Making Businesses Last Past The Founder
It doesn’t seem so hard to imagine. A successful business should stay that way. Children of the founder usually know quite a bit about it. They have a parent’s guidance to help. There is no hurry to know everything.
What’s the problem and why do so few make it to the next generation?
- Many founders are unconscious-competents. They know many things they don’t know they know. They may have consciously known about them at one time, but habit and other attention needs have relegated them to the unconscious. Customer A does not want to be contacted in the morning. Supplier D always delivers a day late. The machine in Building C doesn’t work right if the weather is hot and humid.
There are hundreds of little details in every business. How do you move that information to your successor? A little at a time, and as you think of it. Most transitions take time. Much useful information is lost if you don’t start early.
Think through the technical information you must transfer. All kinds of information. Be especially careful transferring your contacts and their purpose.
- The founder wants to stay. That can be good or not depending on how they behave. Many founders are controlling and giving up control is very difficult. Think through the fabric of decisions in the business.
Day-to-day things. Hours of operation. Pay rates. Who signs pay cheques. Maximum cheque signing ability. Easy enough to transfer that authority.
Other consequential decisions –Pricing, bank borrowing, repair versus replace decisions, some employee decisions. Harder to transfer. Learn to discuss.
Strategic Decisions new products, expansion, new partners. Hardest of all. The one closest to the ongoing operation should make the decision. It might take five years or more before the founder trusts the successor.
If you work out some guidelines in these areas you will solve many conflicts.
- The successor wants the founder to leave. Usually a problem that doesn’t resolve very well.
- Assuming both want to work together doing the transition, the immediate issues involve transferring knowledge. Meet the customers, meet the suppliers, assess employees, understand the machinery, understand the products and their potentials, assess financial structure and why it is the way it is. Learn to use professional advisors.
- Determine how founder gets their value out. There are several areas of interest.
The fair value for the shares. Be cautious about how much the value relies on a successor? The successor should not have to buy the value they add.
Return on fair value. Usually dividends
Fair value for ongoing participation. Usually salary or pension plans.
All or some of the business. Sometimes a minority position to start with an expectation of more later or perhaps those other parts go to another successor as they become old enough to participate. That can be complicated. Do they get along and know how to share authority and duties.
- Understand how the business value fits with overall family goals. Equity amongst children is a challenge when not all the children are involved in the business.. Understand family law issues.
- Determine when the share value is paid for. Immediately or much later, like at death. Maybe something in between. Integrate with the founder’s estate plan. Tax considerations will matter.
- Determine the method. This usually involves professional help. Valuations, corporate freezes, holding companies, family trusts, pension plans, life insured purchase, are not things the most skilled business operator can work out while driving to work. People who do something all the time keep up to changes in the law and methods. You don’t get good at things you do once.
- Just do it. Many of the plans are never executed. If you know you want to do it, do not procrastinate. If something unfortunate kills the founder too soon, money will be helpful to solve problems that arise because too little information has transferred. The sooner you start and execute, the better the chance it will work.
Succession is like building a marriage. From first meeting to marriage is a time to learn about both yourself and your potential spouse. Do not avoid this step. It will be costly to recover later if you do.
Succession is about transferring information and sharing trust for a while. Probably several years.
Rushed cases fail.
Don’t wait too long. Young people have more energy and ideas. Your job is to keep them on the path of reasonable. As you grow older there is too big a tendency to stay with the status quo. Succession should be well under way before the child is 35.
Integrate with your overall estate distribution and retirement spending plan
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