BY ANDI GRAY
Dilemma: We’re a two-generation company, and I find that ownership is confusing. It feels like as long as the seniors are here, those of us in the next generation will never take the reins, even though we’re doing most of the heavy lifting. On top of that, the seniors represent a huge financial drain proportional to what they contribute. Given what they’re taking out of the business, why won’t they give up control for the company’s sake?
Thoughts of the Day: Think about what control you want, and what leverage you have to get it. Figure out how to make the senior generation fully involved. Make sure the next generation is ready to run the business.
It’s best when a new generation enters the business to agree beforehand, in writing, as to how shares will transfer. If that ship has already sailed, then work on how to transfer shares, for what compensation, and over what period of time before you go too much further.
Know that until you hold 51 percent of shares, you are subordinate to whoever does. Make sure you can live with that. Recognize that if the company does not make a profit, the difference between owing 10 percent of shares and 49 percent of shares is more about managing the business than it is about benefiting from profit distributions.
Anyone in the company can make decisions, until their boss overrules them. Think about your interactions with the senior generation. Do they overrule, or do they simply ask questions to learn how and why decisions are made? Do you all openly disagree about the business’ future, or just the tactics of how to get from here to there?
You could have more control than you think. While you may feel second-guessed, keep in mind that the one thing the senior generation probably doesn’t want to do is come back to work full time. If the seniors’ compensation is jeopardizing the future of the business, show them in black and white what’s going on. Ask for their help in reining in spending.
Find out what the company is truly worth. There are several valuation calculations that you’ll want to look at, including asset sale, equity sale and enterprise value, comparing market approach, income approach, and rules of thumb. If you’re not sure what these terms mean, look for a mentor or consultant who is familiar with valuing companies and can offer an explanation.
Hopefully, the senior generation did a good job of saving for retirement. If the company had ups and downs along the way, the seniors may have put money back into the business to keep it going. That may have eaten into their retirement funds, which is—and isn’t—your problem.
If you’re concerned that there won’t be enough money to go around, stretch out payments. Get funding from the bank. Self-fund with shares in escrow. Implement a consulting contract. Deal breakers are often items such as health insurance, cellphones, retirement funding, and car payments. Dedicate some time to figuring out what’s important to the senior generation. Check with your accounting and legal advisors to be sure the final deal is appropriate and legal.
Begin working on the generational transition long before it’s time to act. Divide responsibility as the company grows. Use training and regular performance reviews to help people grow. Demonstrate that next-generation managers are succeeding through checklists, goals, and tracking reports. Prioritize growth, profitability, and reserve funds. [CD0617]
Looking for a good book? Try “Engaged Ownership: A Guide for Owners of Family Businesses” by Amelia Renkert-Thomas and Kenneth McCracken.
Andi Gray is the Founder of the business consulting firm Strategy Leaders. She can be reached at firstname.lastname@example.org.