Over the course of my career, I recall two businesses where the owners were aging and where needed ownership and management transitions had been delayed or ignored. These companies were not clients, and I hold no confidential information about them. My discussion today relates to obvious observations based on reviews of their websites and informal conversations. Any estimates of value are based on my (hopefully) educated guesses.
The first business was a professional services firm with potential value on the order of $25 million. It was controlled by two partners who were in their early 70s. A third owner was of similar age. There were two or three younger owners under 50 years old, but they held smaller, minority stakes. The younger owners did appear to manage the day-to-day affairs of the business, so this was a positive thing.
It was not clear that the older partners of Business One had transition plans for shifting management of key client relationships to younger professionals. This was a business that markets personal attention by account managers for all clients.
The second business was a bit smaller,and also a professional services firm. It was owned by one man who was also in his early 70s. My guesstimate is that the business should have had a potential value on the order of $15 million or a bit more. The owner was single and had no children. There were a couple of other key professionals in the business, but they held no equity. However, they did provide important intellectual capital and support significant client relationships.
There was no known ownership transition plan for Business Two, at least that had been shared with the employee group.
A Few Observations
Let me make a few general observations about these two situations.
- The owners of both businesses waited too long to begin planning for ownership transition. Their options are limited as a result.
- They created a good bit of uncertainty among their employees as result of waiting. No, I didn’t talk to the employees. I just know. Their employees could not help but wonder whether or when the owners would do something and what they might do. That’s human nature.
- Note that I mentioned “potential value” in the comments above. It will be difficult for these owners to achieve their potential values from outside investors. There could be significant questions on the part of external buyers about their ability to purchase going concerns, or real concerns about the risks involved in maintaining business at current levels.
- Unfortunately, it will likely be difficult for the owners to achieve potential value from internal transactions, as well. There may not be enough senior-level professionals to take on the leverage required for internal transactions.
- The estate plans of the two owners of Business One was in questionable situations. The estate plan of the owner of Business Two was in shambles.
While I could go on with observations and questions, you probably get the point that these three business owners had waited a long time, maybe too long, to have effective, smooth and profitable ownership transitions.
I recently met Stan Craig, author of a wonderful book, ForeTalk. Stan’s book discusses the need for parents to talk to their children about their desires and wishes at the end of their lives long before the end. It calls for much greater transparency between parents and children about important life goals. Stan’s book provides helpful thoughts to facilitate these important conversations.
Stan said he begins his talks on this topic by asking the question,”What do we all have in common?” The answer, of course, is that we will all die. He then asks, “What else do almost all of us have in common?” The answer to this question is that none of us wants to talk about the fact that we will die.
When Stan and I were talking, I commented to him: “Stan, this reminds me of many of my baby boomer business owner clients and the thousands of others out there in the world that I write for and speak to. They all have important management and ownership transitions that they have to work through, and almost none of them want to talk about it!”
The point is, there are things we need to do as parents and as business owners that may make us feel uncomfortable. Denial is real, and more than a river in Egypt!
If you are an owner with a significant stake in a successful closely held or family business, the takeaway from this post is to begin to think about, talk about, and to implement important ownership and management transitions long before you have to or are forced by circumstances to address when it may be too late.
A good place to start a conversation is with your buy-sell agreement. Take a look at my new Kindle book, Buy-Sell Agreements for Baby Boomer Business Owners. Priced at $2.99, it is a no-brainer purchase. Then make a gift of the Kindle book to your fellow owners.
Give me a call (901-685-2120) or email (email@example.com) if you’d like to talk about important ownership or management transitions that you (or you and your fellow owners) are facing.