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& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | SEPTEMBER 5, 2000 SMART ANSWERS Succession Strategies for a Family Business, Part One It's crucial to resolve any emotional conflicts that can arise when selling to a relative
Q: My stepmother wants to sell her half of our 20-year-old family business back to the company for $1.5 million. My father is 80 and ill with cancer. Upon his death, the company will be mine (I've been with it since 1993). We have: $1 million in liquid assets, $2 million in inventory, $200,000 in accounts payable, gross 1999 sales of $5 million, pretax net profit of $1 million, including $400,000 in salary for my father and myself. There are no outstanding loans. We have five stores and are opening one more. My father gets angry when I suggest that an appraisal should be done, since he and my stepmother set the $1.5 million figure. How do I know if this is a fair price? -- B.B., Maui, Hawaii A: You really can't know if it's fair unless you have a third party look over the company's finances, history, and potential and give you a professional valuation of its worth. Your instinct to have an appraisal done is an excellent one. Experts say the fact that your father becomes angry at this very reasonable, practical suggestion shows that there are hidden issues and conflicts in your family situation. It isn't uncommon for such dormant issues to surface when the need for business succession arises, which is why it is so important to make exit and succession plans well in advance of when they'll be needed. "A red flag goes up any time I hear the word 'stepmother,'" says Quentin Fleming, a family-business expert with Quentin Fleming & Associates in Santa Monica, Calif. "Are there some 'baggage' issues? Does the family get along? Is the stepmom fearful that the child will turn on her once dad dies and isn't there to protect her?" Unless your family brings its emotional conflicts out into the open and deals with them, they're likely to be stumbling blocks to the company's success. "You need to find a way to identify and resolve this issue before it undermines this exit strategy," Fleming says. You might try appealing to your father's basic sense of fairness. The sale price should be equitable for all parties, meaning not only you and your parents, but also the business itself. Assuming your father founded the company and built it to this stage, he may be more amenable to having it appraised if you can make him see that an unfair sales price could easily put its future -- and the employees' -- at great risk. And what if the price is actually too low, and the valuation comes in higher than expected? In that event, your stepmother would be cheated by the $1.5 million price. INTERVENTION. Does your father have a trusted adviser, such as an attorney or certified public accountant, who might see your point of view and act as an intermediary? The company's accountant or chief financial officer should be able to give you a ballpark opinion on whether or not that $1.5 million is out of line, but don't choose your company's accountant to do a full valuation, since few are trained to do them properly. Perhaps even a friend or another family member (one without a stake in the company) could intervene here, though the fact that your father is ill makes the situation more difficult and emotionally charged. If you can get your father and stepmother to agree, schedule an appointment with a family-business consultant to discuss this issue. Try to find one with expertise in succession and estate planning. Such a professional will recognize the emotional minefields inherent in this situation and be able to help you navigate them so a conclusion that will satisfy all parties can be reached. At the very least, he or she should be able to persuade your parents that a professional valuation is the sensible thing to do when there is a company and an estate of this size. Even if your father won't budge, circumstances may force his hand. Experts recommend that you contact a tax attorney and lay out this situation. It's possible that the IRS won't accept an insider transaction such as your father is proposing without a professional valuation of the company. For more information on family business and succession planning, try The Family Business Consulting Group Inc. and the Web site of Family Business Magazine, which offers an article archive, a directory of professionals who work with family businesses, and a forum where you might pose questions and glean advice from others who frequent the site. Have a question about running your business? Ask our small-business experts. Send us anail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.  By Karen E. Klein  | | |
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