Providing Enough For Yourself First…And Then Some
Caring For “Number One” In Your Family Business
Let me share with you a story about a family business located in Seattle that specializes in wild Alaskan seafood. The founder, who we will call Gerald, brought his son into the business at age 18.
In those days, large amounts of seafood was “brokered” between processing plants and distributors. If you needed 10,000 pounds of salmon or pike for your grocery store, you bought it through a distributor. Gerald’s business was to find the best price for the grocery stores and act as the middleman to the distributors and processing plants. His son accompanied him to trade shows where they built relationships with new customers they could provide seafood too.
When the son matured into his forties, the father worked out a “buy/sell” agreement for his son to gradually assume complete ownership. Because of the purchase price, the father was able to retire very comfortably. He kept a great relationship with his son throughout his life, including watching him grow the business by purchasing an entire processing plant in Alaska.
Eventually, that son had two daughters – neither of whom wanted to work in the business. So he sold off the entire operation and retired on top of a multimillion dollar fortune. You talk about an ideal family business journey! Could it be possible for you? Could you look after both yourself and generations to come?
Click here for a FREE Business Transition Assessment and a 30 minute virtual review ($299 Value). Make the Rest of Your Life the Best of Your Life.
Why Is taking care of #1 Important?
Let’s cover the obvious – once you let go of the reins of your business, it belongs to someone else. Even if that “someone else” is your own child, they are now free to make decisions with what is now their business that may directly conflict with your hopes or wishes.
This can include any “gentleman’s agreement” you might have with your children to be generous with the business’ income or distributions. If you negotiated a buy-sell agreement with your children, the agreement may have an option for them to pay you for the company from future profits and this expected future income will help you continue to enjoy a comfortable lifestyle on the financial strength of your business. If, however, your children make poor financial and business decisions running the family business, you run the risk of losing it. You and your spouse may not like the idea of a significant drop in lifestyle as a result.
At the other end of the spectrum, hanging onto your business to maintain the income you enjoy is also risky. Aging is a fact of life. Your health and energy will decline at some point. The COVID-19 Pandemic is a great example of unexpected changes. Markets change, recessions happen, customers come and go. Nothing lasts forever, no matter how good your character or how skilled you are. If you’re still dependent on income from your business, you’re asking for trouble.
You might even enjoy and find fulfillment in your work, as I do…and still, you need to find a way to not be dependent on that income. There has to be a middle ground between giving your business away without a peep and fighting for dear life to hang onto it.
Amusingly enough, we can learn the right move to make in this instance by studying how law firms traditionally work.
Young lawyers who pass the bar and get hired in their first roles are hungry for case work. They take many kinds of cases. In the process, they figure out what they enjoy, what they’re good at doing, and where they want to specialize. Over time they get promoted and become partners. They may form individual practices or start new firms.
But in their senior years, many lawyers who enjoy the work and intellectual conversation with other lawyers take on a role called “Of Counsel.” This is sort of like being a president emeritus, or a senior advisor. They don’t do much case work, and rarely argue in court. Their main role is to mentor and advise younger lawyers.
Of Counsel lawyers rarely do their work because they need the money. They get paid, of course…but they can also take off weeks at a time to be with their children or grandchildren or go on extended vacations with their spouse.
In an ideal scenario, this is where senior family business leaders should aim to end up. It isn’t possible for everyone to do this. But if you have your children working in the business, and you have good relationships with them, you might like where this could lead. It would enable you to separate completely as an owner, but still hold influence, or be useful to the next generation.
The Tennessee Center For Family Business helps owners look out for number one in meaningful ways that help everyone involved. Click here for a FREE Business Transition Assessment and a 30 minute virtual review ($299 Value). Make the Rest of Your Life the Best of Your Life.
How Buy/Sell Agreements Create Win-Wins For Everyone
Let’s agree, you can’t come up with a random sale price for your family business, especially if the buyer is your adult son or daughter who works in it. It’s unlikely they have the capital sitting around to acquire it. You don’t want to under-sell it and put yourself in a bad position. You also don’t want to over-sell it and cripple your kids financially.
But if you’re willing to go through creating a fair, solid “buy-sell agreement,” there are some terrific advantages. To get started you have to know where you are before you can start planning where you will go.
A great place to start is with a Business Valuation. Unlike real estate or other property, it’s more difficult to place a dollar value on a business. It’s usually the result of answering a laundry list of questions that don’t come to us naturally. And they almost always reflect both money AND time:
What will you need to maintain your current lifestyle?
What is an acceptable price your buyer could reasonably agree to pay, in installments?
Who decides the value of equipment, facilities, receivables and marketability?
How do you determine the per-share value of employee-owned stock?
How should you look at the value of your business, if you decide to self-finance the purchase?
How do you stay above-board with the IRS and other tax authorities, if you “gift” parts of the business to your children?
How do you carve out funds to cover the cost of estate tax, in the event of your passing?
These questions go deep. You’ll find fragments of them in estate plans, contingency plans, leadership succession and shareholder agreements. Those are the documents and decisions a wise family business leader should make ahead of time. That’s how Gerald in Seattle created a smooth transition for his family’s seafood brokerage business.
You may be saying Greg, this seems so hard. And my answer is, “It’s never easy to make hard decisions.” That’s why most successful family business transitions are facilitated by an unbiased family business consultant. If you want to get busy engineering that kind of future legacy for your spouse, children and grandchildren, that’s our specialty at the Tennessee Center For Family Business. No use waiting!! Click here for a FREE Business Transition Assessment and a 30 minute virtual review ($299 Value). Make the Rest of Your Life the Best of Your Life. Happy New Year!!
Author