Portraits of the Family Business: Succession is Sweet at Artisan Dental Laboratory
Posted Apr 28, 2011, Published 2005-10-01
In the rush to retirement, many business owners underestimate the need to properly groom their successors and, instead, simply hand over the keys to the operation. In fact, only one-third of family-owned businesses in all industries survive the transition to the second generation.* Artisan Dental Laboratory in Portland, Oregon, will be one of them, thanks to the time and effort Karl Koch took to properly train and mentor his son, Justan.
Justan Koch had wanted to work at his father's laboratory since he was five years old. "I just enjoyed being at the lab, hanging out with the technicians and spending time with my father," says Justan, who even fondly recalls being on hand for the annual lab cleanup day. "We had lots of fun and initially that was the draw. But as I got older, the concept of working in the family business became really exciting to me."
There was just one snag: with five children between them, Karl and his then-partner, Luciano Monetti, had agreed it was best not to bring any family into the business. Then, in 1996, when Monetti retired, everything changed. Although at the time Karl had no specific plans for a succession, he did have an eye on his own retirement and offered his son a job.
When Justan accepted, Karl knew he was serious about the commitment: he gave up plans to move to Hawaii with his then-girlfriend. "At the time, it was the biggest decision of my life," he says. "I was at a fork in the road: follow the love of my life at the time or become part of the company I'd always wanted to work in. Ultimately, my desire to become part of the lab won out."
So in 1997, with Karl insisting that he learn the business from the ground up, 26-year-old Justan came aboard in the shipping and receiving department; at first, he didn't even have a title. Even though he was the boss's son, he was still low man on the totem pole and the other employees made him earn his stripes. "They tested me daily by putting the wrong models in the case pans to see if I would catch the errors," recalls Justan with a laugh.
After a year, Justan became the office manager so he could learn at the "nerve center" of the 90-person laboratory. "The best way to learn what's important to our business is to be right there on the firing line with customers and staff on a daily basis," says Karl. "He learned what worked and what didn't, and about how to work with the managers."
While he learned volumes, Justan admits it was also a very difficult time. "I was put in control of the lab's workflow, but I was still the boss's kid. I had to work with managers who had been there over 13 years and there was definitely a lot of resistance to my ideas." For instance, when Justan noticed there was a problem with cases being late without the managers' knowledge, he incorporated a new system in which managers simply received a daily printout of cases that were due the following day. "There was a lot of hesitation to it at first, but after six months, they saw how things had improved and got on board."
Three years later, Karl began transitioning Justan into a newly created position--vice president--with the goal of going part-time in about five years. Justan moved into the office next to his father's and began to learn about the administrative end of the business, including finances, personnel management, purchasing and maintenance issues.
But before he actually handed over the reigns of the business, Karl made a move that changed the course of the succession. He brought in an objective third party--a career counseling company--to help assess Justan's ability to run the laboratory. "I wasn't just going to give him the job because he was my son," says Karl. "I wanted to be sure he'd do a job that was satisfactory to me, and I needed to do everything I could to make it successful for all of us."
After days of extensive questionnaires and a comprehensive two-hour interview, the company presented its findings, and it was not the news Karl wanted to hear. The consultants felt that with just four years of laboratory experience, Justan was not yet ready to acquire complete control of the operation.
"They felt that Justan's style was not as conducive to running the lab as mine was. I'm a people person and he's much more analytical. They worried that he might lose sight of the laboratory-dentist relationship and told me that, before I retired, I needed to help him better develop those skills," says Karl. "This was a shock to me. I realized that my succession was not going to be quite what I thought it would be; I couldn't just walk away. At the same time, if I hadn't known, I would've just handed the company over not realizing that part of it wouldn't be taken care of. It could've been disastrous."
It was time for an alternative plan. Because he feared shaking Justan's confidence, Karl decided not to tell him what the consultants had said. Then, determined to make the succession work, he set out to better prepare him for the responsibility of running the business. "I realized that he needed more experience than I could give him on my own. He needed more concrete tools and resources to ensure his success," says Karl.
Here are the tools he implemented:
A personal coach. For two hours each week, Justan began meeting with a personal coach to develop his management style and hone his communication skills. The coach used situational coaching techniques--and even role playing--using real laboratory issues, like Justan's communication problems with some of the managers. "I was at a crossroads. I asked myself, 'Do I really want to work with people who are going to fight me every inch of the way?' Working with a coach made me learn how I could better communicate and how to work through problems, especially in difficult situations," says Justan.
Today, the coaching continues but is more business related. For instance, Justan and his coach set various goals at the beginning of the year, create timelines, then meet regularly to talk through any issues or problems that arise. Although the service costs $200 per hour, Karl says the investment has paid off. "I've seen personal growth I hadn't expected to see for years. He's relationships with other people and learned how to independently handle problems that arise when I'm away," says Karl.
Management support. Karl formed a day-to-day management team consisting of Justan and two key managers. The team was responsible for making key decisions as Karl began to take more time off and, when Karl returned to the lab, the four would sit down together to analyze their choices.
An advisory board. They formed a seven-person board consisting of two accountants (the lab's staff accountant and an outside CPA), a dental industry consultant, a management consultant, a local entrepreneur, as well as Justan and Karl. The board meets for two hours every eight to 10 weeks to review financial statements, talk about ongoing projects, discuss potential issues and, most importantly, put Justan in the hot seat. "He gets asked the tough questions, like 'Why is your labor figure up?' and we hold him accountable for the answers," says Karl.
Access to external resources. Artisan joined TEREC, an alliance of full service laboratories whose members share business and technical information as well as investigate and develop current and emerging technologies. "Joining TEREC gives me the ability to actively stay abreast of new products and techniques and I'm much more on top of what's happening in the industry," says Justan.
Justan gradually assumed Karl's duties and, in January 2003, was named president of the laboratory. "We made the transition both mentally and physically," says Karl, who now works part-time. "I gave him my office and my parking spot--everything a president should have so everyone knows he's the man at the top. It was a big step for both of us."
Karl worked with an attorney and CPA to set up a plan for the formal transfer of ownership that works well for both him and Justan, considering both taxes and payment plans. The price was set based on a formal business evaluation done in 2004; the stock transfer will be complete by the time Karl formally retires in 2012.
So what's it like loosening your grip on a company you've nurtured and grown for the past 30 years? "In some ways it's a lot harder than I anticipated," admits Karl. "For two weeks I work really hard full time, then I have two weeks off and when I get back, I have to catch up. It's not quite what I had in mind, but it's working, and I haven't found anything that works better."
For Justan, having access to his dad's expertise isn't something he's ready to give up. "We don't always agree on certain issues and, in these cases, he usually wins the disagreements," laughs Justan. "But he definitely has a positive influence on the company and I like to tap into that. Sharing success with him has been quite wonderful."
*According to BDO Dunwoody LLP Chartered Accountants and Advisors
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