The next generation of CEOs: many of the B.E. 100's must prepare now to enter the next millennium with new leadership.

Many of the B.E. 100s must prepare now to enter the next millennium with new leadership

IT'S BEEN SIX YEARS SINCE "THE CHAIRMAN" gave up his seat. But in the time since Percy E. Sutton, former CEO of Inner City Broadcasting Corp., handed over the reins to his son, Pierre, his fortune has only grown. The legendary entrepreneur's massive holdings, which include radio stations, cable TV franchises and real estate, have continued to thrive without the elder Sutton overseeing the day-to-day activities. But his company's continued good fate didn't happen by accident--just the opposite, in fact.

From his modest private office in Harlem--a few miles from Inner City's headquarters on posh Park Avenue in midtown Manhattan--the silver-maned patriarch details the intricate process of transferring power to the next generation. This transition has allowed the 76-year-old to gradually step back from a company it took a lifetime to build, confident that his business empire would continue to thrive in his absence.

In 1980, Sutton drafted a comprehensive plan that transferred control of the conglomerate to his son, and provided significant management roles for his daughter Cheryl, nephews Charles, Clifton, Paul and Oliver, as well as the progeny of shareholders. (The Sutton family owns more than 65% of Inner City's shares.)

But Sutton maintains the torch-passing didn't happen overnight. "It took a decade to train the next generation and pass on the management philosophy," he says. "And I needed time to gradually remove myself from the company. Now it's time for my children to take the next step."

As the millennium approaches, that next step is rapidly advancing for many of the companies that hold a place on the BLACK ENTERPRISE list of the largest African American-owned companies. For decades, these hard-charging, pumped-up chief executives have endured what could easily be tagged as a long and, at times, painstaking marathon. Many of these industry leaders, like Sutton, are approaching retirement age and realize that they are now competing in a different contest: the corporate relay.

But after a lifetime spent supervising their enterprises, many of these chief executives have yet to figure out whom to pass the baton to--or how the whole transfer of power should take place. Yet, so much rides on this changeover: These founding fathers are not only betting on the future of lifelong enterprises, but often their family's primary wealth-generating assets are also at stake. (More than 30% of family-owned operations have more than 75% of their net worth invested in the business.) So passing on the family business requires a concrete succession scheme, strong leadership and thorough estate tax analysis.

The changing of the guards within the BE 100s comes at a critical time--the stakes have never been higher. Economic, financial and technological obstacles of the coming century will be tougher to hurdle. And these businesses, which often serve as a gauge to the state of the black economy, need to be more nimble as expansion capital becomes tighter and the competition grows fiercer.

The BE 100s largely consists of closely-held entities that are in need of clear-headed succession planning: 27 of the companies are 25 years or older, and another 34 will mark their 20th birthday by the turn of the century. And although the companies have gone through radical permutations over the years, many of the BE 100s CEOs are well into their 60s. If they haven't already started, now is the time for many of these BE 100s mainstays to prepare succession plans. This group includes: John H. Johnson of Johnson Publishing Co. Inc.; Herman J. Russell of H.J. Russell & Co.; Edward G. Gardner of Soft Sheen Products Inc.; and Byron E. Lewis of Uniworld Group Inc.

To their credit, many of these corporate chiefs have given their offsprings significant operational roles, although most have yet to relinquish the top spot. Many others have yet to develop any type of concrete succession plan or identify runners for the next leg of the race.

So what's at stake for these companies? At the very least, without meticulous planning, many of these founders may see the unraveling of a lifetime of hard work. Or they may be forced to sell their company--some to majority concerns. Only 30% of such companies survive a generational transition, and roughly 10% make it from the first generation to the third. (One BE 100s company, C.H. James & Co., a Charleston, West Virginia, food distributor has been in operation for four generations.)

But the results can be impressive when the process is well-planned. With $26 million in gross revenues, the 25-year-old Inner City continues to maintain a solid position as one of the nation's largest black-owned businesses. And for the elder Sutton, handing over the keys to Inner City was just the first phase of the succession process. Now he's preparing to charge his offspring with management of the family's investment portfolio--including AT&T and Coca-Cola stock--worth in excess of $50 million.

PREPARATION IS THE KEY

Many families have structured plans in two ways to preserve generational enterprises while avoiding conflicts within the business, notes James I. Herbert, who runs the Urban Enterprise Initiative at Georgia's Kennesaw State University. "One way is the monarchy approach in which the child is groomed for the family business from day one," explains Herbert, a family business expert for 25 years. "But most owners hope that their children will come aboard, and really do not orchestrate the training of the offspring for the business." Another option is dividing a diversified business into smaller pieces so several successors can be selected. Herbert says there are several planks of the succession plan that need to be put in place.

First, family members should work together to craft a mission statement that details the goals and philosophy of the business. Then a participation plan should be created that assigns roles within the enterprise based on specific job descriptions and pay levels. Most important, entrepreneurs should make sure that an offspring's participation in the business is a voluntary process. After deciding who should take over the business, increase their day-to-day responsibilities as a way of gauging whether they're capable of sitting in the big chair. Increase their workload and structure their jobs so they have a direct impact on the company profits or losses. Once you're prepared to make the actual transition, it's often wise to get legal advice as stocks and voting rights are often also being deferred to the successor.

But even meticulous planning doesn't guarantee success, as the bestlaid strategies can change--or fail. Look at the investment company of Daniels & Bell, the first black-owned New York Stock Exchange member firm. Founder Travers J. Bell Jr. failed to cultivate a successor, and after his death, his 24-year-old son Darryl Bell (of Homeboys In Outer Space notoriety) inherited the company. In a very short period of time, freewheeling spending of the company's assets led to the company's insolvency.

Baltimore-based Parks Sausage Co. (No. 93 on the 1996 BE INDUSTRIAL/SERVICE 100 list, with $20.8 million in gross revenues) has changed hands more than three times over its 47 years. Septuagenarian entrepreneur Raymond V. Haysbert was forced to sell the company to Pittsburgh-based Super Bakery Inc., owned by former gridiron stars Franco Harris and Lydell Mitchell, because of a nearly $9 million operating deficit. Haysbert and his namesake son, who was in line to take over the institution, now provide consulting services to Super Bakery on the Parks acquisition.

Often the original heir-apparent has to be replaced, making it critical that more than one child has intimate knowledge about what it takes to run the family business. Take 32-year-old Soft Sheen Products, the $91.4 million Chicago-based hair care products monolith (No. 15 on the 1996 BE INDUSTRIAL/SERVICE 100 list). In 1985, Gary Gardner assumed the helm of the Company, pushing the enterprise into international markets and product line extensions. But after Gardner resigned last year, the company was left in a quandary. It considered buyout offers until Gardner's sister Terri Gardner stepped in as president and CEO. A marketer by training, the new CEO, the only daughter of founders Edward and Bettiann Gardner, had spent much of her career with the family business. Most recently she was president of Brainstorm Communications, Soft Sheen's advertising agency. But perched in the CEO's seat, Gardner has wasted little time seeking to increase the firm's sales and profitability by restructuring operations and financial procedures. Like her brothers, she started in the business at an early age: As an eight-year-old, she filled shampoo bottles in the basement of the Gardner home.

THE TIME IS NOW

In some cases, the next generation is poised to take over. For example, last November, Herman J. Russell, 66, fumed the daily control of his 37-year-old construction company over to R.K. Seghal, but with an eye to continuing the company as a family tradition. Seghal, an Atlanta businessman and trusted friend of Russell, was appointed chairman and CEO. (Seghal will buy an undisclosed stake in the company but the Russell family will retain majority control.) The move positions H.J. Russell (No. 4 on the BE INDUSTRIAL/SERVICE 100 list, with $172.8 million in gross sales) to aggressively move into international markets. Russell plans to leverage Seghal's contacts and expertise, while his children gain more experience in the company. Eventually, one of Russell's progeny will be chosen to fill the top spot. They already have prominent roles in the company: H. Jerome, 34, serves as president and chief operating officer; Michael, 31, is vice president of joint venture construction; and Donata Major, his oldest child, works as an executive in Russell's concessions business.

Other BE 100s CEOs are following Russell's lead by not rushing to place their children at the next rung of leadership. For example, the transition to the next generation has not been simple at H.F. Henderson Industries, the $24.6 million electronics components manufacturer in West Caldwell, New Jersey (No. 80 on the 1996 BE INDUSTRIAL/SERVICE 100 list). The most difficult part of planning for the future is two-fold," explains 68-year-old CEO Henry F. Henderson Jr. "First, you try to gauge the personal effect that it will have on your offspring. Secondly, you want to make sure they're qualified for that leadership role. My advisors and I look at the entire business and try to direct them toward those areas where the can best use their skills."

Henderson is structuring the company's three-year strategic plan, which includes the succession process. His two sons, 44-year-old Ken and 40-year-old David, have worked at the 42-year-old company most of their professional lives. (Henderson, however, did not include his two daughters in the business. "I probably made the wrong decision there," he laments.) Ken has a technical background, and currently serves as head of information systems and special projects. He has also managed the company's commercial division, a unit designed to reduce its reliance on government contracts. Meanwhile, David oversees the public relations efforts.

Henderson has made one aspect of his succession plan crystal clear: his sons will not immediately ascend to the presidency of the company upon his retirement. He has tapped the company's executive vice president, Jeff Weinsten, to assume the reins of power for a period of time. "You have to make certain that you are making the right move," says the elder Henderson. "Just because they're your offspring and work in the company doesn't necessarily mean that they are leaders or want to worry about financial problems."

AVOIDING THE TAX TRAP

Henderson is mindful of estate tax planning, like any CEO who is in the midst of overseeing a change in leadership. He is well aware of the myriad horror stories of an owner's progeny gaining their legacy only to have to sell the company piecemeal to pay inheritance and back taxes.

In fact, only a handful of family businesses have been able to avoid paying a staggering tax bill once the founder has died and left the enterprise to his or her children.

Under the Revenue Reconciliation Act of 1993, rates can rise from 18%-55% of the taxable estate--and that, of course, does not even include state inheritance taxes.

And owners must also be careful if they sell their businesses to their children. If the shares of the corporation are not sold at "fair market value," the IRS may require the offspring to pay a gift tax. For example, if the owner sold a share of stock to his son or daughter for $200, when it's actually worth $1,000, the IRS can make the claim that a $800 taxable gilt was made to the heir.

Whether an outright payment or a determent, estate taxes can drain the company of cash that it needs for operations and expansion. Moreover, the family's financial stability may be placed in jeopardy. To protect investments that Percy Sutton made over the past 50 years, he has placed the family assets in a living trust, which holds title to the assets. Even though the ownership of assets have been relinquished to the trust, the trustee retains complete control to buy, sell, transfer or borrow those assets. Upon the trustee's death, there is nothing to probate since the assets were not in the name of the deceased. Moreover, the trust document identifies who will serve as the successor.

Byron Lewis, CEO of Uniworld Group, the $145 million advertising and communications empire (No. 6 on the 1996 BE INDUSTRIAL/SERVICE 100 list), says his company's succession plan is a work in progress. The 65-year-old entrepreneur plans to retire soon, but intends to create a smooth leadership transition before doing so. (Lewis' son, Byron Jr., produces America s Black Forum among other programs.)

Explaining his strategy, the elder Lewis notes: "We want the leadership to be a blend of the elders as well as the young people who are at home with the new technology."

In shaping Uniworld's future, Lewis will continue to diversify and create new divisions of the 27-year-old company, as a hedge against an overreliance on the core advertising business--and as a way to tap new management talent. For instance, he recently launched Uniworld Direct Response, a firm that targets and markets products to microsegments of the African American consumer population such as churches and upscale black consumers. He's also tinkering with a plan to spin off each of his six divisions into separate companies. He would hand the reins of leadership to the top managers of each of the respective units.

Succession is critical to perpetuating black business as we know it today," Lewis reflects, "and, for black companies, there are not many consultants to help you make that transition. The key is to marry those people who have experience with those who have a vision for tomorrow," says Lewis. "That's what I plan to do at Uniworld with the help of my advisors. That way I can leave a company that can function and grow in the future."

RELATED ARTICLE: SEVEN STEPS TOWARD SUCCESSFUL SUCCESSION PLANNING

Succession planning is process, not an event. When it occurs correctly, there will be as little disruption in the day-to-day business activities as possible. The vast majority of parents and most of their offspring, want their businesses to continue in family hands. But participation in the family business must be done voluntarily if it's to be successful.

1. Decide who should take over the business Will it be a family member of an outsider? Target individuals with the technical, leadership and administrative skills required for the job. Don't automatically look toward family members or those you like or know well if they aren't qualified.

2. Talk to your potential successor to determine their interest in the company and the direction in which they would like to take it.

3. Gradually give your chosen successor increased responsibility to gauge whether they are up to the task of running the operation on their own.

4. Set up a career development plan. Send your successor to executive education or management training classes. In a vast majority of cases, significant outside work experience is a vital prerequisite to a healthy career in a family business.

5. The job of potential successor should be clearly structured with specific accountability. As soon as possible, this job should have clear cost or profit responsibility.

6. Eventually the parent will usually serve as "chairman" with authority only over a very particular policy variable. At this stage, if authority is ambiguous, it should rest with the successor.

7. The best final role for the business-builders is as consultant to the successor--only when asked--as a cultural ombudsman as defined by the board of directors.