During the first quarter of this year I had the great privilege of witnessing a significant accomplishment by a long time client. I started working with this family in the late 1980’s as they were contemplating exiting their business due to some feedback from their lender and general frustrations with short cash flow. They asked me to take a look at their situation and share my assessment and recommendations.
Their lender had indicated that since they were not able to “zero out” their operating loan once a year from the operating cash flow of their business, this suggested they were not making money. The lender further argued that if they were not making money they should consider exiting their business. My client was alarmed and considering an exit. I dug into the numbers and had extensive discussions with the client. My analysis indicated that in fact they were very profitable but the combination of their growth rate and the structure of their balance sheet was creating their liquidity challenges. I shared with them that they were bankable and they could likely have their choice of lenders. They shopped their financing package and were presented with financing offers from 3 different lenders. The flood of emotional relief this family experienced upon refinancing was moving.
Fast forward to the first quarter of this year, 25+ years later, to the incredible experience for me. At our annual planning meeting where we were reviewing their financial statements, this client proudly shared that as of this past December they had completely paid off all of their debt. Their personal equity position is now over “8 figures”, they have plenty of liquid assets, and their business continues to churn out positive earnings and cash flow. We spent the meeting discussing the future for them personally, for their family and for the business. The pressures they now face are around stewardship of their sizable equity position, and making choices between options – enjoyable challenges to consider. It has been my privilege to serve this family along their remarkable journey of success.
In a recent program for business owning families one participant asked what the options are when the next generation may not be interested in taking over leadership of the business – but may not want to sell either. Are there options beyond: ‘To sell or not to sell…?’
What we find is there are alternatives if the family is willing to develop themselves into different roles:
1) The family remains the owner but the management of the company is taken care of by professional non-family executives.
2) Ownership is shared between family and some key executives.
3) Part of the business is sold, creating a different and smaller company that the next generation is willing and capable of owning and managing.
4) Not all members of the next generation take over ownership but only one or a few – there is a ‘pruning of the ownership’
Most families will be confronted with two big changes if they decide not to sell but go for one of the alternatives listed above.
The first is to let go of the ‘equality’ principle. In the case of the family that raised the question, to date the brothers had equal shares and equal salaries. The reality is, in most alternatives described above this principle will have to go.
The second big change is to move from operational roles as owner to governing roles as owner.
Governing owners are active with the board, involved in strategic discussions but do not have to take on the day-to-day responsibility of managing the operations. For next generation members with their own careers outside the enterprise, this often can be an interesting alternative. For the family it means that the business is not sold. If it performs well it also means better financial returns in the long run.
Rather than only ask if it is time to sell the business – perhaps the a first question should be, is the next generations willing to prepare for a different role in the family business than their parents had? If so, continuing the family legacy can be a rewarding option for both generation as well as the business.
When family members debate whether to keep or sell their business, anger and tears often are part of the process. Differing interpretation of family’s legacy or level of wealth causes relatives to take sides against each other. Often these battles include arguments over a deceased patriarch’s or matriarch’s true intentions.
Inactive family shareholders may demand a sale for diversification, to create liquidity, to reduce risks or to have a better financial ‘return” on their capital. Those who want to keep the business may see growth opportunities which need family capital, or sometimes they may just want to preserve their own job and lifestyles. Nothing accelerates tension in a family system more than telling someone his “inheritance” is locked up in the family business. Sometimes the insiders view the outsiders’ family capital as “theirs” and resent what they see as meddling when the outsiders begin asking questions about “our investment
Fireworks will often result when the family conflict includes,poor communication and listening skills, inability to accept change or differences, unwillingness to compromise and lack of respect for others. The family needs to develop a process that focuses on the best decisions in realizing mutual objectives. This is easier said than done, since solutions require trust and commitment from both sides. A cautious and respectful process may take time but can result in favorable agreements and potential transactions that both sides view as”fair”. For most business families what’s “fair” is not the highest price but a price and terms that lead to a graceful exit. Even if you get to deposit a big check if the business is sold, some family members are likely to experience some loss of power, authority and involvement. They may need to find another challenge fast to fill the void.