We’re a two-generation company, and I find that transferring ownership across generations is very confusing. It feels like as long as the seniors are alive, we in the next generation will never own the company, even though we’re now doing the majority of the heavy lifting. On top of that, the seniors represent a huge financial drain on the company. Given what they’re taking out of the business, why would they give up control?
Thoughts of the day: When transferring ownership across generations is a process. Think about what control you want, and what leverage you have to get it. Figure out how to make the senior generation whole. Make sure the next generation is ready to run the business.
Change of management in the family business
It’s best when a new generation enters the business to agree beforehand. Put details of transferring ownership across generations in writing, as to how shares will transfer. If that ship has already sailed, it makes good business sense to flush out details. Work on how to transfer shares, for what compensation, and over what period of time before you go much further.
Know that until you hold 51 percent of shares, you are subordinate to whoever does. Make sure you can live with that. Recognize that if the company does not make a profit, the difference between owning 10 percent of shares and 49 percent of shares is more about managing the business than it is about benefiting from profit distributions.
Anyone in the company can make decisions until their boss overrules them. Think about senior generation interactions. Do they overrule, or do they simply ask questions to learn how and why decisions are made? Do you and they openly disagree about the business’ future or just the tactics of how to get from here to there?
Family business succession planning
You may have more control than you think. While you may feel second-guessed, keep in mind that the one thing the senior generation probably doesn’t want to do is come back to work full time. If the seniors’ compensation is jeopardizing the future of the business, show them in black and white what’s going on. Ask for their help in reining in spending.
Find out what the company is worth. There are several valuation calculations that you’ll want to look at including asset sale, equity sale, and enterprise value, comparing market approach, income approach, and rules of thumb. If you’re not sure what these terms mean, get someone who is familiar with valuing companies to explain.
Hopefully, the senior generation did a good job of saving for retirement. If the company had ups and downs along the way, the seniors may have put money back into the business to keep it going. That may have eaten into their retirement funds, which is and isn’t your problem.
Be guided by the needs of the business, not emotional considerations
However, if you’re concerned that there won’t be enough money to go around, stretch out payments. Get funding from the bank. Self-fund with shares in escrow. Implement a consulting contract. Often deal breakers are items such as health insurance, cell phones, retirement funding, and car payments. Spend time figuring out what’s important to the senior generation. Above all, check with your accounting and legal advisors to be sure the final deal is appropriate and legal.
Begin working on the generational transition long before it’s time to act. For example, divide responsibility as the company grows. Use training and regular performance reviews to help people grow. In conclusion, demonstrate that next-generation managers are succeeding through checklists, goals, and tracking reports. Prioritize growth, profitability, and reserve funds.
Looking for a good book? Try “Engaged Ownership: A Guide for Owners of Family Businesses” by Amelia Renkert-Thomas, Kenneth McCracken.
Andi Gray is President of Strategy Leaders Inc., a business consulting firm that teaches companies how to double revenue and triple profits in repetitive growth cycles.
Have a question for Ask Andi? Wondering how Strategy Leaders can help your business? Call or email for a free consultation & diagnostics: 877-238-3535, AskAndi@StrategyLeaders.com.
