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       Planning Forward

How much can you afford to lose in your company, with family members or personally? This short business owning family story is about preventing loss in all areas of our lives.

After spending decades building KC Manufacturing Company into a $150 million electrical apparatus and meter enclosure operation, Rob Daniel faced his toughest decision ever. At 76 years old, the Kansas City, Kansas, entrepreneur was ready to retire in the traditional sense of leaving the company for greener pastures. But who would take his place? Mr. Daniel wanted to hand the reins to his son, Bob, the company’s president. However, Bob wasn’t sure he wanted sole responsibility for the 1500-employee company. “We don’t know what to do, and my dad couldn’t decide,” says Catherine Henne, Daniel’s daughter and executive VP. The family decided to draft a succession plan. But a consultant suggested the family do something else first—write a “constitution.” And so the four Daniel siblings sat down and got to work.

Constitution???
What exactly is a family business constitution? It is a lot like our U.S. Constitution: a statement of principles designed to guide a company and the owning family through times of crisis and change. No, these principles are not legally binding, but many families find that by outlining how they will treat such issues as ownership, performance, accountability, and compensation, a constitution ensures that a family business survives long after the founders have retired or passed away.

Even though the idea is not new, drafting a constitution is no easy task. As always, it is the drafting and redrafting and eventually the execution that makes the difference. The Daniels toiled for 18 months, battling over such provisions as how much education and outside work experience a family member needed to have before becoming a manager. But that’s part of the value of drafting a constitution. “The process is almost as important as the document.” says the consultant who eventually worked with the Daniels family. The family emerged with 25 pages of rules to govern everything from succession to the board of directors.

Second Example
A constitution document could have helped Randy Cliff, chairman of Ventura Moving and Storage Company, stave-off a full-blown civil war after his father died in 1997. First, his stepmother sued Cliff and his three brothers for an interest in the business, the oldest trucking company in California. Then, the four Cliff siblings began battling over who would control the company. Finally, after a two-and-a-half-year legal battle, the Cliffs convened a family meeting to draft a constitution with the help of a family business consultant. The ensuing document carefully defines the requirements for the next generation—stipulating that only family members who reach a management position can be owners. “The constitution and the regular family meetings helped us put things back together.” says Cliff. The family has yet to determine how ownership will be transferred. But that’s okay: Just like the U.S. Constitution, it’s important to treat a family business constitution as a living, breathing document that can be amended and updated.

A Final Note
After Rob Daniel passed away a couple of years ago, Henne and her brother became co-CEOs of KC Manufacturing, Company. “It made the transition much easier,” Henne says, “just knowing we had Dad’s seal of approval.”

This article appeared in Mike Henning’s Family Firm Advisor newsletter.  For more information about receiving one free copy of our newsletter, contact us.