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Transitioning Between Generations: Children Taking Over Parents’ Business

August 17, 2017 // R. Shawn McBride // No Comments »

R. Shawn McBride spoke with Kevin Wright about issues that may arise with adult children taking over their parents’ business.

R. Shawn McBride: I’m trying to help regardless of where you’re are. Does anybody have a specific question from the first point before I open? Anybody have something specific they want to say or wanted to know about?

Kevin Wright: This is more for particular friends of mine who I grew up with that are in business right now. They’re our age, and at least over the couple conversations, I’ve had with them. They run a tree farm. A successful one, at that. Both carry different sides of the business. Do very well on one side. One’s very good with doing the time stuff. One’s very upfront with the customers. They’re hitting an age where they’re starting to say “Okay, where do we go from here?” How do we sell this business to our kids? Even if they don’t want the business. Buy it. It wasn’t even anything when they started this business.

I know it wasn’t even in their thoughts, selling the account at our age, going “Okay, what do we do when we hit this stage? How can we know we’re at this certain level? Go back to our kids and say okay, we’re going to take four million. Obviously, we don’t take that much money.”

R. Shawn McBride: Sure.

Kevin: How does one go about that? When somebody realizes “Oh, okay. What do we do now?”

R. Shawn McBride: The question is multiple owners, partnership – that situation. We’ve got adult children now who may be buying into the business or transitioning between generations. A big part of the planning. But we also know that we don’t plan so far in the future because we don’t know exactly how things are going to evolve. For a situation like that, the owners that are becoming seniors are now looking at their children. You’ve got to give the children some time to develop, to see what their personalities are going to be. You can’t say “I’m going to have a kid in 2020, and they’re going to take over my business in 2047.” Let’s not do that kind of planning. Right?

We work with clients that are in these types of situations a lot. One thing we’ve seen is the generations have changed. Twenty years ago, children used to love to jump in and take over their parents’ business, right? That’s the American dream. Kids are now thinking differently. A lot of them don’t want their parents’ business. They see mom and dad working 80 hours a week, and they say “That’s not my future. I’m not working 80 hours a week,” or they’ve gotten older. Generationally, the parents are working longer, so the kids are in their 30’s, and 40’s before the business finally transitions. A lot of kids are already in a different career, maybe a different city, following their dream. We can’t always just do that.

First, we’ve got to assess where we’re at. Who are our owners, what do the children look like? Then, we often bring the partners together and have a real conversation. What does this look like? I’ve seen reactions all over the place. I had some partners where I say “Hey, would you be okay doing business with your partner’s children?” They say “Oh my god, no. That child is irresponsible; I don’t like their personality, they would be terrible with our customers.” All the way over to the other side, I’ve had clients that say “I would love to do business with them.” I have one of my clients right now who, two guys founded the business, and one of the adult children got involved in the business and became a partial owner. Now we’ve bought the father out, and the adult son. Now it’s two partners with generational change. Father left, son of the one partner is now a partner. From two 50/50 partners to two 50/50 partners of a different generation. Successfully. Through conversation they knew each other, they were happy to work together.

Firstly, you got to assess what’s realistic. You know what? We’ve got to work through some of the economic issues. Sometimes we’ve got multiple children, and not all the children want to be involved in the business. A parent might have three children, and only one or two of them want to be involved in the business. Now we’re hanging out with the issue between the brother and sisters. A lot of times it’s just being realistic. Some people take the theory that everybody should build their business to sell it. I think that’s a good way to think about it. What is the real value of this business at the time of the transition? Then bring the children in and use some type of buy-out mechanism.

A note payable. We’ve used that before, where the child buys in over time. The one or two children that decide “Yes, I want to go into my parents’ business and take over, they buy in over time. Because usually, the child doesn’t have a pile of money sitting around there to buy it. It’s just not very realistic. It might be a 10 or 15-year buy in, where you get a payment system over 15 years. The child will buy in over time. We tailor to the circumstances. We look at where they are, and we look at how to get that in there. The point of this conversation is customization. You just got to know that these things evolve in the partnership. It’s why I’m always going back to the four D’s. I always tell everybody you have to plan for disagreement. You have to know up front that you may get into a situation where you disagree. The parent and those partners may at some point disagree about bringing those children in.

Kevin: We’ve talked to one brother, and I’ve talked to the other brother, so we had that conversation about our kids. While they’re working together, there are some butting heads on some stuff already. I’m like “I don’t even own the business yet.”

R. Shawn McBride: That’s why every business, regardless of what stage you are in, if you have multiple owners, you need to have disagreement provisions in place. Because we don’t know when a disagreement is coming – and this disagreement’s coming because the children are coming into the business, potentially. Other disagreements come for unexpected reasons. I have two partners that I worked with when I represented a company. They had informed the company before they engaged me, and I got thrown in to help them raise some money. Before we got around to raising the money, the two of them started having some disagreements about lifestyle. Specifically, they’re working a lot of hours. They’re working a full-time job, and they’re running this business part-time in the evening. They got approached by their wives – both of them about the same time. Their wives said “You’re working too many hours, spend some more time with the kids and us,” to which one of the partners says “Yes honey, you’re right. I’ll be spending more time with you. I’ll stop working so hard.” The other partner said “This is my dream and my passion. I want to build this business.” What we got now is one partner’s working around the clock trying to build the business. The other partner is working even less than part time. They’re dividing profits 50/50. It was not a good situation – a lot of tension there. They didn’t build a provision in advance for disagreements. If they had come to me in the beginning when they had set this thing up, I would have had a real talk with them. We don’t know when disagreements are coming, because of different circumstances.

It can be a disagreement about a third-party offer to buy a business. It could be a disagreement about a strategic franchise. I’ve had clients disagree in terms of the marketing plan. They disagree about branding. How carefully they should use their logo and trademark, and how nice of materials they’re going to use, and stuff. Fundamental disagreements about how to run the internals of the business led to a disagreement, which led to one partner collecting all the money and paying the lease on the owned property, and leaving the other guy with not enough money to pay the rent, and triggering his personal guarantee of the rent. It happens. Disagreements may pop up at any time.

I’d rather have the partners get in a disagreement and walk away with a check that they’re not happy with, then get in a disagreement and spend all of the money. Tying up the money in a courthouse or walk away with zero. We’ve seen the businesses get absolutely destroyed by fighting over who’s right and who’s wrong, and who gets to make the decision. We start with the prime list of disagreements possible; then we go from there. Right, here we see disagreement. If they don’t have the proper documentation in place right now, they need to go in and update their documents to protect the economic value if that disagreement gets more severe. Come up with some way to break that disagreement. One will probably have to buy the other out.

Get a formula, get a valuation in there. Do that now before the disagreement gets too severe. Because if they get too locked in, they’re going to end up at the courthouse, and that business is going to go. I’ve seen it happen.

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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique.  Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer det_tiara.

 

About the Author

R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment, gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can email R. Shawn McBride or (214) 418-0258.

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Posted In: Business, Management, Risk



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