Preparing Your Family Business For the Future

Katlyn Graham:  Hello. I’m Katlyn Graham, here with Rick McDonald, the President of US Advisory Group. Welcome, Rick.

Rick McDonald:  Good morning, Katlyn. How are you?

Katlyn:  I’m fantastic. How are you?

Rick:  Great, thank you very much.

Katlyn:  Good. You have a lot of family business owners that you help. What if someone is at that point where they need to turn their business over to someone? They’re older, they’re thinking about what to do. What do they need to consider, Rick?

Growing Older With a Business

Rick:  That’s a great question. As every business has its own lifecycle, so do we. As we get older, we need to take a look at what is our purpose, where we are going, what is important to us now. When we’re 25, 30, 40 years old, maybe starting a business and throwing a lot of money to a growth‑oriented endeavor was important.

As we’re 55, 60, 65, we’re starting to slow down a little bit. We’ve got family issues, family health issues, travel objectives, goals, whatever they may be. They’re different than they were 10, 20, 30 years ago.

The question now becomes, where are you going with the business? What is the role of the business to you, to your family? What else is going on around your family that impacts the business?

For starters, you’d have to take a look at what lifestyle is the business providing you right now? If you were no longer in the business 60 hours a week, is that lifestyle going to be supported? Will the people be able to run the business for you on your behalf when you’re not around?

If not necessarily, if they couldn’t do that, then the question is, if you sold the business, what might you get for it? What would you get for it relative to your needs? Take a look at, is the business in a position to be able to be liquefied.

If it is, would those monies, those proceeds, net of taxes, net of bank debt, net of all the different things, would those be able to provide you and your spouse the kind of lifestyle going forward you’re looking for? If it is, that’s great. That might be one solution.

Other issues are, take a look at family members. Are other family members involved in the business and will they continue to be involved if you were to exit the business itself? Key employees, are they people that would want to step up if that’s appropriate?

Overall, you need to take a look at what your next step is. If it’s an exit, if it’s succession planning, depends upon your goals and objectives, the scope of the business, its ability to be sold, other family members that may or may not want to transition to the business.

Take a look at the landscape. Who are your competitors that might buy the business? Is it a private equity firm, if it’s not employees or family members? What might it look like? How do you groom your company to provide the best exit plan you possibly can?

One of the things I always love about family businesses, particularly as we start to look at exit planning, I’ll say this to them, “Who’s the most important person in the company”? Invariably, the owner will say, “Well, I am.” You say, “OK. Terrific. The Monday after a sale and you’re no longer showing up, is that a good or bad thing for value for the company”? They’ll pause a little bit and say, “Well…”

What do we need to do to start reducing the reliance of the company on you showing up on Monday morning, because that’s all about value. If you’re going to sell the company to a successor or your family members, wherever it may be, how do we create really clear, documented, re‑creatable events so people know how to run the company in a way like you did with the experience you’ve learned over the years, in a way that’s going to let the company continue to flourish?

These are the kind of things that are vital when we start looking at exit planning if, in fact, a sale is to family members, key employees, outside competitors, or venture capital firms, or what’s in store for you.

Succession Plan and Other Family Business Considerations

Katlyn:  It sounds like a critical question is figuring out, whether your family is going to be involved or whether you need to exit and hand it over to someone else.

Rick:  There’s two dimensions here, what are you and your family, you and your spouse if that’s appropriate, what are you trying to get accomplished? What works for you? What do you need to be able to live the next chapter of your life?

If a sale of business is what needs to be done, whether it’s to family members, outsiders, or wherever it may be, that’s fine. What’s it going to take, what’s it going to generate, and how will that, then, create the cash flow and liquidity you need for living that life?

In the meantime, you need to look at your business, look at who’s important to the business, who else wants to look at the business or run the business, and how do you set the business up to successfully be transitioned over to them so that it works for everybody.

Katlyn:  Wow! There really is a list of things that you need to consider. What is that list?

Rick:  Number one is, any business owner who’s running a successful business realizes, they’re focused on running their business. They’re spending 90 percent of their time in the business, not on the business. That’s important. You obviously need to run a very profitable, operationally successful business.

That’s terrific but if you back up a little bit, and take a look at what your succession plan is, what happens if you have an uneventful, unexpected health issue? Who’s going to take over, how’s it going to be shaped and how is it going to happen? Who are the right people? If you have key employees?

One of the issues we bump into all the time is how you put proper retention agreements in place. Very often we find key employees having excess compensation. That’s not a good thing, when you look at outside businesses, outside acquirers, having to deal with people who are overpaid because it’s a relational issue. They’ve been loyal. You’ve been taking care of them.

How do you start addressing that with those people in the event of this outside buyer coming in and interviewing your key employees. When that happens, you got a bump in the road that you may or may not survive over. That happens all the time.

There’s a number of different things you need to do to. Number one, assess what is your best proposition. What’s your best exit or succession because remember, over and over I say this to people, you love your business a whole lot more than it loves you.

You’ve got to be critical and very impassionate. What is the best use and purpose of the family business for you? Going forward with the next generation, what makes sense for them? How do you groom the company to make that successful transition?

Katlyn:  Take the emotion out of it, because I’m sure you’re emotionally connected to your business.

Rick:  It is. You’ve lived with this thing. It’s part of the family. You’ve been setting most of your adult life inside this building and now you’re stepping away from it, and you’ve got to detach yourself and take a look at what are we really trying to get accomplished?

What was the purpose originally in creating the business? It was to create income. It wasn’t necessarily to create wealth. Now, you’ve been able to create income for umpteen years and very successfully. Congratulations, you’ve created wealth.

The question now is how do you capitalize on that wealth, reposition that wealth for you to go the next chapter in your life to continue the lifestyle, the travel, the entertaining, the philanthropic areas of taking care of the family members, whatever, and all of the various things that are important to you?

How do you now acknowledge that and move on that? What role does the business have in its current stage or with a liquidity event in addressing those objectives?

Katlyn:  It sounds like planning really helps a business owner. The question becomes, how can you help yourself?

Rick:  The metrics in planning are almost the easy part, Katlyn. The first part is a little soul searching. What’s the business’ role to the family? What’s important to you? Is having a lot of bricks and mortars over the left side of here being worth 90 percent of your net worth the best thing for you and for your spouse going forward?

If it’s not, how do we start doing some planning to move in a position where you’re better suited for what it is you’re trying to accomplish? That’s the real objective. That’s the real magic.

Katlyn:  It does sound like magic. Thank you very much, Rick, for explaining all of this.

Rick:  You’re very welcome. It’s my pleasure.

Photo credit: aag_photos / Foter / Creative Commons Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0)

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