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Reducing the ‘Drama’ of Business Transfers

Approaches to ownership transfer vary, depending on the type of ‘exit owner’ you are.

This article is for small family business owners who are partners with or employ family members, and may be in a transition period of downsizing or eliminating their role in the organization they started. Many of the businesses Cogent Analytics partners with are small, family-owned businesses. The senior member, typically the father, started the business years ago, usually after working for someone else and deciding they can do better, with encouragement from a customer, or in the vein “It just started, and continued to grow.” Now, they are at the age and/or point they need an exit plan or detailed succession planning, and they are not sure how to go about it.

Most often they have reached out to understand the tax and legal implications and their options (gifting, dividends, buy-out, owner finance, etc.), bringing in either their own accountants and attorney, or getting a referral from others. However, the core issues- those emotional decisions- are often overlooked, or more accurately, avoided.

The first step is to identify what type of ‘exit owner’ you are. Typically, there are three types of owners and their exit strategy:
• “I’m out”— the owner who feels he has done his part in growing the business, wants to take the money and enjoy his or her life and live off the fruits of their labor. Typically, they want a lump sum of cash and complete divorce from the organization.
• “It’s my baby”— this owner has a difficult time ‘letting go’ and believes no one else is capable of growing and running the operation of the business. Often times, family members are encouraging him/her to leave, whether due to age, health, etc.
• “XX number of years to ensure it’s good, and I am done”—this owner is somewhere in the middle of the ones listed above.

There are many factors beyond the individual’s perception that influence which category they may fall in. In an article by Louis B. Barnes and Simon A. Hershon in the Harvard Business Review (link to article: bit.ly/HBRfamilybusiness), it is cited how often the spouse plays a crucial role in which succession direction the owner may take.
While the ‘I’m out’ owner is the easiest to contend with, financially, it may not be the best exit strategy, and the majority of owners fall into the other two categories. Regardless, the wise owner realizes this is an emotional time and decision, and would be best to have an outside entity to assist with ‘counseling’ them through the process, especially when there are family members involved.

Cogent Analytics

Larry Scarborough: Wise business owners see the wisdom in outside counseling to guide a company through the transfer process.

For the ‘it’s my baby’ owner, it is important to get outside counseling, or help that can provide unbiased guidance to make the best decision for succession and exit strategies. This person will provide the knowledgeable, agnostic approach to the business, and can help guide the owner through the mechanics of taxes, transfers, etc., but more importantly, through the emotional side of the business when family members are involved.

Some key elements the owner must keep in mind:
• They are ultimately the owner — they started the business, and the business can and will survive without them (while they will not).
• They will not be able to make a decision that some family member will not be upset with, but they need to have the strength of their convictions and know they made the best decision they could have for the family and the business.

For the owner who has set a hard date, the exit can be easier. However, they still need to have specific goals that should be met to provide them with confidence they can exit in the time frame agreed upon— or earlier if met. Unless a major issue has risen, the owner should be prepared to exit as planned, regardless of whether goals are met or not.

The next step for the owner or owners, is to identify ‘pet peeves’ associated with the business. As humans, we all have certain activities or entities that are dear to us, and that is true in the business. It may be quality, customer service, collections, gross profit, etc; it is up to the individual. In one specific instance I experienced, the owner who was passing the business on to his son, it was collections — he put any invoice over 30 days as a top priority and would personally get involved at that point, even with a $38 million organization. For others, it may be safety and the measurement of ‘close calls’ to recordables. This practice helps with the transition and to address these issues, providing confidence that those items are handled correctly and to the (what will be former) owner’s satisfaction.

A final commitment that should be made from the (former) owner: stay out of day-to-day operations and avoid dropping in to ‘check on things.’ This will never be a positive experience for the current or former owner.

There will always remain issues in any organization- and it is always easy to find something wrong, even for a novice. So, while the former owner may find a six-inch tear in the main sail, he may not be aware of the two-foot hole in the hull that was just addressed and fixed.

Taking an unemotional view into succession helps provide clarity and avoid the drama that can be associated with transfer of ownership. Bringing in an experienced and impartial third party will help keep the process on a clear and logical path that will help the owner navigate through challenging times.

Larry J. Scarborough is senior project director for Cogent Analytics. He has served as a management consultant to Fortune 1000 companies and small family owned business alike.
CogentAnalytics.com

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