Rugg Lumber: Stewardship of a 5-Generation Family Business
by Shel Horowitz
Family businesses that survive the transition to a second generation are rare enough, and those that successfully repeat this feat are rarer still. So when Rugg Manufacturing Co.'s president, Mike Fritz, told the Family Business Center how the 153-year-old business has flourished into a fifth generation, the audience was all ears. "One of the things that has driven us is I don't want to be the one to screw it up after 153 years," he joked.
Fritz, a Rugg son-in-law, joined the company in 1972--a time when members of not only the fourth, but also the third generation were still involved. Yet it was still a seat-of-the-pants business; very little strategic planning had been done. "When I talked to my father-in-law, he said, 'I don't need a budget, I don't need a computer. I know how much things cost, I know when we'll need more'" of a particular product. Company executives were used to thinking of the business equity as their retirement fund.
But counting on business assets proved dangerous in 1987, when the building industry entered a four year slump. "We had a buy-sell agreement that relied on the company always making money. We had to cope with putting out 40% of the net worth of the company to fund (the previous generation's) retirement."
This financial shock forced the company to dump its old retirement strategy and come up with a new paradigm: stewardship. "We could not rely on the net worth of the company on the day we retire to fund our retirement. That leap of faith has really and truly empowered our business to make decisions in a business-like way.
"If I were still looking at the company as my retirement fund and I'm 64, and it would be a really good decision to buy another lumber yard, I might say, 'no I don't want to do that because I'm afraid it's going to cut into my pot.'" Getting away from that kind of attitude "liberated us and empowered us. I can't say if it's the philosophy or the fact that we gave ourselves a goal of transferring the business from the 4th generation to the rest of the 5th and the 6th generation. It substantially changed the whole outlook. We no longer make decisions on how they will affect our retirement."
Rugg's solution: a complete restructuring of the business, including a rapid transition to active employee involvement based on "trust, honesty, and communication." The company instituted sophisticated computing and accounting, restructured two divisions--changing one from an income drain to a 6-figure profit center--changed banks, let attrition reduce the workforce by a third--and grew the business 30% in seven years. "We've added profit sharing, benefits--and yes, my retirement is taken care of. We pay 90% of health insurance, and we still keep our operating cost way below the national average (under 20%, versus industry averages of 23-24%). We've added a couple of things in terms of team-building.
"We are in process of instituting a gain-sharing plan. We're educating employees in an "open book" operating method; the employees know every number except owner compensation. We open our books to our employees and say, this is what it costs. So they can understand the impact of their actions on the bottom line. Instead of just us, the managers, talking about stewardship, they can begin to understand that if they're businesslike, they will gain and reap the benefit.
Our philosophy is that we'll (pass on the business to subsequent generations) more easily if all 83 employees see themselves as stakeholders. It has allowed us to take these kinds of risks. It really is a change in mindset to stop worrying about retirement and start worrying about the performance of the business. If you do what is necessary to make the business more profitable, your retirement will be taken care of."
And you won't have to worry about collapsing a five generation business.