When Mark Samuel returned from Harvard University in 1986 to begin working his way up in family business, he must have been awed by the shoes he would someday be asked to fill.

Mark's father, Ernie Samuel, stewarded Samuel Son & Co. through decades of unprecedented growth and was considered a legend in horse-racing circles.

But in 1997, Ernie Samuel suffered a severe head injury and died three years later, leaving Mark, mother Elizabeth and sisters Kim and Tammy to carry on the family legacy.

Luckily, the family had planned its succession strategy early, says Mark Samuel, now president and CEO of Samuel Manu-Tech, a publicly traded company spun off in 1985 from Samuel Son & Co., which is still the majority shareholder.

Brennan O'Connor, Business Edge
Samuel Manu-Tech CEO Mark Samuel believes strong leadership, vision are critical to success.

"While my dad had been positioning things for his retirement rather than for his departure, the plan served us well," he says.

Today, Mississauga-based Samuel Son remains one of the top 10 processors and distributors of metals in North America. Celebrating its 150th anniversary this year, the company has survived and prospered through five family successions.

Similarly, Samuel Manu-Tech, a leading value-added processor and distributor of metal, plastic and related industrial products, is celebrating its 20th anniversary.

"We've been very lucky in that we've had a strong leader in each of our eras who was not only able to run the company, but also had the vision to move it forward to the next step," says Samuel, who also serves as vice-chair of Samuel Son.

"Also, in each generation, we have been a small family. While that exposed us to the risk of not having that successor, it also saved us from becoming distracted into a number of shareholder issues. We were able to have one vision and voice going forward."

Not all business families are as fortunate.

According to the international Family Firm Institute's Family Business Review, approximately three in 10 family businesses reach the second generation and only one in 10 survive or stay in the family long enough to reach the third generation.

But David Simpson, executive director of the Business Families Centre at the Richard Ivey School of Business at the University of Western Ontario, says that statistic is misleading and contributes to the popular perception that family businesses are unstable.

"People have to remember that businesses have a natural lifecycle," he says. "To say that only 10 per cent make it to the third generation is not to look at businesses as a whole and ask how many businesses last 75 years."

Instead, Simpson says, family businesses are crucial to world economies. In North America alone, they constitute approximately 80 per cent of all businesses, contribute approximately 50 per cent of GNP and employ an equal percentage of the workforce.

In addition, he says that family-owned or family-controlled companies such as Wal-Mart, Hallmark, IKEA and Dow Jones & Co., which publishes the Wall Street Journal, possess fundamental advantages that allow them to outperform their non-family peers.

"They tend to be the ones that have a long-term view, a strong sense of community and are continually innovative," Simpson says. "They also tend to have a corporate culture that is much more beneficial to employees and are more likely to build win-win relationships with suppliers and business partners."

Samuel Son serves as a good example. The company has lost money in only two of the last 150 years and had the most successful year in its history in 2004.

Manu-Tech saw net earnings climb to more than $57 million last year from $14 million in 2003. The privately held Samuel Son does not release its numbers, but Mark Samuel says the corporation posted approximately $3 billion in sales in 2004, with a similar jump in profit.

According to research conducted by BusinessWeek and Chicago executive search firm Spencer Stuart, Samuel Son is not singular in its success.

The survey found that family companies in the 2003 S&P 500 consistently outperformed non-family companies in shareholder return, return on assets, annual revenue growth and income growth over a 10-year period.

Given the prevalence of family businesses and their strength and importance to the economy, it is disconcerting how many fail to plan for the next generation says Canadian Association of Family Enterprise (CAFE) national executive director Lawrence Barns.

He points to a survey published by the Canadian Federation of Independent Business (CFIB) in June 2005, which found that only six per cent of family businesses had a formal succession plan in place and 23 per cent had an informal plan. The other 71 per cent had no plan at all.

In addition, of the 4,311 small and medium-sized business owners surveyed, more than 70 per cent of them planned exiting the business in the next five to 10 years.

These factors combined point to a potentially turbulent economic future should the prevailing wisdom about family business succession hold true, Barns says.

"I think the next five to 10 years will see the biggest transfer of wealth that's ever been undertaken in the Canadian marketplace," says Barns, whose 15-chapter organization provides personal and business support for family members to successfully pass on their businesses and family values to the next generation.

"We are talking about billions of dollars and a large number of businesses. If that transfer process fails, it will leave significant holes in the Canadian economy."

Luanna McGowan, national partner in charge of PricewaterhouseCooper's Centre for Entrepreneurs and Family Business, says it is understandable that many entrepreneurs are reluctant to think about what will happen after they leave the business.

Sensitive issues such as how to choose and groom a successor, how to fairly divide interest in the business and the conflicts that arise only add to founders' reluctance.

A succession facilitator, she says her clients too often focus only on the technical issues such as tax planning and financial strategy, and resist more emotionally-charged issues.

"People say that we deal with the 'soft' issues but these are hard personal decisions and a lot of times it is easier to put it off," says McGowan, whose centre has offices in Hamilton, Toronto, Ottawa and Vancouver. "These are complicated and tough things to talk about, but there is a way to simplify it if we just figure out the objectives."

The key thing, she says, is to start planning early and to realize that succession should be a process and not an event. Typically, the first step is for all the stakeholders involved to sit down with a succession facilitator in one-on-one interviews so they can openly discuss their desires.

Open discussion, however, is not the strong suit of many business families, says Barns, adding that most successions fail because of a simple lack of communication.

"Succession plans are often the best-kept secrets in the family, a fact that can leave the kids disjoined when that time comes," says Barns, whose organization provides business families with a confidential forum in which to talk about their challenges with other business families. "That's when you get the worst situations: The will is read and the battle begins."

No matter how well a family plans for the future, conflict will be a natural and inevitable part of succession, says David Bentall, founder and principal of Vancouver-based Next Step Advisors.

Family, business and ownership objectives naturally overlap and not all of them can be satisfied. The important thing, he adds, is to have a proper mechanism in place to handle it.

"One way is to have a board of directors to provide a forum for discussion," he says. "Outside, non-family member can function almost like a buffer relationally as family members may disagree between the generations. They can tell the successor generation when to speak up and when to listen up."

Bentall says another common strategy is to incorporate a "shotgun" clause so that family members who share a stake in the family business have a mechanism that allows them to buy out the others.

"With a shotgun clause, whoever 'pulls the trigger' sets the price at which they would be willing to either buy or sell the business," he says. "It serves as an effective way to arrive at a fair price, but I think it also serves as an effective way for maintaining family harmony and deciding who would be the best owner."

One common source of conflict, McGowan says, arises out of how the assets and responsibilities associated with a family business will be divided between multiple stakeholders.

"The entrepreneur's challenge is being fair to those active in the business and those who are not," she says. "An important thing to remember is that fair doesn't necessarily mean equal. In other words, it doesn't mean that everybody gets the same thing."

For the Samuel clan, splitting responsibility for the family legacy was a matter of giving to each successor what each most valued. While all the family members have a seat on the company board, Mark Samuel is the only member directly involved in running the family enterprise.

His mother Elizabeth chairs the board of both Samuel Son and Samuel Manu-Tech. His sister Kim became president of the Samuel Family Foundation while Tammy, the other sister, serves as president of Sam-Son Farm, one of Canada's most successful horse-racing and breeding operations.

"There are also five grandkids now and if any of them wanted to get involved in the business, we would certainly encourage them to do so. If they showed aptitude and ability, we would encourage them to thrive and develop as individuals," Mark Samuel says.

"As a family, we work very hard on shareholders' agreements, so that everyone understands where they stand, and on creating a model of family involvement that will work into the next generation," he says.

(Mike McLeod can be reached at mcleod@businessedge.ca)