Generation-to-Generation: How Nepotism Can Work
YOUNGSTOWN, Ohio -- Owning and running a business is challenging enough. Parents who hire their children to work in the family businesses, without realizing it, make it even more challenging for themselves and their sons and daughters.
Keeping a business in the family – hiring your relatives and transferring ownership – is nepotism (from nepos, Latin for “nephew”). Although nepotism is usually thought of as people in government providing their unqualified relatives with jobs and benefits, few give a second thought to the practice of owners of small businesses hiring their relatives and passing control to the next generation.
Paul Johnson Jr., third-generation owner and president of Adolph Johnson & Son, Mineral Ridge, is the beneficiary of smooth transitions from his grandfather, Adolph, to his father, Paul Sr., to himself and his brother. “A family business is a mixed blessing,” Johnson reflects. “Nepotism is not all it’s cracked up to be. It’s more difficult when you’re working for your own family. It’s more than strictly business.”
In the Brier Hill neighborhood of Youngstown is another third-generation business that continues to prosper, Prout Boiler, Heating & Welding Inc. It enjoys annual revenues of $10 million, says primary owner Wes Prout.
Founded by E.C. Prout in 1945 with a $2,000 loan from Farmers National Bank, it has grown to 40 employees. “It was implicit that my father [W. Cortland Prout] would follow my grandfather and expand the business,” Prout says. His sister, Linda Prout, “has a small ownership stake.”
He recalls his grandfather taking him to the office Saturday mornings after breakfast at Isaly’s and before lunch served by his grandmother.
When he was in high school, Wes Prout worked summers and many weekends for his father, “doing whatever there was to do” and finding he enjoyed the work.
His children, two sons and a daughter, are 8, 9 and 10. “Both boys say they want to come and work here,” their father relates.
At William Price Heating & Cooling Co., Girard, Christian M. McKernan is the fourth generation in his family to work in that company founded by his great-great-uncle. Chris’ parents, Bill and Linda
McKernan, still work with him as they have gradually transferred controlling interest in the enterprise founded in 1937. “We’re a tight family that’s helped each other – like all families,” Bill says.
Actually, not all families are as close and unselfish as the McKernans whose love and respect for each other is not as common as Bill suggests. (See related story Page 3).
The three companies profiled in this article have enjoyed success because the families not only worked closely with their lawyers and accountants but avoided the friction that often occurs in families whose businesses lack the closeness, love and respect the Johnsons, McKernans and Prouts have displayed.
The story of what has become Adolph Johnson & Son could have turned out several ways other than the third generation’s Paul Jr. taking charge.
Adolph, born in 1880 in Sweden, came to the United States in 1900 where he worked in the coal mines of Pennsylvania. There he met his wife and they moved to Youngstown later that decade because, as their grandson relates, “Youngstown was a vibrant, growing community at that time.” Adolph worked as a carpenter by day and studied in the public library at night. “He was self-taught,” Paul Jr. says.
In 1919, Adolph Johnson and Andrew Carlson started the Johnson-Carlson Construction Co. on Rayen Avenue that “went great guns through the ’20s and then the Depression hit,” Paul Jr. says. “My grandfather hocked his pocket watch to meet payroll” because payments were slow and construction jobs not much better.
When Carlson died in the late 1930s, Adolph “bought out his widow” and it became the Johnson company.
Paul Sr., the youngest of Adolph’s three children – the other two were daughters, Ruth and Charlotte – graduated from the University of Kentucky with a baccalaureate in civil engineering and worked in Cleveland before the United States entered World War II. The Navy sent him to Yale University where he studied airplane mechanics and was assigned to the South Pacific Theater.
After the war ended, Paul Sr. returned to Youngstown and went to work for his father who stayed with the company, “active until the day he died in 1961,” Paul Jr. says. He had called on two customers that morning, went home where he ate lunch, took a nap on the couch and died at age 81.
While Paul Sr. was running the company and had primary responsibility, Adolph had incorporated the business and made arrangements in the 1950s through a lawyer for his children to buy stock. “Aunt Charlotte was the office manager/bookkeeper,“ Paul Jr. says.
There was no buy-sell agreement in place, Paul Sr. kept control “and the sisters were compensated with other assets. Things were simpler back then,” he remarks.
Paul Sr. had two sons, Paul Jr. and Jim, who followed him in the family business. Paul Jr. went to Duke University where he graduated with a baccalaureate in economics and then he and Jim went to Colorado where Paul worked as a union carpenter and took more college courses, “construction-related classes,” he says. He stayed in touch with his father until an article in Forbes magazine persuaded him to return to Youngstown and join the family business.
When Paul Sr. died at 94, he was chairman of the board.
After Jim, who is childless, retired, Paul bought his shares, giving him majority ownership. Their mother owns the remaining stock.
Throughout, Paul Sr. and his sons met with their attorneys and accountants to review their situation and ensure a smooth succession.
Today Paul Jr., who thoroughly enjoys his work, plans to live as long as his father and grandfather and states, “I’ve never had any interest in retirement.”
His older son is 25 and in medical school, his younger son is 10 and interested in what his father does, but it’s too early to determine whether he’ll be the fourth generation of Johnsons to run the company, his father allows.
Paul Jr. has “thought about” succession planning and is still in discussion with accountants. “A family business is a very interesting animal,” he says.
His choices are three: keeping the business in the family, selling it – he’s looked into creating an ESOP (employee stock ownership plan) and closing it. His preference is “keeping the family involved,” Johnson says. “You put your heart and soul into your business.”
Price Heating is another company with inauspicious beginnings that started in two small shops in Girard with a loan from Bill McKernan’s grandfather, E.J. ”Jim” McKernan, to Bill Price. Price then hired McKernan, his nephew, as his first employee.
As the company grew Jim McKernan brought his three sons into the business.
Chris McKernan’s parents, Bill and Linda, gained control and while Bill has taken a lesser role as legal ownership is slowly ceded to Chris, Linda remains as active as ever as business agent. “She runs the inside,” Chris says.
Very closely held, Price Heating was organized as a C corporation in 1960 for both tax purposes and to allocate ownership. “The shares are the mechanism that has transferred ownership from generation to generation,” Bill McKernan says. He bought his brothers out when they retired.
The family attorney, Jimmy Thomas, a sole practitioner, attended to legal matters. Schroedel, Scullin & Bestic, a public accounting firm in Canfield, has handled financial matters at Price Heating since 1997.
In working with Thomas, Bill McKernan says, “We knew what we wanted to do to keep it in the family” and Thomas drew up the documents.
“Everybody has done what they wanted to do,” adds Chris McKernan, whether to retain and interest in the company or divest themselves or maintain a smaller stake and share in the profits.
“We’re in the process of stepping back,” Linda says of her and Bill’s roles. Bill isn’t ready to let go completely as he tells how “My father retired three times. … When you have a close family relationship, you can choose to work as we do.”
Both Bill and Chris McKernan came to the shop at early ages and Chris brings his boys with him to work fairly often as well. He allows them considerable latitude to explore, just as his grandfather did with him.
“I started right,” Bill McKernan says, “as a sheet metal apprentice. My dad never intervened one way or another” and he followed his heart into Price Heating. That resulted in part because at age 14 he would visit the shop Saturdays during the school year and summers when “I would sweep floors and move stocks.”
One reason the family gets along so well together, Bill McKernan suggests, is “My father never brought his work home with him.”
Adds his wife, “We made that our rule, too.”
Outside work, Chris and Bill McKernan have played on the same softball team together.
Linda McKernan understood family businesses because she grew up in one, the drugstore her father, Kenneth Woodford, a former mayor of Girard, owned.
“In 1986, my father-in-law invited me into the business,” Linda Price relates. “I had an accounting and business background” and learned the Price accounting system from the accountants there.
(Linda’s sister ended up running her family’s business.)
Chris McKernan went to the University of Mount Union where he studied sports management and business administration. “My folks worked hard so I wouldn’t have to come here if I didn’t want to,” he says.
If there is a secret to Price Heating’s success, Bill McKernan says, “You’ve got to work hard, eat, drink and sleep the business.”
But Chris did want to and “I was started off at the bottom of the totem pole. I had to do what they [more experienced employees] did and do it better, or at least as well.’
Today Chris runs the day-to-day operations while his father focuses on sales.
Chris has a brother, eight years younger, who “chose another [career] path and he’s successful at what he’s doing,” the elder brother says.
Should he ever decide he wants to become part of the family business, “There would be a spot for him,” Chris says without hesitation. “I would welcome him.”
Like Bill and Chris McKernan, Wes Prout worked summers while in high school at his family’s business, founded in 1945, “doing whatever there was to do.”
He followed in his father Cort’s footsteps, earning a baccalaureate in mechanical engineering. Where Cort Prout earned his degree in 1965 at Youngstown State University, Wes went to Ohio State University, graduating in 1991.
Jim Prout, who graduated from high school, suffered a heart attack in the early 1960s, causing Cort, who was attending Case Western Reserve University, to transfer to YSU and help out the family’s mechanical contracting business.
Even if Jim Prout had not suffered the heart attack, “It was implicit that my father would follow my grandfather and expand the business,” Wes Prout relates.
Cort Prout died of cancer in 1994. His death was “sudden,” Wes remembers. However, he had the foresight to set up a trust to ensure a smooth transition. Attorney Robert Lenga, now retired from Harrington, Hoppe & Mitchell, advised the family and made sure Cort Prout’s will was in order, Wes Prout says.
Like the McKernans at Price Heating, Wes Prout remembers how much he enjoyed playing in the office and on the shop floor. “I enjoyed all the machinery and pipes and fittings.” And he remembers the smiles on the faces of his father and grandfather when they saw how much fun he was having.
When Cort Prout took ill, Wes, a couple of years out of college, did not need to step in because “Dad had good people in place” to act in his stead. “Everyone pulled together.”
Of the brief time after graduation, Wes says, “I was his shadow for a couple of years. I helped with the bid estimates and went over the accounts payable and accounts receivable with him. Basically, we were inseparable.”
And he discovered the engineering side of the company “is easier than running the business side.”
Helping him on the business side is Schroedel Scullin & Bestic –“They’re a great accounting firm” – and “my brother-in-law is second-in-command. He’s been here as long as I have.”
Wes Prout has key-man insurance on his brother-in-law.
Another aspect of the success Prout Boiler has enjoyed is customer loyalty. “Many of them date back to my grandfather,” Wes Prout says.
PICTURED ABOVE: Paul Johnson Jr. holds a portrait of his grandfather in front of a portrait of his father.
EDITOR'S NOTE: This story was first published in the October edition of The Business Journal. CLICK HERE to subscribe.
Copyright 2012 The Business Journal, Youngstown, Ohio.