Son Proves Worth in Family Business

Originally published by The Globe and Mail Online on December 10, 2010.

We often read about companies that endure bumpy, life-threatening transitions as they pass from one generation to another. While they make good stories, they mask the fact that if you plan your succession process properly, there’s no need for things to go bad.

Case in point: Mississauga-based McLoughlin Promotions Ltd., a promotions-marketing company founded by Don and Lee McLoughlin in 1988.

Five years ago, when Mr. McLoughlin reached his early 60s, they transferred management of the company to their 30-year-old son, David. Given the fragile economy and the current upheaval in marketing, there are many reasons why the transition might have failed – but years of preparation ensured a smooth transfer of power.

The first thing the McLoughlins did right was to diversify their assets. As the company thrived through the 1990s – selling pens, t-shirts, trophies and other promotional knick-knacks to corporate clients – Don and Lee never let money accumulate in the business. They withdrew profits through dividends and deposited them in a retirement plan.

They knew that a company that distributes promotional products, like many service businesses, doesn’t build much long-term value: “Its only real asset is relationships,” Mr. McLoughlin says.

In a group interview with the three family members in the McLoughlin boardroom, the founding partners said they were never sure they’d even be able to sell the company. “We thought we might just close the doors,” Ms. McLoughlin says.

“A lot of people in our industry, if they had a good year, they would spend all the profits,” Mr. McLoughlin adds. “We didn’t. We were always prepared that the company would not fetch a lot of money.”

Another smart move came even earlier – the McLoughlins made sure their two children understood the value of money. To raise spending money, David and his sister Karen would sell vegetables in the summer at the family’s hobby farm near Collingwood. One year the parents gave each child a lamb (they used to raise sheep) to fatten up over the summer. But David’s sheep died, teaching him that no return is guaranteed.

David’s sister, a nurse, showed no interest in a career in the business. David joined the company after university, but he worked in the warehouse while trying to decide what to do with his life. In 2000, at age 25, he took a skills-assessment test that said he had great aptitude for sales. David realized he should exercise that talent.

Dressing up in a suit and tie, David invited his father to lunch and formally asked for an office job. Mr. McLoughlin agreed, but told his son to ask his mother, too. That night, over dinner, Ms. McLoughlin put her son on probation. “I was worrying about what would happen if this didn’t work out,” she says. “How do you fire your own son? So I said, ‘we’ll try it for six weeks, and see how it goes.’”

David started as an account co-ordinator, accepting a tough assignment to overhaul the promo catalogue for McLoughlin’s biggest customer. He rooted out old, tired products and sourced exciting new ones, winning himself a permanent spot in the company. David proved he was totally committed and that he could lead the business forward.

In 2003, David was named sales manager. Although his father retained his title of president, he withdrew from day-to-day running of the business, letting David make the decisions. “You can’t be looking over his shoulder if you’re expecting him to be the authority,” Mr. McLoughlin says. “People would say: ‘who’s running things around here?’”

In October, 2004, he called David into his office again, and presented him with a piece of paper that set out a transition plan to make David president, and enabling him to buy the company. He had earned his parents’ trust and respect.

The plan was geared toward making things as fair as possible for David. His father would be gone within two months. His mother, not ready to retire, would stay on, working with her accounts and helping David learn the financial aspects of the business.

Using an estate freeze, the value of the company was frozen – from here on, David would benefit from the growth of the company. And because he was still young, and short on financial resources, the plan called for him to start buying his parents’ shares only when the company hit certain financial milestones.

David, Don and Lee spent weeks working on the plan with the company’s lawyer and accountant, to translate the parents’ goodwill into a legal, workable framework. They were pleased that the valuation the accountants calculated matched Mr. McLoughlin’s estimate. “If it had been higher, that would’ve been tough,” David says.

After Mr. McLoughlin retired, David restructured the company in ways his parents would not likely have envisioned. He focused more on higher-margin marketing promotions than on commodity products, and he devoted himself to business development by helping clients achieve measurable results from their promotions.

He eliminated McLoughlin’s inventory and warehouse, downsizing the company dramatically. In 2007, he moved the company into a smaller building in Mississauga, and he told his mother there was no office for her. After two-and-a-half years tutoring David on the financial side, her job was now finished.

“That came as a bit of a surprise,” she says. “But I needed a bit of a push.”

While McLoughlin is still pioneering David’s new marketing vision the family believes David’s restructuring was the right thing to do. As the economy picks up, the parents hope they will soon be able to start divesting their shares. But they’re in no hurry. “If we had put a timetable in place, it would’ve been awfully hard [for David] to make things work,” Ms. McLoughlin says. “We foresaw that.”

The parents have also been forgiving about David’s reporting style. The only formal feedback they get on the company is an annual report – plus verbal updates whenever David drops by for dinner with his wife and new baby. “That’s one thing I would like to do better,” David admits.

“I would like to get a written quarterly report. I think that that would be prudent,” Mr. McLoughlin says.

But he doesn’t want to press his son too much as he deals with today’s market challenges. “It’s sink or swim,” he points out. “David knows that if this doesn’t work, it’s gone. We’re not coming back.”

Hearing his parents describe his future in such stark terms, David offers a better metaphor: “This lamb better not die on me.”

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