Experts: Plan for the worst: Anticipate succession before death, illness

September 25, 2006

When Beth Dzuba's husband Mark died suddenly 18 months ago, running the leak-detection business he owned was the furthest thing from her mind.

A marketing professional at Eli Lilly and Co., she knew nothing about the leak business, let alone how to run a company. The couple-married less than three years-had never even imagined such a tragedy, let alone discussed what to do with the business if the unthinkable happened.

Nevertheless, Dzuba found herself dealing with her husband's business even as she was reeling from his death. And she's far from alone. Few smallbusiness owners think about succession-let alone plan for it-until they're forced to, experts say.

"They're just not planning for the unexpected very well," said Bob Bai- ley, district director for the 14 Indiana chapters of SCORE, which provides small-business counseling. "Owners simply don't want to plan for it. Most wait until something awful happens. The result is just not pretty."

Businesses can suffer, to be sure. CDaddy's BBQ, a family-owned restaurant near 10th Street and King Avenue, remains closed nearly a year owner Clarence Williams was shot and killed. His wife, Carla Jones-Williams, has said she's not sure if or when it will reopen.

Beth Dzuba, 43, faced the same decision when her husband died. The closest they'd come to discussing succession was talking about Beth taking a three-year leave of absence so they could explore running the business together. But those conversations were full of "ifs" and "maybes" and "someday when we can afford its."

"We never even got that far," Beth Dzuba said. In March 2005, Mark went into the hospital for routine surgery and died days later when complications arose. He was 42. "It was very unexpected. It just shouldn't have happened."

At first, she thought she'd sell the American Leak Detection franchise outright.

"That's what I thought I'd do," she said. "But with everything that happened ... I needed a little time to figure things out."

She took a 90-day leave from Lilly, still thinking she'd sell. She informed the franchise's corporate office in California of her decision, and went into the office occasionally to help Mark's cousin, Mike Dzuba, who was trying to keep things afloat.

"Then I fell in love with the business," Beth said. "It just made me feel close to Mark. I realized this was where I was supposed to be."

She told American Leak Detection she was going to keep the business and asked Lilly for that three-year leave she and Mark had talked about.

"Planning for the unexpected should definitely be done, but it's extremely difficult because both sides are so entrenched," Dzuba said. "I was at Lilly, so for us to plan for me to come into the business to learn it in case of the unexpected was just not practical."

Even had the two considered such a tragedy, their plan would not have called for her to take over the company.

"This is not a glamorous business," she said. "Had we talked about it, I would have said, 'If you die, I'll sell the business.' So perhaps you at least have the conversation, but leave the door open for the possibility of making a different decision."

Tough love

It's not always death that sparks business owners'thoughts about succession planning, but it's usually something serious.

Bob Melloh, owner of Johnson-Melloh Inc., an Indianapolis mechanical contracting, plumbing and heating company, got serious about passing on the family business when he was treated for prostate cancer about three years ago.

Melloh has been in remission for a year, but, as the disease ran its course, he started talking to his sons, Andy and Nick, about taking over. Andy was working for the company at the time; Nick worked for a residential heating and air conditioning firm, but has since joined Johnson-Melloh.

"Most people don't want to think about succession planning, as it's related to death," Nick Melloh said. "Unfortunately, we kind of got pushed into thinking about it."

Working with a financial planner, the Mellohs made changes to their wills and the company underwent some restructuring to minimize tax liabilities in the event of a sudden death.

"You can't just ignore things," Nick Melloh said. "There's been a shift in practices and mindset since our father's illness."

That tough-love approach to succession planning is critical, but rarely carried out in small companies, said Kent Lutz, director of the Goering Center for Family and Private Business at the University of Cincinnati.

"It's very difficult to talk about your ultimate removal from your own business," he said. "It's a very emotional issue. Often [business owners] have their whole identify wrapped up in the business."

An emotional time is the worst time to make next-generation decisions about one's business, Lutz said. So waiting until the unexpected happens isn't a prudent decision.

Rather, Lutz and others recommend tough love-drawing in someone from outside the company to help make difficult decisions.

"The founding family is not adequately able to take themselves out of the equation and do the planning," Lutz said, adding that it often takes a "hard-nosed" adviser to get the job done.

That's not necessarily the company's accountant, banker or even financial adviser, Lutz said: "In many cases, they have a vested interest in the business, so they can't necessarily push the owner far enough for fear of losing their client."

Plan to plan

Lutz has created an eight-step program that includes identifying a growth strategy for the business, putting together a team that will keep owners accountable, valuing the business and going through the estate-planning process.

While he uses his program to counsel small businesses on succession strategies, Lutz said it's important to remember that even the best-laid plans aren't set in stone. Decisions can and often do change-as they would have with the Dzubas.

What's important is moving forward with planning anyway, Lutz said.

"Any succession planning is a very complicated set of procedures and that's one reason it's avoided," he said.

It's like putting together an estate plan, said Bailey of SCORE. "Someone has to get the owner to face up to the issue. They have to admit they need to do this and think ahead."

And not all unplanned successions are unmitigated disasters, certainly.

Dzuba is exploring her new career path, for example.

Patora Fine Jewelers co-owner Ramiro Campens also is content with his role in the jewelry store his late brother, Julio, founded 20 years ago.

Julio died of pancreatic cancer five years ago, and Ramiro left a marketing position at Houston-based Sysco Corp to join Julio's two partners, who took over at the time. A fourth owner has since been added, creating a stronger, more stable structure.

"I'd had no inkling of getting into the business while my brother was alive," Campens said. "Succession happened without us meaning for it to happen."

Although none of these business owners had plans in place before the unexpected happened, they all agree it's crucial to do so.

Like the Mellohs and Patora co-owners, Dzuba has begun to plan for the unexpected now that she's got the business back on its feet.

Not only does planning help ensure the company carries on, but it also minimizes revenue that could be lost as family members try to think about sales and profit amid the emotional trauma of death or serious illness.

"We lost a lot of business initially because we didn't have a back-up plan," Beth Dzuba said. "But the unexpected does happen and there has to be some consideration to keep the company from going under."
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