Transferring your business internally can be harder than you think

  The Denver Post | BUSINESS

Gary Miller

Posted:   10/19/2014 12:01:00 AM MDT

Gary Miller is founder and chief executive of GEM Strategy Management, Inc.

After growing a commercial electrical contracting company that he bought from his father 38 years earlier, Bob thought he and his wife, Charlene, could transfer the business to their two sons and happily live the remainder of their lives.

But like 70 percent of family businesses trying to transfer on to the next generation, Bob and Charlene’s company did not make it into the hands of their children. Companies being handed to a third generation have even worse odds, with only about 3 percent surviving.

Like Bob and Charlene, most families just assume their business will easily pass from one generation to the next — and continue to thrive — without any planning or forethought.

Unfortunately, this was not going to be the case for Bob and Charlene. Bob had been feeling a little under the weather, and Charlene urged him to go the doctor. The doctor’s report was not good: stage 3 prostate cancer that needed immediate treatment.

Bob had terrible reactions to treatments and was unable to work. Charlene started going to the business to help and both sons tried to pick up the extra workload from their dad, but it was very difficult.

Bob was the only licensed electrical engineer in the company. The sons could not sign off on any of the jobs. They would visit with Bob after hours — when he was feeling up to it — and go over the jobs so he could approve them, but it was becoming more difficult as each week passed.

When the vendors heard Bob was ill, they became concerned and were reluctant to keep extending credit to the business under their normal terms.

The town’s general contractors, who were the company’s largest customers, were also concerned since Bob usually oversaw the crews.

They knew the sons well and felt they were well qualified, but they thought they did not have the same capabilities as their dad.

Bob had never given his sons much responsibility in actually running the company — he thought there was plenty of time for that.

Charlene grew concerned about cash flow and took a second mortgage on the home they had recently built to get some additional working capital to keep the business afloat until Bob recovered.

You may have guessed the rest of this story. Bob passed away within a year. The business closed. Charlene had to sell their home to pay off the mortgages and moved in with family. Their sons went to work for their competitors at a fraction of their previous salaries. Even Bob’s life insurance proceeds were lost since the beneficiary was the company and the money went to satisfy creditors.

This disastrous ending could have been avoided if Bob had properly planned the business transfer. Before it became critical, Bob needed to:

  • Reduce the business dependence on him by empowering and allowing his sons to run the business.
  • Put in place personal and business contingencies, including pushing his sons toward professional licensing, and developing a business line of credit and a durable power of attorney assigned to provide for someone to take care of the day-to-day operations in case of serious illness as Bob experienced.
  • Establish a succession plan and facilitate critical contractor business relationships with his sons.
  • Create a buy/sell agreement satisfactory to all.
  • Hire a seasoned transaction team to develop a comprehensive transition plan, including a law firm for structuring the transition, a tax-advisory firm for minimizing taxes, and a wealth-preservation firm to protect the income and the necessary insurance benefits for Charlene after the sale is complete.

While the implementation of the points above would have made a dramatic difference in the outcome of Bob and Charlene’s company, a complete comprehensive plan could have provided them much more than avoiding this sad outcome.

It could have assured them the business would provide them enough funds to retire in comfort and that their sons would have a business they could one day sell or turn over to their children and fund their own retirement.

Every business situation is different and has its own complexities. Events happen without warning — including divorce, death, loss of a key employee, loss of a major account, loss of a partner, terminal illness — and can dramatically change an assumed outcome.

Bob’s family experienced a catastrophe. Even if you don’t plan on transitioning away from your business for years, having a comprehensive plan in place gives you the peace of mind knowing that your business, your future and your family are secure.

Gary Miller (gmiller@gemstrategymanagement.com)  founder and CEO of GEM Strategy Management Inc., a management consulting firm focusing on strategic business planning, growth capital for expansion, mergers and acquisitions, business transitions, value creation and exit strategies for middle-market company owners. Go to www.gemstrategymanagement.com or call 970.390.4441

 

 

9 thoughts on "Transferring your business internally can be harder than you think"

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