I have two clients where the founders are struggling with passing the torch to the next generation.
In one case, the founder was ready to pass the torch: he had worked leading the business for close to 30 years, had brought two of his three children into the business at a relatively early age and knew what he wanted to do after he sold the business. We helped him develop his kids and did reviewed the MOU for the transfer (the legalized transfer was done by the lawyers after the fact), so this transfer went smoothly.
In the other case, we’re somewhat stuck on what one child will do after assuming the Presidency. He will run the company differently, but all the other kids agree that he should run the company, since he’s been the operating head for the last couple of years. The problem is the founder is having a hard time accepting that there might be more than one way to run his business. And one division has been somewhat neglected, but we’ve got a plan to fix it. We’ve proposed a unique stock ownership structure where at least two of the kids, and the founder, have to agree on a major decision. And it’s actually in the buy/sell that the company has to remain in Solutions Forum.
The answer, in our opinion, is to leap off the bridge, go ahead with the buy/sell and see how it works.
Nothing is irreversible.
Pass the torch!
This is actually a topic that I’m doing in a podcast for my good friend Shauna Weckerlein, The Tax Goddess, so I’m throwing it out there to see if we get some comments.
- Do you have any idea what you’re going to do after you hand off the business? IMHO, playing golf travelling and eating get old after a while.
- What or who are you going to hand off to? Do you have kids who are interested? Are they in the business? Do you have another person who’s interested? Don’t expect to make the decision on a Sunday, do the handoff on Monday and be done with it. (Entrepreneurs usually don’t think that way, anyway)
- If the kids are interested, what have you discussed with them? If you have more than one child interested, could they both, or do they, run the business in tandem? Is the business big enough to support all those who want to run it, or could it grow to support everyone? Is it clear who the lead dog is?
- What have you done to validate your children or this person’s interest in running your business? Have you done an in depth interview with them, probably offsite?
- Assuming after the answers to one and two above are positive, what are his/her plans for the business? Do they plan to run it ‘as you would have’ or do they have larger plans? For example, when I and my business partner bought my family company, I knew what the weaknesses were, and I thought we could fix them, and we was successful, but there wasn’t an organized, written down plan. And, after he bought my controlling stake, he stayed on essentially the same plan for another 15 years, so it was enduring.
- What financial arrangements are in place, or could be in place for the new manager to acquire a financial stake in the business? (In our experience, managers should have a financial stake in the company, so they have an incentive to make the business grow and prosper)
- Do you have in place a non-disclosure agreement with the prospective handoffee?
- If you have performance goals that have to be met, by the handoffee, are they spelled out?
- Is there a buy/sell arrangement that is in place, should the handoffee want to purchase the business?
- Do you need the money that you might get from a sale? When and how do you need it? Monthly payments ease the tax and cash flow burden, if not the overall tax of buying the business. BTW, whatever you hammer out with the handoffee, run it buy a tax advisor.
- What are the financial metrics that you’d like the handoffee to meet? E.g., profits, return on equity.