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Confusing business discipline with being fancy

June 14, 2019

By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader

Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.

Exiting a business is complex. It’s full of intertwined parts and pieces between the business, your personal and financial life, the lives of your employees, customers, and vendors, and so on. The weave may be tight or loose, but it is all connected. Successful transitions honor the competing elements and follow a straightforward and disciplined approach.

The transition process is daunting to some owners. So much so that it often paralyzes owners from taking any action until and they’re forced to.

On the other end of the spectrum, we see many owners oversimplify the process to a mere transaction. They leap right to calling the attorney to draft up the paperwork. More than a few owners have said, “We don’t need to overcomplicate this with a fancy process.”

It’s always interesting to me to hear that. I believe there are three drivers behind a statement like that — frugality, false familiarity, and fear.

Frugality

I totally get “frugality” in concept. Who wants to spend money they don’t need to? I can be as cheap as the next guy and not waste money on things I don’t need.

Yet, there are times when it is wise to spend. How many of us pay someone fees to manage our 401(k) or brokerage accounts? How many of us would not put money into repairs to sell our house, even if it’s only fixing that window or giving it a fresh coat of paint? We recognize that a need exists and there is value in spending the money. We will get a better outcome.

It’s the same with the largest asset in an owner’s portfolio. Just like your 401(k), your business does not magically grow and fund your retirement without someone experienced actively helping you manage the asset and pull monies out. The house needs to be strong, attractive, and viable for its next owner to enjoy it as much, if not more, than you have. You’ll bring in the experts to help you fix the foundation, spruce up the place, and stage it for sale.

Resist being pennywise and pound-foolish when it comes to preparing your company and yourself for transition. Understand the process and what success looks like for you. Carefully weigh out your needs and the value of having your team of advisors support you throughout the process.

False familiarity

You know your employees, customers, vendors, and business partners like the back of your hand. You know the players in your industry pretty darn well. You have a good sense of what makes your business successful.

There is comfort in what is familiar. However, there is danger, as well. Peril lies in the assumptions that familiarity brings along, no extra charge.

A recent situation demonstrated this in spades. A company is owned by the second generation of family members. John is involved in the business a bit, but he has transitioned all the management and operations to his four adult children, Jim, Joe, Bill, and Ann. The second generation is now nearing retirement age and discussing succession. Kathie, Ann’s millennial daughter, is a rising star in the business. According to John and Ann, Kathie is the logical future leader for the company. Kathie’s cousins, thus far, have shown no interest in being involved in the business, although some are still too young to have an opinion. An internal transition appears to be coming.

Ann is leading the charge and, along with her father, believes:

  • We all want the business to stay in the family;
  • We’ve done well financially along the way. We’re willing to make sure it’s affordable to the next generation;
  • We all agree on the value of the business and how shares should transfer to the next generation;
  • We all agree on who should qualify to be an owner in the future;
  • The owners see Kathie as the future leader;
  • Kathie wants that level of responsibility, to be an owner, and make a lifelong commitment to the company; and
  • Kathie’s performance in her current role is indicative of her competence for running the entire business at some point in the future.

Sounds great! What could go wrong?

Plenty! The stage is set for four people to have 15 different opinions. There is no plan to find out how much consensus does or doesn’t exist; how personal, financial, and business goals mesh; and whether an internal transition is even realistic.

The cure for false familiarity is a structured, transparent, straightforward and disciplined approach. Straightforward, not fancy. Jim, Joe, Bill, and Ann need to peel back their many layers of opinion and realistically assess their individual and collective readiness. It takes time, investment, and support from experienced advisors. It demands a willingness to set fear aside and challenge assumptions.

Fear

Ann was open about her fear in taking what she called a “fancy” (aka: structured and disciplined) approach: What if the process stirs up the hornets nest and:

  • We find out what the market value is for the company and it’s not what we assumed;
  • Some want to sell the company outright because they need or want the liquidity;
  • We don’t have a third-generation family member who has the competence and desire to lead the company; or
  • We discover we don’t agree.

There is a human tendency to avoid conflict to preserve the peace, whether in your family or in your business. Is it better not to know whether you have consensus up front? Is it easier and more economical to deal with disagreement when and if it comes up?

My personal bias is to know sooner than later. If we do all agree, we can be confident about our path throughout our transition. If we don’t agree, we have a chance to address it up front and create a better solution for us as individuals and as a family. Ann certainly knows her family dynamics better than I ever could. Yet, as she gives into her fear and rushes to a transaction, she may still find herself on a very slippery slope.

Every owner I talk to about transitioning his or her business wants a successful outcome. You can see it in their eyes and shining from their hearts. The challenge comes in building an understanding of the how they can make it happen. They need a process to address the personal, financial, and ongoing needs of the business and individual. Better outcomes don’t come from fancy; they come from rolling up your sleeves and doing the work — one straightforward, disciplined step at a time.

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