur," Martin-Tanielian said, "and I was the one who managed the finances." That collaboration served to bolster the odds for the success of Commercial Neon, already an established player in California's signmaking industry.

Additionally, Martin-Tanielian called upon her husband's longtime colleague and friend, former Commercial Neon shop foreman Mark Haist, to join her and son Arlen as a partner in the company and to groom Arlen Tanielian to succeed his father.

Strength through grief

A few months earlier, Floyd Johnston had died doing one of the things he loved — piloting his single-engine Beech Bonanza airplane on a trip back to Fresno from San Diego. One of his employees, a passenger in the airplane, was also killed in the Jan. 6 crash near the Kern County town of Woody.

His death forced his wife, company vice president Evelyn Johnston, and daughter Karen Johnston, the company's controller, to quickly come to terms with steering the company forward.

"There was never a moment of doubt," said Karen Johnston, who is now the vice president. "The front that Evelyn and I presented was, 'We're going to go on.' "

The grief over Johnston's death was not limited to his relatives. "Floyd and Evelyn started this business 45 years ago, and we have employees who have worked for us for 25 or 30 years or more," Karen Johnston said. "The grieving process wasn't just the family grieving while employees looked on. We were all grieving together."

Like the Tanielians, the Johnston company had no formal succession plan. But Karen Johnston, who's been involved with her dad's business for 25 years, said "It's always been pretty clear that if Floyd or Evelyn were to pass away, I would take over."

Several years ago, the company's contractor's license was transferred into Karen Johnston's name as her father began to scale back his day-to-day involvement in the business. "We didn't do that in anticipation of his demise, it just seemed like the logical thing to do," she said. "It ended up to our benefit that we didn't have to deal with that" after his death last year.

Karen Johnston said the culture her father fostered in the company provided a foundation for continued success because he trusted his employees to make key decisions. "This business wasn't just Floyd," she said. "There are a lot of people here who have made this place successful, and they are still here. We lost a key player, but we didn't lose the team."

Having a more formalized succession plan, she added, "would not have changed the direction of this company after losing him."

Lack of planning

A growing number of family business owners are coming to terms with the need for succession planning, said Refuerzo, who is on the board for the Institute for Family Business at Fresno State's Craig School of Business. "It's more common now than it used to be because there is more education now."

But while the university's institute offers workshops and seminars on succession planning, "It's still more the exception than the rule for a business to have a succession plan," he said. "It's still the vast minority who have a plan in place."

A report to the Small Business Institute's 2010 national conference in New Mexico estimated that "70% of businesses have no succession plans in place" — a figure that corresponds to the "roughly 70% of business successions (that) don't work."

Refuerzo said he often finds himself coaxing or cajoling clients into facing their own mortality. "Sometimes you have to sit people down and say, 'You have to think about the future of your business,' " he said. "You built it and, assuming you want it to continue, what is the plan going forward? … It's always better to really do any planning when the owner is still around."

That conversation, however, is just the first step. Then comes the discussion of who will take over. "Are there successors within the family or within the business itself? Then you have to develop those people," Refuerzo said. "That's why it takes time. Developing someone to take over includes proper education and work experience."

On the legal front, formal agreements can ensure that an owner's choices are followed by everyone involved, minimizing the odds for squabbling for control among surviving family members.

"The basic thing they probably should have is a buy-sell agreement, which restricts transfer of shares outside the family or smaller group," Refuerzo said. "That makes sure the family business stays within the family, and provides rights to buy in the event of death or divorce."

Estate planning, including a will or trusts, is also helpful for business founders "to determine where the equity interests in a business are going to go," Refuerzo added. "Some of the next generation may want to continue the business and others don't, so you have to have that conversation."

Assuring continuity

At Commercial Neon, Haist was one subject of the conversations that the Tanielians had before Jeff died. Haist was to be the executor of the Tanielians' trust should both Jeff and Susan die.

"Any business that has a loss of a founder or co-founder is kidding themselves if they think they're going to replace that founder," Haist said. "One of the things we explained to employees is that I cannot fill Jeff's shoes, and I'm not going to try. Jeff was a unique person and built this company from nothing to where it's at today."

"But we have to look at that void and say, 'Who's going to handle what?' " he added "As a group, we can fill that void, but there's no one individual in the company, including me, that can fill that void."

Haist said Martin-Tanielian made it clear to employees, just one day after her husband's death, "that she was going to do what it takes to keep the company in business and growing, so it would be there long-term for the employees to have a job and for Arlen to take over someday." That, he said, was a crucial step to comfort the work force about the company's continuity.

"We didn't lose one employee through this," Haist said. "They didn't know what the plan was for all this, and frankly you couldn't know on the day after. But what was there was the conviction that we were going to stay in business."

Karen Johnston said reassuring employees also helped her family deal with her dad's death. "As emotional and heartbreaking as it was, we could see that everyone around us was pretty rattled about it," she said. "We had all these people looking at me and Evelyn, and I know that every one of them was wondering what's going to happen next, 'Am I going to have a job?' "

"In some way, it was nice to be able to comfort someone who works for you, that you're not just sitting there wallowing in your own grief," she added.

 

The reporter can be reached at (559) 441-6319, tsheehan@fresnobee.com or @tsheehan on Twitter.

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