Cash In: Grow Business to Accommodate Successors

admin August 9, 2014 Comments Off on Cash In: Grow Business to Accommodate Successors

Your business has to grow substantially now if you intend to accommodate more than one successor in an internal business transition. Stated another way, if you have two offspring who are going to take over the business, the business has to be twice the size than when it just accommodated you. And here’s why.

Grow BusinessIf an owner is doing $1 million in sales and spinning off 20% Income before Owner Compensation*, then you’ll typically be a happy family. (*Yes, it can be done.)

Why? I don’t see owners doing what it takes to earn more than $200,000 a year generally. Some exceptions but one only wants so many boats, cars, houses, etc. In fact, if earning more would require more work; then we’ll often trade the extra money for spare time to enjoy the toys. We’re just in those kinds of businesses. (Millionaire Next Door by Stanley and Danko reports average millionaire earns $131,000 in 2006 – available at amazon.com).

Okay, now if you’re NOT doing $1 million and earning $200,000, the following still applies only you have to get your sales up and/or fix what’s wrong now so you can earn that amount.

So, here’s my rule of thumb: you need $1 million in sales for each prime family in the business. That way each can earn up to $200k (some settle for much less) and be fulfilled so it can be somewhat less in sales. Anyway, it’s a good rule of thumb.

Follow it and you avoid two unpleasant side effects.

Amish Effect in Business

Amish farm family starts off with fifty acres of land and makes a good living.

Then, as they age, he and the misses divide it among the two children, so each has twenty-five acres.

Their children then divide the land with their two children and each has little more than twelve acres.

Each succeeding generation makes less, complains farming isn’t what it used to be when they were growing up and everyone goes into town and gets a real job. The farm is sold and is no more. Usually this happens before it ever transfers to the third generation.

Translate this to business.

If $1 million in sales produces two hundred thousand dollars in income then Mom and Pop do well.

More commonly, the shop is doing about $500k and we’re earning $100k which is more than adequate.

Now transition to two siblings and they’re each making $50k. Trouble is brewing. That’s because in order to transition to two children, sales needs to be more like $3 million.

Huh?

That’s $1 million for each of the kids and $1 million for Mom and Pop who, in my experience, continue to take money out of the business at the same rate until a transition actually occurs.

So, we need growth in expectation of a transition.

Otherwise Cannibalism in Business

That’s where we pit successors against each other.

As earnings are reduced each generation in a stagnant sales growth business, cannibalism occurs.

Bickering begins among second generation owners, especially if the business is not organized around functions and accountability exists where everyone who does their job gets to keep it.

There’s usually one sibling who inspires other siblings to leave as income shrinks. Sometimes others go quietly. Sometimes there is a big fight. But go they will, for only so many can be fed from an acre of land without increasing the yield.

What’s the Remedy?

Grow the business now to accommodate more than one successor.

Show the offspring how it is done.

Organize around functions, not people (related or not).

Demand performance and hold everyone accountable, even yourself.

Sell something to someone.

Teach your offspring to fish. Don’t just feed them.

Sell the business to the next generation, don’t give it to them.

People, related or not, always do what’s in their best self-interest. Make sure it is in their best interest to succeed.

Want to Grow the Business and Transition to son/daughter or employee?

Yes, we can help even with small businesses with three-four workers.

Does the son/daughter or employee have the knowledge to “run” and “grow” a business? Is the business organized around functions, not people, so it can succeed beyond you?

This is particularly important for often an “internal” transition requires the seller to finance all or part of the sale. So, you need to assure that you will get paid in your golden years and not have to come back and run the business. The way to do that is to assure your successor is trained. Our program has helps prepare successors.

If you’d like more information on how our program could help you, please message me at tom@cprint.com

Happy Trails,

Tom Crouser

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