Fairness in a business transition doesn’t mean to treat the children taking over the business equal. It means treat them fairly. Here are some thoughts on an internal transition.
An Internal Business Transition in Nature: Cats and Kittens
How Mother Nature handles “internal” transitions in nature is similar to the passing of a small business from one generation to another.
My oldest son brought home a kitten years ago. It grew up to be a cat. Later the younger son also found a homeless kitten and brought it home. This cat and kitten proved a very valuable lesson in transition.
The kitten thought right off that it was okay to jump in and start eating whenever the food bowl came out – we’re all friends, right? Wrong. The old cat smacked the kitten across the room. Thereafter for years, the young cat stood by patiently as the old cat ate.
That was until one day when the younger cat decided not to wait any longer. He decided to eat first. He did so by smacking the old cat’s across the room. From that day forward, the old cat then sat and waited on the younger cat to eat first.
That is a transition in nature and it’s not always pretty.
And that’s exactly what an internal business transitions look like when they’re not planned. They’re not pretty. Often they tear the family apart and can guarantee that the family won’t be together during the holidays ever again.
Fairness Doesn’t mean Equal
Did your mother ever tell you “life was not fair?”
Problem is, most of the time, Mom and Dad equate“fairness” as being “equal.” It’s not.
Georgia son ran the business for 15 years after Dad left with the new wife to travel the world. Every month, the son divided up the profits and send Dad his half. The son thought it time that he secure his position and asked Dad about a transition. Dad thought about it some and came back to the son with his proposal: give the two sisters a 10% state in the business and he and the son would split the rest to be “fair.” The two sisters, one married to a doctor and the other to a lawyer, never spent much time working in the business at all.
Michigan printer dropped dead at the press leaving his wife with the business. Dad had turned the tasks of running the business over to the son ten years before and the son had done quite well; the business was flouishing. Problem was the sister who worked in the bindery, would throw tantrums and leave in the middle of the day. Mom was in a quandry. On the one hand, she needed for the business to succeed and on the other, she wanted to be “fair.” The son was paid more than the sister but the sister earned a stellar wage for a bindery worker.
Neither of these situations was fair and the businesses could have easily have failed because of it. Worse yet, these moves tore the family apart.
To be fair with the business is to give siblings “fairness of opportunity.”
The time to transition is when Mom and Dad no longer want to run the business. They shouldn’t “retire in place” and continue to depend on the children to finance them.
In short, determine the value the business and then “sell” it to one of the children, or the other, or all of them. Or to an outsider. Most often this means the parents would finance the deal and the sibling would pay them over time.
How is that fair?
Equalness of opportunity is the fair part.
Value the business and offer it to the children. Who amongst you wishes to buy? It could be one, the other or both. Take the highest offer if there’s competition among them. If parents want to be fair, then take some of the proceeds and give it to the children. But from the transition day forward, the business should belong to whichever combination of new owners step forward. Be fair with the proceeds but don’t be fair with the business.
Dr. Leon Danco, the late leading expert in family business, has said, “The founders must select, train and install the successor in their lifetime.”
I’ll address how to do that in a future edition.
Understand for now that for a family-based business to succeed through generations, a real transition must occur.
Questions and Comments
Q: You mentioned creating a panel on (transitioning). Is being on this mailing list what you meant by being on the panel? Yes, being on this list means you will get these messages as well as surveys from time to time. You’ll also be able to get your questions answered. Just hit reply and message me with your question or comment.
Comment: Last week I mentioned a business needs to earn $100,000 in order to be marketable. Earnings in a small business isn’t net income rather is in simple forms, Income before Owner’s Compensation. Formula for that is Sales – Direct Materials – Wages Paid to Others – Overhead = Income before Owner’s Compensation. We’ll go more into that later but we’re not referring to Net Income.
Thanks: I had the pleasure of addressing the 2014 Locksmith’s Owner’s Conference in Pittsburgh last week and I was pleased to find out that the things I’ve been talking about has applicability to these businesses as well. What have I been talking about? Well, specifically, the things I covered in my book, Prospering: Putting the Business to Work for You and Your Family in 5 Basic Steps. The book will be updated in the near future and republished, but if you are interested in an original copy, go to https://crouser.com/shop/prospering/ where you can get a copy for $19.95 (including regular shipping).
Noteworthy: Business Sales at All Time High in 2013 and are continuing strong in first quarter of 2014 ccording to a report in Accounting Today. Click on the link for the full story.
Commercial:Yes, we have helped many families navigate transitions. If you’d like information on how our program may help you and your family, please message me at firstname.lastname@example.org
In the meantime, here’s hoping that all your trails will be happy ones.