Peer Coaching

Barry Fries' succession plan was poked full of holes by nine other business owners. Good thing

Barry Fries knows he is in for a grilling. He gathers for a full-day meeting with nine other business owners in a midtown Manhattan conference room, and after some chat over juice, muffins, and fruit, everyone takes a seat. Each owner spends a few minutes reporting on personal and professional news. Then the group gives the floor to Fries, the stocky, blunt-spoken 60-year-old founder of B.R. Fries & Associates, a New York construction firm whose clients include Target (TGT) and Kohl's (KSS). Fries talks about his plans to transfer management and ownership to a protégé.

The group, led by Vistage International, a CEO membership organization, includes the owners of a hotel chain, a fashion accessories company, and an extermination business. Many had been around in 2003, when Fries' previous attempt to transfer ownership of his 65-employee, $85 million company fell apart after he realized his potential successor was a poor fit. This time Fries wants to get it right. He aims to cash out most of his shares over the next 10 years and reduce his stake to 15%, a move that would leave him with his goal amount.

Fries finishes, and the questions fly.

"How much do you have to leave in the business for working capital?" asks Patrick Denihan, co-CEO of New York hotel company Denihan Hospitality Group.

"The epiphany I had recently is that we need 5% of revenue," Fries answers. The group homes in on net margins, which are running about 30% below those of well-performing companies in the industry.

"This is going to come down to the numbers in your business and the balance sheet," says Kevin Rees, president of New York document translation company LanguageWorks. "It would be helpful to drill down on the financials."

After more discussion, Denihan chimes in: "In my opinion, if your revenue doesn't grow at least $100 million, you can't get your money out."

"We are planning 3%-a-year growth," Fries responds.

"That's not enough," Denihan insists.

Rees, not hiding his frustration, says: "That's why we need to find out if he can grow the business enough so money spins off to him." He walks up to a whiteboard and grabs a marker, jotting down lines for revenues, general and administrative expenses, and wages and other items. "Tell me about your balance sheet," he says, and creates a new statement with lines for debt and retained earnings.

Once the numbers are written, the discussion turns to Fries' putative successor. "How much of this discussion have you had with Peter?" asks Denihan, referring to Peter Morandi, the 33-year-old chief operating officer whom Fries hopes will replace him.

"Not in depth," Fries responds.

After another round of questions, Denihan says he is concerned that Peter doesn't know enough about running a business.

Fries acknowledges that Peter "needs a lot of nurturing, teaching, and mentoring."

Hal Byer, founder and president of Magic Exterminating in Flushing, N.Y., takes up Denihan's point. "How are you going to get Peter to be you?" he asks. "And how much confidence do you have that that will happen?"

As the session ends, Fries is subdued and worn out. "I need to take a step back and think about it all," he tells the group. "This is a very emotional conversation for me."

But when the group reconvenes a few weeks later, Fries is upbeat. He asked his CFO to take a hard look at the company's historic profitability. And Fries retained a consulting firm to help the company institute a best-practices plan and improve margins. "At the end, I'll receive my target dollar figure, and Peter will have a company that is well-financed," says Fries. As for Morandi, he has been spending more time with the CFO and clients. "There clearly has to be some kind of grooming and mentoring to go from my current position to heir apparent," says Morandi.

Rees, who had hit Fries so hard on the numbers, seems encouraged. "These steps are prudent, working on improving the business and working with Peter," he offers, and the group takes up another entrepreneur's battles.

Back to BWSmallBiz February/March 2008 Table of Contents