A More Perfect Business

After spending decades building Milbank Manufacturing Co. into a $100 million manufacturer of electrical meter enclosures, Bob Waldrop faced his toughest decision ever. Now in his mid-70s, the Kansas City, Kan., entrepreneur was ready to retire. But who would take his place? Waldrop wanted to hand the reins to his son, Rob, the company's president. Rob, unfortunately, wasn't sure he wanted sole responsibility for the 1,000-employee company. "We didn't know what to do, and my dad couldn't decide," says Katrina Henke, Waldrop's daughter and executive vice president. The family decided to draft a succession plan. But a consultant suggested the family do something else first—write a "constitution." And so the four Waldrop siblings sat down and got to work.

A family-business constitution is not unlike the U.S. Constitution: a statement of principles designed to guide a company through times of crisis and change. These principles are not legally binding, but many families find that by outlining how they will treat such issues as ownership, performance, accountability, and compensation, a constitution ensures that a family business survives long after the founders have retired or passed away. The idea is not new. But with baby boomers set to retire—40% of family-owned businesses will change leadership within the next five years, according to the Raymond Family Business Institute—such documents will prove more valuable than ever.

Drafting a constitution is no easy task. The Waldrops toiled for 18 months, battling over such provisions as how much education and outside work experience a family member needed to have before becoming a manager. But that's part of the value of drafting a constitution. "The process is almost as important as the document," says Bill Chapman, the Kansas City consultant who worked with the Waldrops. The family emerged with 20 pages of rules to govern everything from succession to the board of directors.

Such a document could have helped Randall Clifford, chairman of Ventura Transfer Co., stave off a full-blown civil war after his father died in 1994. First, his stepmother sued Clifford and his three brothers for an interest in the business, the oldest trucking company in California. Then, the four Clifford siblings began battling over who would control the company. Finally, after a two-and-a-half-year legal battle, the Cliffords convened a "family council" to draft a constitution with the help of a consultant. The ensuing document carefully defines the requirements for the next generation—stipulating, for example, that only family members who reach a management position can be owners. "The constitution and the council helped us put things back together," says Clifford. The family has yet to determine how ownership will be transferred. But that's okay: Just like the U.S. Constitution, it's important to treat a family-business constitution as a living, breathing document that can be amended and updated.

Drafting a constitution can cost anywhere from $5,000 to more than $100,000 in consultant's fees. (You can go it alone, but you'll need a referee for the inevitable interfamilial squabbling.) "It is a very small price to establish good policy, guiding principles, and spell out the rights and responsibilities of all involved, " says Ira Bryck, director of the Family Business Center at the University of Massachusetts. Indeed, after Bob Waldrop passed away last fall, Henke and her brother became co-CEOs of Milbank Manufacturing. "It made the transition much easier," Henke says, "just knowing we had Dad's seal of approval."