Surviving the succession trap Featured

9:40am EDT July 22, 2002

Cathy Philistine talks rapidly, jumping from one topic to another, then back again, punctuating her conversation with lots of hand and facial gestures.

She laughs easily, pokes fun at herself and talks about her partners and employees like they are family. She works long days but says she doesn't mind. She divides her time among several areas of the company, and some of her customers, she concedes, don't know she's the company's president.

"I love it today. I'm having a good time," says Philistine, president of F.B. Wright Co., a Bridgeville-based supplier and fabricator of gaskets, seals and other products for industrial users.

The atmosphere at F.B. Wright, which could be described as extreme casual, reflects Philistine's attitude. The company's 13 employees and owners keep things light. Finding a cutout of your face, placed on the picture of someone else's body and stuck to the refrigerator door, or being the victim a harmless practical joke isn't unusual if you work there.

The first person in the office each morning makes coffee, and Bud Kopach, one of Philistine's partners, makes toast every day for the employees.

Philistine bakes cakes for employee birthdays, although she's finally handed off the responsibility for watering the office plants. Although it doesn't fall into the dot-com, go-go category, the notion of 'work hard, play hard' isn't be foreign at F.B. Wright.

Things haven't always been so relaxed, however. For most of the last eight years, the owners and employees didn't have much to smile about. In fact, the company nearly collapsed after the death of its founder, Joe Burke, who launched the company in 1962.

"It got to the point where it was very shaky," says Philistine, now the company's biggest single stockholder.

Philistine says the company is back on track. While it isn't setting the world on fire in growth and profitability, it is stable and profitable, even though sales have increased only modestly over the past five years to reach just over $3 million annually. Hard work, cost-consciousness, employee confidence and scrupulous attention to customer service are the reasons for its success, Philistine says.

None of it has been easy. The years from 1992 to 1998 were fraught with difficulties. Burke, a strong leader around whom the entire operation revolved and who commanded employee loyalty, died unexpectedly, leaving a leadership void.

Key employees left in the following years, and the company experienced an unexpected cash shortage, triggered by inadequate planning.

Planning the plan

Philistine started working for F.B. Wright in 1965. Over the years, she took on more responsibility, and she and two other long-time employees, her current partners Kopach and Jack Gasper, acquired stock in the company. They understood that the three of them would assume ownership some day.

That's why they drew up a buy-sell agreement to acquire Burke's stock in the event of his death. They also purchased life insurance on Burke, a common practice in preparing for succession, to cover the costs of buying his shares upon his death.

In 1992, Burke died suddenly, triggering the buy-sell agreement. The life insurance they had purchased covered the acquisition of most of the remaining stock. (When the buy-sell agreement was implemented, the three current owners agreed to release some stock to Burke's widow, who ultimately passed it on to her two daughters. The Burke children remain shareholders in the company.)

But the partners were about to discover disturbing news. While the life insurance settlement allowed them to buy out most of Burke's ownership, it didn't provide much else. There was no provision for working capital.

Burke had been the company's rainmaker, its biggest grossing salesman and the one who maintained primary relationships with key vendors and customers. Without him, the company faced a significant loss of revenue.

"I ran the company in the back, but he was the front guy," says Philistine.

Without working capital, the company faced chronic problems with cash shortages and short-term financing. It would be impossible, the new owners realized, to replace Burke's income-generating capacity in the near term, and without cash, difficult to recover it at all. The company owned few tangible assets, so conventional financing and lines of credit would be hard to establish.

Not unlike many companies, the parties believed that simply having enough life insurance on the owner to buy out his stake would be enough to carry on the business. An adequate buy-sell agreement, however, needs to take into account a variety of factors to ensure a smooth transition and the survival of the business.

"The reality is that the best buy-sell agreement won't work if there isn't a business plan in place to support the intentions of the parties," says Gary Hunt, managing partner of law firm Tucker Arensberg.

Personnel problems

Financial troubles weren't the only woes. The company, for the most part, revolved around Burke. Employees looked to him for leadership and guidance, and Philistine says it wasn't easy to gain the confidence and loyalty of employees.

In 1994, a salesman with 20 years at the company quit to work for a competitor. Within a month, a second rep, one with 16 years at F.B. Wright, decided to launch his own business. Later, a promising employee who had been lifted out of the ranks of the warehouse to be groomed as a salesman left after three years of selling and 10 years with the company.

The departure of the salespeople wasn't the end of the personnel troubles. In 1998, a promising inside salesperson left after a year because her husband's company transferred him to another city. Another inside salesperson, who had been with the company for 30 years, left to help her husband launch his dream business, a baseball school.

Philistine says she harbors no bitterness over the departures, even though some came with little or no notice. But she acknowledges that the difficulties took their toll.

"It got to the point where I'd go home and think, 'What am I going to do at this point in my life?'" she says. "I would think about myself and I would think about my workers. What are they going to do? We've got workers who have been here for 20 years."

There were other problems. The outside sales reps were independent contractors, so technically F.B. Wright had little control over them. And it had done little in the way of monitoring purchasing; if customers asked sales reps to carry an item, it would be stocked in the warehouse.

Much of it, such as the $25,000 worth of disposable protective clothing, turned into dead inventory.

An incomplete buy-sell

Philistine acknowledges that the buy-sell agreement she and her partners had with Burke was incomplete. Not having a structure that allowed them to meet the real needs once Burke was out of the picture left them vulnerable.

"The lesson to be learned in these situations is that you have to consider the business as well as the legal side of the transaction," says Hunt.

A succession plan contains several components, says Hunt, including a functional description of what the plan is, the mechanism used to fund it, how you intend to implement it and the documents that establish the rights of the parties.

"Lawyers can advise clients in the structure of their plans," says Hunt, but the implementation, ultimately, is up to the parties involved.

Louis Plung, a partner with Louis Plung & Co., a downtown accounting and business consulting firm, says the parties in buy-sell agreements need to have a clear understanding of the functional role of the company owner. An owner who has reduced his or her direct role contributes less immediate value to the business, so covering an amount closer to the actual value of his or her holdings may be appropriate.

If, however, the owner is a major contributor to the company's revenue and plays a significant role in the business, including established goodwill with clients or customers, allowances have to be made to compensate for that value.

"The cost of procuring that kind of talent in the market can be quantified," says Plung.

Plung advises business owners to review the company's needs periodically and adjust their plans accordingly.

Taking a cut

"We really didn't have a road map," Philistine admits. "The plan we had was to take hold of the company -- that was the plan -- and the only way we could do that was to have people who cared. If I care, they care. Not that they didn't before, but it wasn't with the intensity we have now."

The company put a renewed focus on customer service. Philistine vowed, for instance, that callers wouldn't get an automated attendant when they dialed the company.

"Without a customer, you have nothing," she says.

The partners sought ways to reduce operating costs. Changing the health plan saved about $25,000 a year. Switching long-distance carriers, changing printers and cutting expenditures on promotional items also reduced costs.

Kopech took control of the warehouse and purchasing and keeps a close watch on inventory. The owners also took a hard look at the facilities, now in two separate buildings, for an opportunity to cut expenses. They identified a larger building, better suited to their needs and about 30 percent less expensive, and expect to occupy their new quarters, complete with an employee gym, some time this year. They even subleased office space to a personnel staffing firm.

Despite their cost-consciousness, Philistine says the one area in which they increased expenditures was advertising.

"We actually spend more money in that area, but we spend more wisely," says Philistine.

They've dropped Yellow Pages advertising in favor of a listing in the Thomas Regional Directory. The company also joined SMC Business Councils, an organization Philistine says has helped her company in a variety of ways, including dealing with critical human resources issues. (She sits on SMC's board.) The cost-cutting seems to have worked -- operating costs were 17 percent lower last year than they were in 1996.

Perhaps most significantly, the partners made major commitments to the business that demonstrated to employees their determination to save the business. During one cash crunch, Philistine and her partners took pay cuts averaging more than 20 percent. When it came time to borrow money -- the first time in the company's history -- they put up personal guarantees to secure the $35,000 loan.

"That was a big turning point for us," says Philistine. "They knew that we were committed."

Throughout the hard times, the owners kept the lines of communication open not only with employees, but with customers and suppliers as well. It wasn't unusual to ask vendors to extend or modify terms, but once they had an agreement, they held themselves to it.

"When we were in trouble, we'd set a payment schedule and we'd stick to it," she says.

F.B. Wright also realized it had to adjust its relationship with its sales reps. As independent contractors, they earned straight commission, operated almost completely independently.

Consequently, F.B. Wright couldn't exercise much control over them. It couldn't direct their sales efforts or establish work schedules. Now, sales reps are employees, compensated on a salary and commission basis.

On the desk

When the two inside sales people left, Philistine tackled the task herself. She split her responsibilities between the general operations and sales and brought in two warehouse workers to work part-time in inside sales. The result has been a better understanding of the business for Philistine. Although she had worked for the company for more than 30 years, she had never been involved in sales.

"That was the one part of the business that I didn't know about," says Philistine.

At first, employees were wary.

"They were looking at me like, 'What are you doing here?'"

Two years later, Philistine says she is in sales to stay.

"I got into this hands on, and I'll tell you, I'll never leave the desk."

Is she concerned that immersing herself at the grass roots level of the business will distract her from keeping the bigger picture in focus? "No, because that is your business," she says. "It makes you understand what makes your company work." How to reach: F.B. Wright Co., (412) 257-1100; Tucker Arensberg, (412) 566-1212 or www.tuckerlaw.com; Louis Plung & Co., (412) 281-8771

Ray Marano (rmarano@sbnnet.com) is associate editor of SBN magazine.