Home Ideas Family Business Breaking with tradition: What happens when the next generation doesn’t want the...

Breaking with tradition: What happens when the next generation doesn’t want the family business?

When Kim Nichols was just a toddler, she would help her mom out at their family business. Nichols, the recently retired chief executive officer of Racine Metal-Fab, would sit in an office while helping fold, seal and stamp completed invoices. On Saturday mornings, after the family got their work done, they would walk across the

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Ashley covers startups, technology and manufacturing for BizTimes. She was previously the managing editor of the News Graphic and Washington County Daily News. In past reporting roles, covering education at The Waukesha Freeman, she received several WNA awards. She is a UWM graduate. In her free time, Ashley enjoys watching independent films, tackling a new recipe in the kitchen and reading a good book.
When Kim Nichols was just a toddler, she would help her mom out at their family business. Nichols, the recently retired chief executive officer of Racine Metal-Fab, would sit in an office while helping fold, seal and stamp completed invoices. On Saturday mornings, after the family got their work done, they would walk across the street to a nearby diner to get chocolate milk. Family business has always been a part of Nichols’ life, almost since the time she was born. “We helped out after school, on weekends … whenever work needed to be done, we would help out,” Nichols said. But when she started looking at retirement in her mid-60s, keeping the business in the family wasn’t an option. Both of her daughters had chosen different career paths. “I think younger generations have much broader interests. When my generation was younger, or generations before that, you didn’t have exposure to so many other industries or career paths, yet you had a very intimate knowledge of your family business. That’s what you knew, so sometimes that’s just where you stayed,” Nichols said. She ended up selling RMF, which was founded by her parents in 1968, to Milwaukee-based Midwest Products & Engineering Inc. in December 2021. The difference in values between baby boomers and Generation X and millennials have been clear for several years. Some suggest the desire to choose one’s own career and maintain a better work/life balance than one’s parents is contributing to an increase in the number of family businesses being sold, rather than being passed on to the next generation. Nichols started working full-time at RMF after college but ended up leaving after a decade to work in the banking industry, where she spent another 10 years.  “I can’t really say that it was always a goal (to take over the company), but I always loved the business and I loved the opportunity to create a great place for people to work,” Nichols said.  Her mother eventually asked that she return. The transition between Nichols and her parents was a natural one that took place over several years. Nichols said she stepped more fully into a leadership role as the family navigated through two hardships: Her father, Jim Madson, passed away at a young age, and her mother, Marge Madson, was diagnosed with cancer.  “They founded the company, and she (Marge Madson) was always interested in what was going on,” Nichols said. “She may not have been in the office on a regular basis, but she always knew what was going on behind the scenes.” Nichols said RMF was doing well and had significant opportunity for growth. During conversations with the company’s president, she said it became clear that to continue the company’s growth pattern, it needed to find a larger partner with greater assets.  Never a part of the plan For Michael Graf, founder and former owner of New Berlin-based Letterhead Press, having his kids take over the company was never part of his plan. Graf began his company in 1984, using a single Kluge press in the back of an ice cream warehouse.  Letterhead Press quickly grew to become one of the largest graphic finishers in the U.S. and gained recognition for its use of 3D holograms and foil. Graf said he always expected his children to go off and choose their own career paths, not continue at Letterhead Press.  “I told my kids from early on, ‘You’re going to create your own nightmare. You’re not going to be part of this business,’” Graf said. “They did work in it on and off through high school as teenagers.” He said he did not want his kids to grow up and be unhappy. It was important to him that they chose jobs that interested them and that they did not feel forced to take over.  “Every generation is different, and you just have to accept them for what they are,” Graf said. [gallery td_select_gallery_slide="slide" size="large" ids="543217,543218"] When he first started thinking about selling Letterhead Press, Graf was in his mid-50s and looking to take advantage of the good position the company was in. “When you leverage yourself, you borrow a lot of money and at one point in time (there was) maybe $10 million in debt with the company. You live with that hanging over your head,” Graf said. “At that point in time (when I started thinking about selling), I had just paid off all my debt and I’m thinking, ‘Well, is now the time to sell or do I take on another $10 million in debt and go in a dramatically different direction?’” Graf sold Letterhead Press in July 2017 but was still running the company until January 2020. Making sure his employees would continue to be treated well was a priority when Graf was considering sellers – so much so that after beginning the purchasing process with one buyer and realizing they weren’t the right fit, he pivoted to considering an employee stock ownership plan (ESOP). Just before that plan was finalized, Graf was able to find a buyer who reflected his values. “I think if it were an ESOP, I would still probably be involved with it at this point in time way more than I would like to be,” Graf said. Graf said he feels he made the right move, and he has changed directions into different business endeavors. He is involved in real estate and is getting into the hydroponics industry, on a part-time basis. His children have embraced their own career paths within the fields of engineering and accounting. An increasingly complex process Shane Vaughn, chief executive officer and president of Waukesha-based KDV Labels, is the second generation of leadership within the company. He is still actively involved despite his parents making the decision to sell to Milwaukee-based Mason Wells in 2021. Dick and Karen Vaughn started KDV Labels in their garage in 1974, and Shane recalls from a young age being a part of the family business. “When I was about 2 years old, I was helping my dad move a press. Growing up, our family days were Sunday (and we) came into work to help with cleaning up the shop or stuff like that. Just doing odds-and-ends type of work as both my parents were working many hours,” Vaughn said.  While he was attending college, returning to work at KDV Labels was always a strong possibility but never guaranteed. The more he considered different options, coming back made the most sense to him. Once he did return, he spent time working in each department.  “My parents were in a semi-retirement stage. I was handling most of the day-to-day operations and they were working on some of the big-picture thoughts. I think the thought process for them in the retirement stage was looking at how we could take KDV Labels to the next level, from a growth perspective,” Vaughn said. “When we looked at that and looked at all the different opportunities that private equity was putting in place, it made the most sense to bring in a strategic partner.” [gallery size="large" td_select_gallery_slide="slide" ids="543219,543220,543216"] Vaughn said it was critical to his parents that the company’s leadership team stay intact through the acquisition process, as well as keeping the core benefits that were being offered to employees. The fact that Mason Wells is a Milwaukee company was also a strong benefit for the Vaughn family, as they were looking to keep alive a tradition of Midwest values. The transition process was slow, as Vaughn said he eased his way into different aspects of the business over the course of a decade.  Vaughn said to be successful, a family business must maintain open communication while making sure all parties remain as respectful as possible.  “It’s a tough situation because as companies get bigger and bigger, it’s harder to keep the family atmosphere involved,” Vaughn said. He said one reason kids may not be interested in taking over a business from their parents is because of how complex the process has become over the years. “All these different government regulations have come into place and your customers have started requiring more documentation for everything you do. It’s not about just making a product anymore or just servicing the customer, it’s about all these regulations and paperwork you need to fill out. It doesn’t sound quite as intriguing,” Vaughn said.  Why founding business owners sell David Borst, chief operating officer of Family Business Leadership Partners and former dean of business at Concordia University Wisconsin, said the decision to sell a family business goes both ways between the founding generation and the younger generation. In some cases, parents may feel that their children aren’t capable of taking over the family business, so they prefer to sell or shut down operations. Another common scenario is that a child does not want the family business or is simply not ready to consider taking it over at the time a parent is considering selling. “I am definitely seeing people of the younger generation choosing to not follow in their parental footsteps. The reason for that, in my experience, is family businesses are a drain. They are all-consuming,” Borst said. “Many of the spouses of family business founders consider the business to be a mistress or someone that is vying for their attention. The children see this too and they ask themselves, ‘Do I really want to work as hard as mom and dad?’” According to a 2021 North American family business survey from PricewaterhouseCoopers, 54% of first-generation business leaders expect to be controlled or owned by family within five years. The survey examined the outlook of more than 230 family business leaders across Canada, the U.S. and Mexico. Thirty-nine percent of business leaders interviewed said they would like to see the next generation increase their current involvement in decision-making and involvement.  [caption id="attachment_450351" align="alignright" width="300"] David Borst[/caption] Financials are often a key factor in deciding whether to pass on the family business. As younger generations generally experience less financial security than their parents and grandparents, it becomes difficult to compete with outside parties, such as private equity firms, which can provide more of a payout. It is increasingly less common for parents to simply gift their business to a child.  “You have to remember that for a family business, this is the bulk of their estate in most cases. The vast majority of these people have all of their money tied up in this particular entity. Sometimes the child is not in a financial position to take over the business and give the parents the cash-out that they rightfully deserve,” said Borst.  Choosing their own path Ann Hanna, managing director and founder at Milwaukee-based Taureau Group, said she has noticed a “good number” of family businesses coming through for sale, and the most common reason owners choose to do so is because the younger generation has chosen a different career path. Hanna agreed there is a different set of values between millennials and their parents, noting that the younger generation has more of an idea of what a true work/life balance looks like and view their lives more holistically. A lack of financial security can also make it difficult for children to take over the family business. “The founding owners, they need some sort of financial event so they can retire. The next generation is just not able to provide that or secure enough funding to provide that,” Hanna said.  While not common, she has seen cases where parents do not want to pass along their business to the next generation. In a scenario like this, Taureau Group would help the parents find a buyer who is best suited to work alongside the next generation. [caption id="attachment_506148" align="alignright" width="300"] Ann Hanna[/caption] “That’s a very, very difficult decision to make and we don’t see it often,” Hanna said. “In the ones that we’ve been involved with, it’s been handled very well and the first generation has explained their motive and what their intent was.” Management teams are also often considered as buyers for family businesses. Hanna said this is often an ideal situation for business owners because they commonly seek to reward their employees. “That sentiment is right at the top of what sellers are concerned about when they start a (selling) process. In today’s market, we’re getting a large number of buyers for each business. How they believe buyers will interact (with employees) and what opportunities they will bring to their employee base is a huge consideration,” Hanna said.  Some common signs that a family business founder might be ready to sell include not enjoying running the business anymore, lacking motivation and having a desire to do something different with their lives. “The best time to sell your business is when you don’t want to sell it. When you’re in a growth pattern and profits are good is the very best time to sell the business,” Hanna said.  Keeping the tradition alive For those interested in passing their business along to the next generation, Borst said there are a few principles to follow. First, business owners should make sure to get their kids involved from a very young age, which can involve simple tasks such as helping take out the trash or cleaning up the building. “Getting them in there on a regular basis just to see how hard mom and dad work, that makes them part of the business,” Borst said.  Another important principle for successful family businesses is having a shared religion or faith. Borst said family businesses are far more likely to succeed in passing things on to the next generation if there is a common religious core, regardless of what that religion may be. It becomes a common theme tying one generation to the next.  Nichols said the keys to having a successful family business include being able to realistically assess the strengths and weaknesses of all team members, finding opportunities for both individual and team growth, supporting that growth, and holding people accountable – whether they are a family member or not. “I think on a personal level, it’s very important for the family members to spend time learning and working in all the areas of a business. It’s really the best way to earn respect and build understanding from the bottom up,” Nichols said. She also found value in working outside of her family’s business for several years, which gave her a broader perspective on what it means to run a business. “The younger generation really needs that time to gain that confidence and the understanding of how a business does work,” Nichols said.

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