Hank, Joe and their families had fully intended to continue to operate Blommer as a family-owned business, and to pass it on to their own children. These hopes were now in jeopardy. The third generation of Henry’s family, including Hank and Joe’s adult children and the son of their deceased sister, Ann, had begun to work for Blommer Chocolate, and they were determined to keep the enterprise in the family. Peter Drake (Ann’s son, and the head of sales and marketing) realized, “We had to unify as a family in order to accomplish that, so we could fight the battle together.”

They went directly to Cargill board members who were now on their own board, and explained that, like Cargill, they, too, were a family business and they wanted to remain independent. They were gratified to find the Cargill representatives receptive, and they soon arranged to buy back the rest of their company.

Henry’s sons Hank and Joe kept the voting shares themselves, but, as a result of the company’s near-death experience, the family began to plan actively for the future, and to engage the third generation in leadership. “As [the third generation] started working together, we realized that we wanted to make sure there was structure in place to allow us to work as well together as possible,” Drake explains.

One of the keys to Blommer’s success, both as a business and in its transition to management by the third generation, has been the group’s enthusiasm for the enterprise, something many third-generation businesses lack. Tori Blommer-O’Malley, who joined the business only after considering the move for more than a decade, notes, “I always thought it would be wonderful to work there—an opportunity and a privilege.” Peter Blommer agrees: “We are all aware that we are blessed with a business with our name on it, and we have the legacy and responsibility to carry it on.” (Click image to enlarge)



Divided We Fall
For any family business, survival into the third generation is a cause for celebration. It must overcome the weight of entropy to avoid losing its business edge. The vibrant vision and energy of the founder is succeeded, in many cases, by the more cautious and conservative management typical of members of the second generation. The third generation therefore often finds itself with a middle-aged business that needs more than a touch of entrepreneurship to revive it. Without that spark, it can quickly weaken. To avoid succumbing to senescence, the third generation must find unanimity and resolve to make hard decisions—not least of which is whether to try to grow the business (as Henry Blommer’s heirs wanted) or to sell and invest their capital and attention elsewhere (as Al’s heirs chose).

A family business entering the third generation faces classic challenges: deciding who will lead it, and who will own it. Family dynamics can thwart a third-generation business in either or both of these areas. Members of the third generation are often far removed—both physically and philosophically—from the entrepreneurial founder. These cousins may have different values, concerns and needs, degrees of connection to the business and interest in the founder’s vision.

“[The third generation] is certain to have members who have drifted away from the mother ship,” notes Jared Kaplan, a lawyer specializing in estate planning with McDermott Will & Emery in Chicago. As with the Blommer family, Kaplan notes, “Some family members are invested and emotionally connected to the business, while others want to leave. This is where the rubber hits the road—the family has to accommodate both sides.”

Problems arise when the founder’s and second generation’s work ethic fails to take hold among members of the third generation. Unlike previous generations, a family business’s third generation often has grown up in affluent households. Members of this generation may feel entitled to their wealth, and may be less cognizant of the need to work for its continuation. Also, the growing number of people who now depend on the company’s largesse to maintain their lifestyles—that is, the founder’s grandchildren—can overwhelm its resources and leave little cash to reinvest into the business.

Teddie L. Ussery, a director at Synovus Family Asset Management in Columbus, Ga., a family office that represents many third-generation family businesses, observes: “There are three major challenges for the third generation: defining who has the passion to continue the business, developing a common vision and identifying the talent to run it, both within and outside the family.” Successful third-generation family businesses place the needs of the business above the needs of the family, he notes. They allow new leadership to emerge by opening the door to the third generation.

Policies Versus People
Jack and Bill Mitchell became managers of the men’s clothing business their father, Ed, founded in Westport, Conn., in 1958, and helped grow Mitchells into one of the most successful independent clothing stores in the country. In 1991 the company needed to hire a financial executive, and decided to approach Jack’s oldest son, Russ, who worked for IBM and was clearly qualified for the job, although he had never considered working for the family business. Russ agreed.

TOP VIEW Only the most carefully planned and skillfully integrated family businesses can hope to thrive under the management of the third generation. The grandchildren of the founders and their extended families may drift away from the core values that animated the companies and prompted their growth under the management of the first and second generations. Indeed, many liquidate their companies rather than tackle the thorny management and governance issues. However, a select few are able to put in place mechanisms to achieve consensual decision making among the growing ranks of owners, while centralizing management authority in the hands of the most competent individuals, thereby spurring their companies on toward greater success.

A year later, the company’s senior buyer left, and the company hired Jack’s son Bob, who had a passion for selling. Russ and Bob had clearly internalized their father’s and grandfather’s work ethic. They soon sought out the chance to prove themselves. “In 1995, we saw the opportunity in another market, and purchased a business, Richards, in Greenwich,” Bob recalls. “This became Russ’ and my project.” By having their own company to develop, they were able to demonstrate their ability outside of their father’s orbit. Richards became the successful counterpart to Mitchells in the Greenwich market.

However, more brothers and cousins joined the businesses in the years that followed—Todd, Scott, Andrew and Chris. It soon became apparent that Jack and Bill needed both a plan for governance and a blueprint for succession in order to manage both the business and the family’s expectations.

Before the issue of hiring members of the third geration even arose, Jack and Bill attended an industry conference where they heard a presentation by family business consultant David Bork, founder of Aspen Family Business Group in Fort Worth. While Jack had been thinking about succession, Bork’s discussion spurred him to take more formal steps. “They struggled because they were not sure how to transition the business to the next generation,” Russ recalls. “David Bork helped us see that you need to have guidelines; you can’t do it haphazardly. While you cannot predict the future, without a clear road map, it will get away from you.”

Before members of the third generation began to join the firm, Jack and Bill worked with Bork to design guidelines for hiring. They decided that business strategy had to take precedence over family members’ desire for positions. Their Family Employment Policy states: “Family members are expected to work elsewhere for five years. A job will not be created for a family member. When family members enter the business, there must be a real job and they must have the skills to match.” They designed these policies to quash any expectations of entitlements and perks that might weaken the business.

“This rule is not about getting experience in the clothing business, but rather to help discover yourself, who you are and how you work, and to experience work where you don’t work for your father,” Russ explains. “It also helps you make sure you really want to work here. We all think the process has been really successful. We just met with my cousin Chris, who is starting work, and he used the five-year period to sharpen his skills.”

Professional Exigencies
By the third generation, the scope of most family businesses has grown well beyond the small, entrepreneurial ambit overseen by the founder and his or her children. Taking the family business to the next level of performance often requires that members of the third generation become more professional in their management skills—or secure managers who have the requisite experience.

Blommer Chocolate now produces more than 500 million pounds of chocolate and cocoa products a year, with factories under third-generation leadership in Philadelphia, Chicago and outside San Francisco. “We have always felt that we were relatively small, but that is not true,” observes Rick Blommer, Joe’s son and a Blommer vice president. “It is difficult to go from an intuitive business that we can run on the back of an envelope, to seeing ourselves as a big company. Thus, we have focused our efforts on the need to have intentional management—management that is clear about its intentions, plans and goals.”

BLOMMER FAMILY photo: (left to right) Peter Blommer, COO; Joseph Blommer, President; Rick Blommer, VP; Henry “Hank” Blommer, Chairman & CEO; Tori Blommer-O’Malley, VP; Steve Blommer, VP; Peter Drake, VP, sales & marketing.

The five members of Blommer’s third generation involved in the company had to stop thinking of themselves merely as individuals moving up the ranks and instead see themselves as a management team. They now come from all over the country to meet quarterly. Hank’s daughter, Tori, who runs the company’s plant in San Francisco, says, “The responsibility is on our shoulders to come up with a plan for the future that we will present to [Hank and Joe].”

Rick says each member of the third-generation team participates in a so-called 360-degree assessment, in which peers, subordinates and supervisors rate an individual on a variety of competencies. They then share the results and seek ways to improve performance. “We [also] talk about our Code of Conduct, communicating about what has been working and what has not,” Rick adds. “We had to begin to look at it as one company, not a bunch of separate fiefdoms. We have been able to learn how to face issues directly with the person concerned, and to be able to talk to each other.”

The Blommers and the Mitchells have learned similar lessons about the importance of connecting the third generation to work together. The Mitchells emphasize the importance of mutual trust and respect. “We are all partners, respect each others’ positions and have open, honest communication,” Bob Mitchell says. Tori Blommer-O’Malley says her family found it best to “talk about issues openly and directly. We got issues on the table and learned to talk to each other.”

While the second generation can often muddle along without hard-and-fast rules regarding family business governance, successful third-generation businesses often find these structures crucial to success. The members of the second generation often grew up in one household, where parental guidance was near at hand. The third generation, by contrast, often consists of several separate families, raised with different philosophies and expectations, each of which may view the business quite differently.

One of the factors that differentiates third-generation families who succeed in maintaining a unified family, as well as a successful business, from those that fail is their ability to agree on clear boundaries between the two, argues Bork, an advisor who has worked with more than 400 families. They do this by creating structures that separate the business of business from the business of the family, and by creating clear agreements that define the goals, rules, expectations and interactions between the two, and structures to oversee their interaction.

The central structure is typically a board of directors, which oversees the business, family office or the family enterprise’s holding company. The second generation usually has a simple board, with family members involved in the business acting as directors. But because the third generation may not have the same expertise or drive as the first or second, the board becomes more important. To look after the health of the business, family boards often take on one or more independent directors, much like their public company counterparts (although they are not required to do so). They also tend to limit the number of family members to a handful of those who are active and qualified. Some families have representatives from each family branch on the board, while other families elect two or three representatives.

Third-generation family members also play different roles as executives and as owners. The Blommers, Peter Blommer notes, “make sure we get together frequently to remind ourselves no matter what titles we have, we are business partners with a common goal of growing the business profitably.” Thus, while one heir may eventually emerge as the business’s CEO, the two family branches still hold equal voting shares.

Third-generation family businesses often separate control from ownership by creating a special class of voting stock that is held only by family leaders, as the Blommers did. While there are nearly two dozen Blommer family members with roughly equal shares of stock, management control is shifting to the third-generation family members who are in executive roles in the business and are empowered by their fathers, Hank and Joe.

Not everyone can be a leader. The family usually designates one family member, or a small group, to make the important decisions. However, this group must ensure it keeps the rest of the family in-formed, and seeks its buy-in for principal decisions.

MITCHELL FAMILY photo: (back, left to right) Andrew Mitchell, Scott Mitchell, Russ Mitchell, Bob Mitchell, Todd Mitchell, Bill Mitchell; (front, left to right) Jack Mitchell, Linda Mitchell, Chris Mitchell. Jack & Linda are parents to Russ, Bob, Andrew & his twin, Todd, & Bill is the father of Chris & Scott.

The Pritzker family of Chicago had a trio of third-generation family leaders who each led a division of its vast business empire. However, a very public lawsuit broke out when the nonactive family members argued that the managers did not adequately inform them about how they made decisions, how they compensated executives and the nature of the family’s various trusts and business entities. When executives do not share information with the owners, suspicion and distrust may arise and weigh on the business, as this high-profile dispute did on the Pritzkers.

Family Frontier
Robert (Bob) Young inherited hundreds of acres of rich farmland in California’s Alexander Valley when he was 16, after his father, Silas, died in 1935. With his sons, Jim and Fred, he worked the land, producing grapes that were sought after by premium wine vintners. They worked together, often joined by their sisters, JoAnn and Susan, who were always available to assist in the family enterprises. The family recently established its own winery, featuring its own labels: Robert Young Estate Winery Scion and Chardonnay.

As Bob entered his 80s, with his adult children approaching the half-century mark, their children, the third generation, ranged in age from 4 to 40. A host of issues emerged. Their wine was well received, but the high-end wine market is very competitive and labels seeking to compete there must be well managed. The whole family had done well economically, but the future was less certain. The third generation would inherit the business, but it could not expect the profits to support its members indefinitely.

The dozen members of the third generation were not as close to the land as the second generation, but they felt deeply connected to the family heritage, and wanted to know how they could become involved in the wine business. Like many families, the Youngs did not talk much amongst themselves about the business, the future or money at home. They respected Bob’s right to make decisions about his estate, and they knew he would do right by all of them. But they were not clear how the business would evolve, or what to expect.

The Youngs had no clear third-generation heir waiting in the wings to take over. Instead, there were many creative individuals with a wide range of ages and experience. While some of them had worked part-time and weekends, none had dedicated a career to the business, although several expressed an interest. The family boasted enthusiasm for and curiosity about the business, but the members wondered how to proceed.

In 2002, Jim, Fred, JoAnn and Susan attended a gathering run by the Aspen Family Business Group, where members from about a dozen families came together to share their experiences in family business succession. “After the gathering, we were so high,” Susan recalls. “I came away knowing that we weren’t alone; a lot of people face the same problems. We came away with a plan to take a next step, and began to involve the third generation by holding a family meeting.”

Members of several of the family’s branches did not know each other very well, so they decided to convene a family council to bring together the members of the first (Bob and his wife), second (the four siblings and their spouses) and third generations (a dozen young adults and a few spouses) to share information and explore these issues.

The family discussed its history, heard presentations about their business’s current structure and operations and had the opportunity to field many questions. They reminisced and shared memories, making them aware of their common heritage and love of the land. “People learned about the business and they got involved,” Susan says. “Now when decisions are made, everyone has a voice, whether or not that view is taken by the others.”

The family made several important decisions at that meeting. First, because ownership was already in the process of being passed to the third generation, that group wanted representation on the board that governed the businesses. It elected one representative from the third-generation cousins, and one from the third-generation spouses. It also decided that the board would establish a holding company to oversee the operating company’s strategy and approve major decisions, and to hold an annual gathering.

Over the course of that year, the council met monthly and made some important decisions. It created a charter to govern the operations of the board, and its relation to each individual business unit. It elected Paul Kelly, JoAnn’s son-in-law, to act as the chairman. Instead of operating individually, each unit (the vineyards, winery and real estate entities) would begin to report to the board at each meeting. Until then, the various business units acted on their own, without family oversight, which led to growing costs and dampened profits. The council therefore developed strategic and financial plans for each business entity.

It decided that its new winery needed an executive who was a seasoned marketer, and hired someone to help the fledgling operation become profitable. He had previously helped other family wineries, and agreed to stay on for about seven years, with the expectation that he would mentor the third generation into leadership. The council members also discussed how to involve the third-generation cousins as they emerged from school and honed business skills.

A year later, the family held a second retreat and examined how it was managing the shift between generations. While many of its initiatives strengthened the governance and operations of the businesses, its most important contribution was to foster a feeling of opportunity and connection among the third generation, and to clarify what they needed to do to become involved with the business. Since that time, Susan’s daughter, Kelly, a 30-year-old sommelier, has joined the staff of the winery. She is considering a career there, one that will begin to etch the third generation’s mark into the family legacy.

Illustrations by Jonathan Barkat.

Additional Information
Capital and Control
Learning Curve

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