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Family business succession planning: How Clover Stornetta made it to a third generation

BUSINESS SUCCESSION PLAN ESSENTIAL TO SUSTAINING GENERATIONS OF OWNERSHIP

NORTH BAY – Clover Stornetta Farms Inc. has beaten great odds against making it to the third generation of family ownership, in no small part because its founders avoided common pitfalls in business succession.

Dan Benedetti, chairman of the Petaluma-based dairy processor, vividly remembers the momentous lunch in 1987 when his iconic father, Gene, unexpectedly announced his retirement and an unusual new split leadership structure with Dan Benedetti as president and Gary Imm, also one of the five original partners, as CEO.

"His true strength was to back away and leave," recalled Dan Benedetti. "He said, 'I'll be here if you need me.'"

Clover Stornetta's transition from Gene Benedetti to Dan Benedetti and Gary Imm and in the past 18 months to Marcus Benedetti and Kevin Imm was part of a recent BUSINESS JOURNAL seminar on succession planning.

Panelists addressing the session – "Family Business Succession Planning: What are you afraid of?" – were Jim Andersen of Andersen & Company LLP; attorneys Mark Gladden of Passalacqua, Mazzoni, Gladden, Lopez and Maraviglia LLP in Healdsburg and Steve Goldberg of Friedemann Goldberg in Santa Rosa; Steve Herron of Exchange Bank in Santa Rosa; and Judy Barber of Family Money Consultants LLC in San Francisco.

Panelists told more than 100 attendees, including many owners of the region's family businesses, that any number of pitfalls can sink a family business succession, including failure to properly value a company, taxes, management readiness and family differences.

Mr. Andersen suggested "parallel tracking" of succession and exit planning processes, such as business valuation and creation of buy-sell agreements, to prepare family members for the transition so they are less likely to become dissenting shareholders.

"Most of the dissenting-shareholder actions were with family members who were inappropriately communicated with and didn't understand the processes," he said.

Generational differences on how a company is run and where it will head often scuttle business successions, according to Ms. Barber. She noted that less than a quarter of family companies pass to the second generation and only 8 percent make it to the third.

"There has to be a leap of faith and letting go, or succession planning won't happen," she said.

While Gene Benedetti's sink-or-swim approach to succession spoke to his faith in the next generation, failure to formally plan and communicate that plan to family members inside and outside the company is another major transitional pitfall, according to the panelists.

"You need to separate the grief of death from succession planning so the family is not dealing with both at once and so that the business can continue," Ms. Barber said.

That planning should also include bankers, according to Mr. Herron, senior vice president and relationship manager for Exchange Bank in Santa Rosa.

"The owner getting out may not want to guarantee loans for the business any more, and that could be bad for the banker because the new owner may not have as high of a net worth," he said.

A bank's worries can be eased with some method of phasing out fiscal responsibility, such subordinated debt, according to Mr. Herron.

Yet, the bank will want to know other details about the transition:

* What's the strategy for retaining top management not related to the family?

* What is the formula for establishing up-to-date business value in the buy-sell agreement? Such a mechanism could be a multiple of pretax earnings. "If a business does not cash flow, it may not be worth any more than its assets," Mr. Andersen said.

That valuation needs to represent fair-market value to pass IRS muster for interfamilial succession, he noted.

* What are the methods for redeeming shares when an owner or partner leaves, dies or is incapacitated? Gene Benedetti started selling his shares to his president upon retirement at age 75, so the company didn't have to come up with a lot of cash to pay the estate when the father died in January 2006 at age 86, according to Dan Benedetti.

However, the company did have to obtain a loan for the shares of John Markusen, a founding partner who died at age 80 in December 2006. The corporate bylaws now call for payments for redemption of stock to be made over 10 years.

* What industry-related training and experience do the new owners have? Dan Benedetti's promotion was abrupt to him, but he had started in sales and other aspects of the business first on a milk route with Petaluma Cooperative Creamery, for which his father was general manager, and then as a partner in Clover Stornetta when it was established in 1977.

For two of his children, Marcus Benedetti and Joanie Benedetti, who handles public relations and marketing, the training has been a combination of formal schooling and on-the-job experience.

Today, Clover Stornetta is developing a training program for grooming future leaders of the company, including cross-training in different roles.

"There is continuous mentoring going on," Dan Benedetti said. "That is the strength of a family business."

 

The story behind Clo the cow

Though the public has come up with most of the 8,000 or so Clo-sly related puns that grace Clover Stornetta Farms billboard signs, the Clo mascot herself was another innovation of Gene Benedetti.

When he was general manager of Petaluma Cooperative Creamery, Mr. Benedetti told the group's board he wanted an icon for the dairy different from anything else in the industry. Something light, fresh, fun.

In the late 1960s, Santa Rosa-based advertising wizard Lee Levinger presented him with an campaign idea for punny billboards plastered with a cartoon cow named Clo.

"That doesn't even look like a cow," Chairman Dan Benedetti recalled his father "Gino" telling Mr. Levinger after seeing the sketch. "I tell you, the dairymen will go crazy when they see that cow. The cow has got teeth, it's ugly, it scares children."

Gene Benedetti accurately predicted the board's reaction, but he convinced them to let him try the ad on one billboard along Highway 101. If the public liked it, she would stay. If it flopped, she would go.

The public voted. And after six months of being "out standing in her field" on that first sign, Clo the cartoon cow clinched her claim as a Clover keeper.