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FAMILY

Company MEETING THE CHALLENGES UNIQUE TO FAMILY BUSINESSES

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A NEW GENERATION AT FREDON CORP. More Inside: + Make Philanthropy Part of Succession + Brothers Succeed in Family Business Startup + Sustaining Culture During Transition

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FROM THE CEO

e’ve all experienced the emotional devastation that comes with the death of a family member. But when that loved one is also an owner in the family business, the impact is twofold. That’s why I’m such a strong proponent of the repeal of the estate tax, also known as the death tax, which imposes a whopping 40% penalty on assets transferred to heirs upon death. This tax can create an insurmountable burden for family companies, which may have to sell or even shut down in order to pay the tax. Last month, I was part of a contingent of 25 family business owners from across the country who visited Capitol Hill to speak out in favor of the estate tax’s repeal. Organized by Family Enterprise USA and the Policy and Taxation Group, our group met with Sen. John Thune, one of the most vocal proponents of the elimination of the death tax alongside Rep. Kristi Noem of South Dakota, who experienced the impact of

Repeal of the death tax is needed for family firm survival the death tax firsthand introduced a bill to in her family’s farm also repeal the Gift Tax, when her father was which places a limit on killed in a tragic farm the amount of money accident. or property you can gift Sen. Thune shared your heirs before death his optimism that the without paying tax. climate in Washington, Other legislators have D.C., today is right for taken similar actions Jeff Ahola tax policy negotiation, toward eliminating including the estate tax. this punitive portion of our tax There’s also growing support code. on Capitol Hill: Rep. Noem and As a long-time family Rep. Sanford Bishop of Georgia business, we believe the role of introduced in January the Death government should be to help Tax Repeal Act of 2017, while a family business endure such Rep. Mac Thornberry recently a devastating loss. Repealing

the death tax can protect jobs and preserve the philanthropic contributions that so many family businesses make to their local communities. What can you do? Get educated about the implications of the estate tax and the proposed legislation to repeal it. Engage with organizations like Family Enterprise USA that are advocating for our interests in Washington, D.C. Write or call your local members of Congress urging them to protect family businesses from this punitive tax, which disadvantages family firms against non-family enterprises. As a matter of principle, it’s wrong for the government to tax someone for literally dying. We spend our entire lives paying so many different taxes, let’s not tax death too. It’s common sense that taxes should be levied when the profit is made, not when a death occurs in a family. Jeff Ahola, CEO The Ahola Corporation

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Family Tradition

Fredon Corp.’s Alyson Scott continues her father’s legacy Q: How do you maintain a healthy balance between work and a personal life? A: It’s important to make sure you have your priorities straight. You can fall into a trap where you’re not doing great in either one of them. I’ve tried very, very hard not to discuss business outside of work. My days look different than my father’s days. I’ll be on the computer at 11 at night and on the weekends so I can spend time being a mom during the week.

By BARRY GOODRICH

t didn’t take long for young Alyson Sustar to get down to business. On weekends and summer days when the 10-year-old visited her father’s Fredon Corp. in Mentor, she displayed a talent for operating the office’s Xerox machine. “I felt very important,” she says. “Making copies and filing was fun. And when you’re little, a postage machine is very exciting.” Today, Alyson Sustar Scott occupies the president’s office at Fredon, the precision machining manufacturing firm founded in 1969 by her father Roger. Her brother Christopher, who got his start sweeping floors, is now a vice president for Fredon, which serves the aerospace, defense and transportation industries. “I can’t believe I’m not one of the younger ones anymore,” muses Scott, who talked with Family Company about the pros and cons of family ownership, the challenges of leadership and the importance of a succession plan. Q: What are the unique advantages and disadvantages of working for a family-owned business? A: Many times people who are not involved in a family-owned business have the perception that it’s kind of an easy road. As far as I’m concerned, you have to work a little bit harder to prove yourself. You’re not getting a free lunch. But if you’re not related to your boss, you know they’re not going to call you on a Sunday (laughs). It’s a gift to be able to work with

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Q: What was it like going through the company’s succession plan? A: It started 15 years ago when my brother and I were brought into the leadership team. There was an off-site meeting with my [family] and a non-family facilitator, which was helpful because someone has to be the referee. It was an eye-opening experience. It was kind of disaster planning, if you will. My dad’s still involved with the business … he will never totally retire.

Fredon Corp.’s Alyson Scott says family members often have to work harder to prove themselves. my family and exciting to carry on a legacy built by my father. Q: You started with Fredon 20 years ago in a public relations capacity before working your way up to president. What are some leadership lessons you’ve learned? A: It’s often difficult to find your own leadership style and be confident in that. As I grow and mature, it’s easier to be

confident. I listen to people’s opinions and appreciate input from all areas of the business. Don’t assume people will just follow your ideas without you working hard on those ideas. As you transition to an ownership team you have to understand how to keep 88 people rowing in the same direction. And you don’t want to ignore past success — you want to build on it.

Q: Approximately 38% of your employees are under 40 and you often hire people just out of high school. Why? A: Spending time developing the next group of leadership is something our company holds important. A lot of larger companies want a readymade employee but our ideal employee is someone who wants to learn. The younger generation wants to be challenged every day. They’re not going to stay with you if they’re not challenged.

FA M I LY C O M PA N Y | 3

By JENNIFER KEIRN

ong before Tom Venarge succeeded his father David as president of APV Engineered Coatings in 2010, he already knew that philanthropy would be a central tenet of this family business’s long-term plans. Instead of waiting until after a sale or succession to make a significant charitable gift, the Venarge family oversees a donor-advised fund at the Akron Community Foundation to support causes of their choosing. “If I worked in another organization for someone who was not my father, I don’t know that I would have philanthropic conversations with my CEO,” says Tom. “Because we are a family, we discuss things that are important to us as a family.” Tom is the second generation of the second family to own the 139-year-old APV — previously known as Akron Paint & Varnish and, earlier, Akron Varnish Works, which was founded in 1878 by J. Martin Beck and Edward G. Kubler. The company stayed in the Beck family for more than 100 years, until David, a former employee and now chairman, stepped in to buy the company in 1982 as it teetered on the edge of bankruptcy. The Venarges’ philanthropy centers around children and education, benefitting such organizations as RePlay for Kids, a nonprofit that modifies toys for children with disabilities, but also to needs closest to home. In 2015, the family established a nonprofit to purchase and operate the abandoned Mount Hope Cemetery across the street from the APV headquarters. “This is the way we connect with the community that has

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PHOTO COURTESY OF THE VENARGE FAMILY

Philanthropy was part of the APV succession from David Venarge, second from right, to son Tom, left.

Give and Take

Making philanthropy part of succession makes an impact while easing tax burdens supported us for 139 years,” Tom says. As chief development officer of the Akron Community Foundation, Margaret Medzie has worked with the Venarges and other family-held businesses to incorporate philanthropy into their succession strategies. The foundation recently created the Center for Family Philanthropy, and Medzie holds a certification with 21/64, a national nonprofit that works to incorporate philanthropy into succession planning. She says that too often

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families wait until after a sale or succession to plan for philanthropy, but there are significant benefits to making such plans up front. “When the transition of a sale of a business comes into play, often the transaction has already happened and the family is left with a large liquidity event,” says Medzie. “They are having to scramble on the back end to pay Uncle Sam.” Sometimes Medzie works with family businesses like APV to establish a donor-advised

We are here for the long haul and it is our aspiration to always have a Venarge in charge.”

fund. In other cases, she has arranged the donation of stock options to a charity in advance of a transaction or helped a company establish a scholarship fund for the children of employees. “Not only is the inter-generational transfer of wealth happening, the inter-generational transfer of leadership is happening, too,” says Medzie. “This is similar to what you would do to create a successful business — what is your vision and mission? What are the organizations you want to support?” In the event of the death of a company’s founder, for instance, the immense tax burden could force a family to consider selling the business, says Rob Malone, a partner with Buckingham, Doolittle and Burroughs. “A philanthropic enterprise can help the family preserve the business, lessening the taxes that would otherwise create a demand on a company to create liquidity,” he says. And those difficult interpersonal issues that arise in so many family businesses? “The philanthropy allows them to work together on something that’s for the common good … and resolve some of the family conflict,” he says. The Venarges’ three daughters are still too young to join the business, but plans for the future of APV are a regular topic of dinner-table conversation. “We are here for the long haul and it is our aspiration to always have a Venarge in charge,” says Tom. But philanthropy is just as much a part of those family conversations as succession is. “They won’t be able to say there was a time in their lives when they didn’t understand philanthropy,” Tom says of his daughters.

FA M I LY C O M PA N Y | 5

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lot has changed since 1931 when Joseph and Elsie Schultz founded Great Lakes Integrated, which grew from a traditional commercial printer operating in the height of the Great Depression to a provider of print and digital marketing services with largescale warehousing, fulfillment and distribution capabilities. Four generations and 86 years later, the company has succeeded in maintaining a positive culture with employees and customers that has weathered the test of multiple generational transitions. “If there’s an issue, we move forward with 100% honesty, because, at the end of the day, you’re as good as your word,” says Jason Schultz, Great Lakes Integrated’s vice president of marketing and great-grandson of Joseph and Elsie. A company’s culture isn’t easy to define; it’s an intangible part of office life and often not formalized. It’s something leaders must instill via actions, not just words. “When you think about culture, it really describes a company,” says Linda Bluso, CEO and founder of leadership development firm Adaptive Knowledge Institute. “It’s not just a descriptor, a label or a brand. It’s a feeling that one gets, in either working for a company or wanting to do business with a company.” However, culture “does start at the top,” she adds. “It starts with the leaders.” That makes a generational transition especially perilous for family businesses, whose founding leaders are not only deeply intertwined with dayto-day operations, but have dictated — if not created — the company’s values and vision. “The culture of a business,

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Fourth-generation Jason Schultz, second from left, and his family have maintained a positive employee culture over 86 years.

Culture Hub

Sustaining culture during a family succession takes cooperation from both generations especially a family business, often serves as a significant competitive advantage for them,” says Kelly LeCouvie, a senior consultant with the Family Business Consulting Group. “Sustaining and strengthening that culture is pretty important.” The stakes are high if culture isn’t preserved, adds Bluso: “Losing people, productivity and processes” is a real concern. When companies are anticipating a transition, work to protect the culture should start well in advance; in fact, there’s also no such thing as starting too early. “Succession is not like a transaction where you bring everybody together, you sign some legal documents and, presto chango, we have a new

regime, a new generation running things,” says John Neff, an adjunct faculty member at Wittenberg University and the founder of Family Enterprise Consulting. “It’s a long-term process that needs to be planned and developed over a period of time.” Bluso recommends having a written leadership transition plan for internal and external communications which can help companies mitigate potential culture-damaging pitfalls such as confusion over leadership hierarchy or anxiety related to change. Outgoing leaders can also bring new leaders to customer meetings in advance of transition, so “people get used to seeing a new face,” Bluso says.

Neff stresses that outgoing leaders should be explicit about their philosophies and hopes for the business: “What’s this business about? Why are we doing it? What are we trying to accomplish? … It’s not something you can sit down in an hour and say, ‘Hey, here’s our family values and our vision. Go to it.’” At Great Lakes Integrated, Schultz says the culture has benefited from having previous leaders stay on as advisers to the next generation. “They may not be in the office every day, but they’re still a sounding board and a great source of knowledge,” he says. ”Having that guiding principle has allowed for smooth transitions over the years.”

FA M I LY C O M PA N Y | 7

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Brothers Brandon, left, and Jarred Smith say their close relationship has been key to NOOMA’s success.

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Brothers Brandon and Jarred Smith ground their startup in family By BARRY GOODRICH

s hockey players for Gilmour Academy and the East Coast Hockey League, brothers Brandon and Jarred Smith knew all about getting knocked around on the ice. As entrepreneurs, they experienced hard knocks of a distinctly different kind. “There were plenty of landmines to step on in the beginning,” says Brandon of the startup process for the brothers’ all-natural sports drink NOOMA. “We were warned about how hard it would be to compete in an industry where two companies control 99% of a $10 billion market.” That didn’t deter the broth-

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ers from creating a sports drink that replenishes fluids and electrolytes by using natural ingredients such as potassium from organic coconuts and sodium from natural sea salt. They billed their gluten-free, paleo-friendly, vegan and kosher product as a healthy alternative to industry giants Gatorade and Powerade. “I experienced acid reflux, and Brandon had issues with the sugar in those drinks,” says 28-year-old Jarred. They teamed up with partner Chris Cummins, a family friend and mentor, to create NOOMA, and four years later, it’s on the shelves at area Heinen’s, Giant BROTHERS continued on next page

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BROTHERS continued from previous page

Eagle, Marc’s and Mustard Seed Market stores and at local gyms and yoga studios. The Smiths have expanded their market to 20 states up and down the East Coast and in the Midwest. “One thing we’ve done well is make mistakes and learn from them,” says 30-year-old Brandon. “Our product was far from right at the beginning. It’s been a discovery process.” But the Smith brothers also had a significant advantage: the close family relationship that has lasted from childhood to today. They even share the same house in Mayfield Heights. “What’s always been positive for us is we have a great relationship and trust each other,” says Jarred. “We’re big believers in (that) your feelings are your feelings and you’re not wrong for having them.” Creating a startup rooted in a

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One thing we’ve done well is make mistakes and learn from them.” — BRANDON SMITH

healthy family relationship has been a secret of success for the Smith brothers. “We’re both Type A people … I ended up in operations and Jared is doing marketing and branding,” says Brandon. “When we do butt heads, it means we care. It’s never smooth sailing … the only way we’ve been able to do this is by having the kind of relationship we do.” Creating a startup with family worked well for the Smith brothers, but it can often create challenges. “You’ve got to be able to park your egos at the door,” says Dave

Gaino, Apple Growth Partners’ chairman emeritus and principal of its tax practice. “A family member may be a great inventor but a horrible administrator. Do we have the right cultural fit and the right people in the right seats on the bus?” The Smiths capitalized on their brotherly relationship as part of their marketing effort. They often make on-site appearances at gyms, yoga classes and races, and describe hearing, “The NOOMA bros are here!” when they walk in the door. “We call them sweaty

samplings,” says Jarred. “We participate in the workouts ourselves. It’s a grassroots approach to marketing.” It’s also a chance to test the market for potential new products: They’re banking on the concept that hydrating the masses will become more palatable with flavors like NOOMA’s Blueberry Peach, Chocolate Mint, Watermelon Lime and Mango. “How do we survive in a grocery store where there are players who have been around for 40 years?” says Brandon. “We have to figure out a way to live in their world while creating our own business.” The challenges of taking on such large competitors are significant, but their family bond is invaluable. “We don’t have to go through the walking-on-eggshells thing,” laughs Jarred. “That’s kept us sane in the countless hours we’ve spent together.”

Chapman and Chapman Chapman and Chapman is a 5th generation, family-owned advisory practice focused in the employee benefits and financial services industries. The Chapman family has been providing insurance and employee benefit services to corporate and individual clients for over 130 years. We distinguish ourselves by the strength and depth of our service model, which we believe to be unmatched by any area firms. As a member of NFB Benefits Partners, a national corporate benefits organization of more than 180 offices across the country, we have access to greater solutions, greater insight and greater support. To learn more please visit: www.chapmanandchapman.com

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BY THE NUMBERS 17% OF 2016 RESPONDENTS FORESEE AN OWNERSHIP CHANGE IN THE NEXT 5 YEARS Percentage of respondents over the last five surveys who expect ownership to stay in the family:

72%

55%

76%

74%

52%

2007

2010

2012

2014

2016

Form of ownership change PASS TO NEXT GEN TO OWN AND RUN 100 75

52%

48%

41%

25 0

PASS TO NEXT GEN TO OWN BUT NOT RUN 100

100

50 25

2012

2014

2016

SELL OUTSIDE THE FAMILY

50 24%

26% 11%

2012

2014

2016

25 0

12% 2012

19%

2014

30%

2016

Succession Readiness

68% HAVE SOME FORM OF SUCCESSION PLAN, EVEN IF INFORMAL

23% HAVE A FORMAL SUCCESSION PLAN

29% HAVE NO SUCCESSION PLAN

SOURCE: 2017 PwC U.S. Family Business Survey

Join Us! Crain’s Family Business Forum PRESENTING SPONSOR: The Ahola Corporation WHEN: Wednesday, May 3, 8:00 a.m. - 1:00 p.m. WHERE: Stillwater Place, Cleveland Metroparks Zoo

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Join Northeast Ohio’s leading family business leaders at the 2017 Crain’s Family Business Forum for speakers, networking and hands-on education designed to encourage family business success. This year’s keynote speaker will be Jane Grote Abell, a member of the founding family of Columbus-based Donatos Pizza, who will share her family’s success story which dates back to this national pizza chain’s 1963 founding by her dad, Jim Grote. Now Donatos’ board chair, she’ll share lessons learned from her four decades with the company. Attendees will also benefit from a panel of family business leaders and experts discussing “Sustainable Growth in Family Firms,” and Jane Grote Abell a hands-on workshop facilitated by Andrew Keyt on “Creating Family Policies and a Family Constitution.” Keyt is president of Family Business Network North America, a professor at Loyola University Chicago Family Business Center and author of “Myths and Mortals: Family Business Leadership and Succession Planning.” Grab your family members and sign up to attend the Crain’s Family Business Forum at CrainsCleveland.com/events.

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