Tuesday, December 15, 2009

Working for the "Family"

A couple of recent consulting jobs reminded me of an on-going problem I have observed in this industry - family members, typically second generation, working and managing the businesses (for parents and/or parent-in-laws) with no written agreements as to how, if ever, ownership of the business will be transferred or sold to the next generation.

A classic case, repeated many times, is the best described as an example with fictitious names.

Steve married Karen 19 years ago. Karen's parents owned Quickie Print. About eight years ago, Steve was invited to join Quickie Print and soon became its manager. Under his direction and management, the company experienced healthy rates of growth and profits, with sales in 2009 projected to top $1.6 million. Steve has been well rewarded with an excellent salary package and benefits.

During the past five years or so Steve has discussed with his in-laws on numerous occasions the possibility of buying the business. The in-laws, especially his father-in-law, have always tended to be vague about what they thought the business might be worth, or even whether they were really interested in selling it.

About two years ago, Steve's in-laws decided to semi-retire to Colorado, drawing out healthy dividends from the business. In the meantime, Steve continued to manage the business full-time. Buying the business had slipped to the back burner.

Well things changed dramatically about six months ago. Steve and his wife got a divorce. The divorce was amicable, but it highlighted Steve's tenuous position in the business. He wants to buy the business, but his father-in-law, when pushed for an "asking price," has mentioned a totally unrealistic price.

Now, what does Steve do? In one sense, he has the in-laws over a basket. For all intents and purposes he is the business and if he left and took some accounts with him Quickie Print might not survive, short of the in-laws returning back home and taking over all management responsibilities. On the other hand, Steve has invested his heart and soul into this business for the past eight years but still has no stake in it whatsoever - he's just another employee and he has no equity in the business.

Comments - In eight years neither party really sat down and put in writing how the business might be valued and when and how the business might be sold. Sad! Steve is in full-charge of the business and makes a healthy salary but has absolutely no ownership stake in the business.

If you recognize your own situation in the above, whether you are a son, daughter, daughter-in-law or have any similar relationship and you are working in a business owned by parents, you need to clarify exactly where you stand, when you can purchase the business, and agree on a specific method for valuing the business. Of course, the same situation would also apply to a long-time manager who has been promised time after time, as an inducement to remain with the business, the opportunity to buy it "some day." Days turn into months, and months turn into years and still nothing is put in writing.

One good start, at least in terms of valuing a business, would be to purchase "Print Shop for Sale." Another idea might be to email me and discuss your specific situation. I will be glad to help if I can.

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2 Comments:

Blogger Dennis Ewing said...

I have a friend who with her husband have been running the shop her dad started after WWII. He won't sell it to her as he is planning on leaving it to all the kids equally. With out her and her husband there would be no business. I have been trying to get her to turn the key and start one of her own. The current shop will die within a couple of months with out them.

December 29, 2009 at 4:40 PM  
Blogger Gail F said...

This is Gail Finke -- Gail F is the Google name I registered a long time ago.

I have a neighbor who has been trying to buy a small specialty retail business from its owner for years (she is not a relative). Recently, the owner decided to close the business and did not even notify her before she sent out an email to clients. They had an informal agreement but the owner just "never got around to" any of the paperwork... Now this neighbor, who has worked in the business for a long time, has no recourse but to give up or start a business from the ground up, which she could do in a year or two once she retires from her main job, but is not in a position to do now. She knows a lot of people in the industry, but does not have the buying knowledge and contacts the owner does, and she could not use the business name, which is fairly well known in the field.

From the outside, it seems obvious that the owner never intended to sell. There are too many red flags. But in a close working relationship, it's easy to overlook things, especially when you consider the owner to be a friend. You want to believe her many assertions and half-finished plans.
It's essential to have an actual plan, worked out with actual lawyers and/or bankers, no matter who you're dealing with.

January 7, 2010 at 8:06 AM  

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