- Only 12-15% of businesses transfer to the third generation
- 30% of businesses survive to the second generation
- 65% of transitions to the second-generation fail
- 90% of transitions to the third-generation fail
Recently the Wall Street Journal had a column on this topic and from that column and other sources I’d like to discuss the following points.
- Make sure they are ready. Do they have the skills? Don’t be like one 80 plus-year-old owner I met who told me his almost 50-year-old son, “wasn’t mature enough yet” to run the business. The same son who drove all of their sales.
- Are you ready? There are too many instances of mom or dad not willing to give up control (it’s still “their business”).
- Have an agreement. Let’s say it’s your business pre-nuptial. Get all the issues on the table and memorialized in writing.
- The most important issue is “who’s in charge.” A tough one but it has to be dealt with.
- Consider buying out family members who aren’t interested in being involved with the business. Don’t have them hanging around pestering about a distribution when the operators want to reinvest for growth.
- The above is important and can be summarized with the word, “Conflict,” because there will be some.
Realize a family transition may not be best. The kids have different interests and goals. Ask yourself if transitioning the business will create more family issues than it’s worth (again, see above). Perhaps it’s best to take the money now by selling to a good operator who will grow the business and preserve the legacy.
This whole issue reminds me of a long article I read a few years ago about the conflicts that arise when there’s a family cabin passing to the next generation. Those who love the outdoors want it, those who don’t say sell it. Some want it fancy while others want it rustic. Repairs and maintenance are affordable to some but not others. As with a cabin, maybe the best answer is to sell it, distribute the money, and move on.
There are three things a business with the possibility of a family transition must do.
1. Plan it by getting all involved well in advance.
2. Make the tough decisions now.
3. Get the proper advice from a transition and/or buy-sell advisor, attorney, and accountant.
On Saturday, January 9, 2016 the front page of the Seattle Times had a banner about Ken Griffey Jr.’s election to the baseball hall of fame main story while picture and main story was about the Seahawks playoff game, and the fact star running back Marshawn Lynch decided not to play on Sunday.
These stories were even more prominent on the front page of the sports section. As always over the last 6-8 weeks the Lynch story mentioned he did his injury rehab away from the team, in Oakland. And that as of Friday morning coach Pete Carroll was saying Lynch would play on Sunday.
What struck me was the difference between these two prominent athletes. Griffey was (and is) nicknamed The Kid because when playing a kids game he always appeared to be letting his inner kid show. He smiled, interacted with fans and reporters, and just came across as someone very appreciate he was able to earn a great income playing a game, i.e. having tons of fun.
All while avoiding the steroid scandals prevalent during his time. In fact, if you saw the video of him getting the hall of fame call or heard his interviews about being elected with a record percentage of votes, you realized how humbled he was by it.
Isn’t that the kind of person you want working with you or for you? Isn’t this the type of person to whom you’d like to refer business (and get referrals from)?
I’ll break his talk into three sections.
- Business decisions can create innovation. Ask what you are doing and how you’re selling it. Apple upended the music business by selling 99-cent songs.
- EXperience – ask how you can change the customer’s experience.
- Technology – who can provide the technology for you? You don’t have to do it yourself.
Third, leadership – determine what you are really good at and surround yourself with people who fill your weaknesses. Above all, leadership requires grit so you can persevere through challenges. Leadership also means stepping back and asking (yourself and your team), “If we dreamed, what would we do differently?” Then do two or three of your dreams.
“People who are wrapped up in themselves make small packages.” Benjamin Franklin
Recently I saw a long-time friend and one of the first things he said to me was, “I’ve become the person I never liked.” You see, many years ago he left the private engineering sector for a high-level government agency job (he didn’t like the business development part of being a partner in a firm).
He now goes to work everyday bored, fed up with the bureaucracy, and wondering if he should have made a change a few years ago.
Boy do I see a lot of that in my business. Business owners who love their business, don’t want to put the effort in to grow it, don’t know if they want to sell, and who are coasting. So nothing happens. It’s stagnant. But they remember it from when they worked harder and it was growing at a fast clip.
Management and executive level people change jobs on a regular basis. I’ve seen statistics saying it’s anywhere from every three to seven years. Business owners are the same type of person (as an executive), they just own the business, so it’s not as easy to pick up and leave.
At some time, no matter what the owners age, it makes sense to accelerate the pace, show growth, and go on to the next great adventure in life (they should read my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?).
For those execs who change jobs every so often, maybe it’s time to consider taking control and owning a business (as described in my other book, Buying a Business That Makes You Rich).
Life is too short to trudge through it being someone you hated a couple decades ago.
“Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.” Winston Churchill
Pete Higgins at 2nd Avenue Partners, a Venture Capital (VC) firm, has told me a few times the toughest thing about his business is telling people, “you have a good business, it’s just not a VC business.”
In other words, you’re not going to get funding because VC’s need to believe there’s a good chance the company they fund will take off, i.e. have hockey stick growth. But, it’s still a good business, which can grow, make a profit, create jobs, add value, etc.
I can think of many small business owners who read the headlines and dreamed of massive amounts of funding, only to find out what they had was a nice profitable business.
It comes down to goals and expectations. And most importantly, knowing what the other party wants.
A business buyer wants a business that is “scalable.” So when a seller tells them they’re coasting, how everybody works at a relaxed pace, or similar, the first reaction is, “the culture here is conducive to growth (and hard work).”
And owners, if you are thinking of selling, know what buyers want. While I have a long list of things (see my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?), be sure:
Your financial systems are solid and the statements accurate;
Be able to show a growth plan, not just use the word potential;
Get rid of your major dependencies, the top one often being you, the seller. Take a month long vacation. If things are in good shape when you return, your company’s value just went up.
You have a good business. That’s great because there are a lot of crappy businesses out there. Be proud of it.
“The truth stalks us like bad credit.” (Journalist) Ta-Nehisi Coates
- When someone gives me a year-to-date P&L and emphasizes the good or the bad, compared to the most recent full-year, I always ask for similar statements for prior years. There’s a little thing called seasonality.
- I get a kick out of owners who tell me business is good because there’s been a lot of orders “this week.” Usually they say that because the rest of year has been mediocre at best.
- Even sales pipelines have to be compared to other years as many companies order at the end of year (to use up budget) or at the beginning of year (to use their budget before it gets slashed).
- Projections of what a company will do over the next year based on one or two months. As in, “We made $100,000 in June and July so the next year will show $1.2 million in profit and we’ll base the price of the company on $1.2 million.” Of course, June and July are typically spikes not trends.
- To be fair to business sellers I’ll relay the following. The buyer made an offer, it didn’t fly, came back months later with a lower offer because during those months the annual run-rate was lower than the prior months. The seller made the point the company always had 9-10 okay months and always had 2-3 months with large orders, which is why they were growing at 10% or more per year for the last five years.
- Owner’s (and staffs’) attitude
A good marketing person will tell you, it’s not about features, it’s about benefits. So in this case, it’s not about activity it’s about results. Examples from the small business world include:
- You don’t have a device with the latest titanium flange, you have a device that will save 23% on energy costs.
- Customers don’t want their taxes done for the lowest fee, they want them done so they pay the lowest amount of tax (legally) and not get flagged by the IRS.
- My clients don’t care as much about my methodology as they do about avoiding a bad deal and getting a good, sustainable, deal.
Too often we get caught up in the features of what we do. The focus should be on the results (benefits) our customers get. Understanding why they keep coming back and/or referring others to us gives us insight into what the real benefits are (versus what we perceive them to be).
In December, and besides holiday parties, shopping, and other festivities for a lot of people this means assessment, planning, and goals.
Some of the most successful people I’ve known are goal driven. Other very successful people simply do “their thing” as they know if they do what they are supposed to do success will follow.
Football teams (professional), all have the same three goals.
- All teams, and especially their fans, will tell you the ultimate goal is to win the Super Bowl.
- But before you can win the Super Bowl you have to make the playoffs (goal number two).
- And every coach will say to make the playoffs the team has to do the little things. Do what they’re taught, do them consistently, and do them correctly (goal number three and the one the players and coaches can control).
The football season is four months but only 16 games. Baseball, basketball, and hockey are six months long but have 5-10 times more games. There’s a lot more room for error when you play 80-160 games.
These latter sports are like our year; we can recover from a small mistake. Every football game is like a customer relationship. Blow one game and it could mean playoffs or no playoffs, a game at home versus all games on the road. Blow an important customer relationship and it could make the difference between a bonus or no bonus, profit or loss, keeping or losing your job.
My points are:
- If you’re a goal-setting person, you need to do the things you’re supposed to do, on a daily, weekly, or monthly basis, so you can achieve your goals.
- If you’re not a goal-setting person, you need to do the things you’re supposed to do, on a daily, weekly, or monthly basis, to achieve success.
- Pay attention to the details and the big picture will come into view.