The secret to a successful next generation transfer is to create a structured plan as a guide prior to the changeover. The plan needs to be specific to the business and to the family’s circumstances. Once potential trouble spots are identified, proper succession and transition plans can be put into place to overcome them.
The goal of a strategic succession plan is to ensure both the well being of your loved ones and the security of your retirement. To make the transition successful, you must develop a comprehensive business plan and complete it well in advance of the day you have targeted to begin life after business.
Sometimes it’s hard to let go.
The following is an excerpt from Doug’s book “There’s Always a Way to Sell Your Business”
I Put My Foot Down
During the mid-nineties I got a call from a chap named Grant. He had just received an advertising piece from us promoting one of our workshops. He said he wasn’t interested in selling; he wanted to buy his father’s business.
Grant was forty and had a degree in civil engineering and an MBA in marketing. He had joined his father in the family business in the early eighties when the revenues were only $3 million and there was barely enough money for each of them to live on.
In the mid-eighties Grant went back to school and got his MBA because he realized that the business needed professional management. Since that time the revenues had increased to $43 million, a direct result of his efforts.
Owen had become passive over the past five years. There had been an understanding between father and son that Grant would take over the business for a proper consideration. No one knew what “proper consideration” meant.
They had spent a lot of time and about $150,000 in professional fees trying to set up a structure. But in the end, Owen just said no.
Grant told us he had just given his father his resignation and would be moving two hundred miles away to start his own business. He went on to say that his mother was devastated because the move would mean she would seldom see him and his three young children. Owen was perplexed. He couldn’t understand why Grant was leaving a job that was now paying him $250,000 per year. Owen was also being paid that amount.
We met with Grant and Owen a week later and were warmly received. We conducted a series of meetings: one with both of them; one with Grant; one with Owen; and a fourth meeting with both of them again. It was agreed that Grant didn’t really want to leave the business and Owen didn’t want him to. What was needed was an orderly transfer of the business from father to son.
The problem seemed to be Grant’s three sisters and how they could participate in the value of the business. One sister was a nurse and two were teachers. Owen had suggested that the business be divided into five equal shares: one share to himself and his wife, one share to Grant, and one share to each of Grant’s sisters.
Grant objected. He was doing all the work – why should his sisters share equally in the profits?
We started conducting a comprehensive review of the business, which included interviews with their lawyer and accountant. Both the accountant and the lawyer noted that they had had great difficulty communicating with Owen.
We valued the business at $7.5 million. We recommended an estate freeze whereby that amount would be converted into special shares and placed in a family trust. Documents were drafted to summarize the details of this arrangement. Grant signed. Owen hesitated, saying he wanted to discuss this with his lawyer and accountant. That was fine by me because I knew that the lawyer and accountant had already given their blessing to this plan.
Several weeks went by. Even though Owen wasn’t playing an active role in the business, he still claimed he hadn’t found the time to visit either his lawyer or accountant. As I pushed him to bring this to a conclusion, I detected the probable reason for the delay.
Owen was seventy-five but looked sixty. He wasn’t ready to admit that he was getting old. I arranged to meet with him
and his wife, Sheila. It was an amicable meeting and in the end, Owen agreed to proceed. I pulled out the document and asked him to sign. Once again he refused.
It was time to play hardball.
“How are you going to operate the business without Grant?” I asked. “If Grant opens up in competition with you, what effect will that have on your business?”
I turned to Sheila and asked, “How will you feel when Grant and his family move so far away? You won’t be seeing your grandchildren very often.”
The two of them sat there, speechless.
Sheila finally turned to her husband and simply said, “It’s time, Owen. Sign the papers.”