Small Business

Letting Go of Your Business


I'd like to share an e-mail I received recently, as well as my reply.

Dear Paul,

My wife and I are in our late 60s and want some free time for ourselves. We own our own business, and it's our desire to turn it over to our son and daughter, who have worked with us for 15 to 20 years. We'd like them to send us a monthly check so we can live happily ever after, but the business has to go on in order to fund retirement agreements for us.

Several years ago, I sold a prior business, and the buyers ran it into the ground. My wife is concerned that could happen again. In talking to our bankers, who have been with us for many years, they suggested a way to arrest my wife's fears about the "children" not performing. They said if we're convinced that our son and daughter are capable, hard-working, honest team players with a passion for the business, we should take a one-year leave of absence with pay.

We should let them run the business, spread their wings, and operate without us on-site. They could send us financials each month. And at the end of a year, if everyone is pleased with the results, we should enter into a formal agreement with a promissory note and retire. What do you think?

Sincerely,

George

Dear George,

Research shows that a gradual succession of leadership bodes better for business continuity than does a sudden change. What's your goal here? Is it to take a year off? Or is it to provide a way to assure your wife that all will be O.K. after the transfer of ownership in the business to your son and daughter?

If it's the latter, then there are other ways of doing this. For example, you could determine a transition period, i.e., a time frame in which the ownership and leadership of the business will be moved over to your son and daughter (typically several years). Together with your accountant, you could set performance standards which the business is expected to meet over this period. These could include goals for gross revenue, net profit, cash flow, liquidity, etc. -- basically the kinds of covenants that a banker would attach to a loan.

If the business meets those goals, your wife will have the assurance she needs. If the business doesn't perform under your son's and daughter's leadership/control, the ownership transfer plan could be altered. Both you and your wife must realize that some risk is involved. It's a question of how much you're willing to tolerate.

If your goal is to have some time off and "test" your children, your banker's plan might work. The complication occurs when and if you return. What if you see things you don't like? How will others in the company react to yet another change in management? Will it send a message to all that your children have failed? What then happens to their careers? Then what do you do about the business? Do you sell it to outsiders? And what responsibility do you still have to the business even while you are away?

You're still the owner and, as such, are still accountable. Perhaps you'd look at this as an "interim management contract" with your son and daughter and give great attention to the clarity of their roles, i.e., the limits of their decision-making authority in your absence. (Full wing-spreading while you are still the owner may not be prudent.)

Under this scenario, you could take time off, maybe take extended vacations of several months each for a few years, and leave them in charge on an interim basis, but still retain the accountability, including receiving financial reports regularly, some info monthly, some quarterly. You might even want to plan periodic scheduled phone conference calls to share information and give you a chance to offer input, both positive and critical.

Maybe you, your wife, and children could explore the options further by getting together and brainstorming the notion, starting with goals, alternative solutions with pros and cons, and looking at the best- and worst-case scenarios.

Sincerely,

PK


Steve Ballmer, Power Forward
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