Why Gifting Stock to Your Children May Be Poor Stewardship

**Note: This story is a composite derived from five different real-life situations.  The names are fictitious and are changed to protect the identities of those involved.**

Tom and Jenny own an eight million dollar manufacturing and retail business. They manufacture decorative fascia products for homes and then sell them through their own showrooms as well as selected partners around the country. They have one son and two daughters.

Ever since the kids were young, Tom told them that they would own his business. It has been his life-long dream to pass along his business to his children. And they have been raised to believe – right or wrong – that they will inherit the business and “be the boss”. Tom never said anything to them about buying the business – just that they would one day own it.

Tom’s son – the eldest of the three – worked in the family business in high school and college. After graduation, he worked full-time in the business but grew tired of his ideas to improve sales and get new customers in the door being discounted and often outright rejected by Tom. As part of trying to keep his son in the family business, Tom gifted 10% of the shares of the company to him. His son worked another couple of years, but was still unfulfilled, so he left the business. He went back to school, earned another degree and pursued a career in a different field. After 3 years, he also tired of that career. Tom wanted him to come back, so Tom offered his son another 10% of stock to come back and also offered 10% of stock to his son’s wife as part of a “signing bonus”. They both felt this was an opportunity too good to pass up, so Tom’ son came back into the business, this time as (pragmatically) 30% owner. Still, Tom was not open to new ideas from his son. When Eric returned to the business, he realized that nothing had changed. But he had a choice to make – get back out or dig-in and see what he could do to improve the business. He chose the latter.

Tom didn’t discuss with his son or Jenny much of anything about a succession plan. In fact, he didn’t plan at all. He just kept working in the business until, one day, at the age of 63, he realized he was tired, burned out and ready to sell. He decided he wanted to get it sold in 30 days (which, for those of you who don’t work in the sale of businesses, is a completely unrealistic time frame. Most businesses take 9-12 months, minimum, to sell).

So he calls his accountant and asks for a valuation of his business. The accountant told him that it was worth $1.2 – $1.5M. Tom heard the accountant clearly say it was worth $3M while Eric heard him say it was worth $400K. Nothing was written down – the accountant only gave a verbal, back-of-the-envelope valuation – so Tom and Eric started pointing fingers at each other. Finally, Tom asked his son to take a seller note for $3M so that his son could own the business.

Naturally, his son, Eric, refused to pay $3M for the business. Sales had been declining the last two years due to customers wanting a new type of product that they didn’t supply. Tom refused to spend $500K on a new machine to manufacture the new product and pointed to the decline in sales as a reason he couldn’t afford to spend that type of money. Tom blamed Eric for the drop in sales. Eric blamed his dad for not investing “in the future” of their company and that was the reason for the drop in sales.

Jenny is most upset about the deterioration of their family relationships. She is scared that there may come a day when she can’t see her grandkids because of the building animosity between Tom and Eric. Eric’s wife doesn’t want to be around either Tom or Jenny because Eric gets so made so easily with them. She values the peace and tranquility of being a family, but doesn’t want the fireworks of Tom and Jenny’s presence in her home.

So, what has gone wrong? A number of things – and if you own a business and want to pass it on to your children – then you should pay attention to the rest of this blog post.

Tom’s Mistakes

Tom’s first mistake was in promising the business to his children. While a romantic idea, he should have never made such blatant promises over and over again when his children were growing up. It significantly contributed to Eric’s sense of entitlement and caused a temporary rift between Eric and his two sisters as portions of their natural inheritance from the business was being gifted to Tom.

Secondly, he should have never gifted stock to Eric or his wife. Eric was right to refuse to pay full price for the business – after all, he already owned 30% of it. What Tom and Jenny didn’t realize was that by gifting the stock to their son and daughter-in-law, they would never be paid for that stock. They gave it away. Foolishly, they thought their son would pay them anyways out of the goodness of his own heart. They were wrong. This further contributed to a growing rift between them.

Thirdly, after gifting the stock to his son, they never held Shareholder meetings to elect corporate officers, hold board meetings and so forth. They never acted like a corporation. So Eric felt more and more “used” and didn’t feel like an owner. His dad made all the important decisions without consulting him. So Eric saw his future being squandered away by (what he perceived to be) his father’s poor choices and he felt discounted by his own father. Eric was never given the respect he was due as a legal stockholder in the company.

Fourthly, Tom offered to sell the business using a Seller Note – meaning that Eric could pay Tom for the business over time. Fortunately for both, Eric turned down the offer and didn’t sign the note. Had he signed it and then ran the business into the ground, not only would Eric be bankrupt, but Tom would have nothing to live on during his later years in life. The value of the business could have been destroyed had Eric made some blunders. I always recommend that the younger generation pay cash for the business so that they have to get some real skin in the game.

Lastly, Tom didn’t get objective values on his company by taking it to market and finding out what others would pay for it. So their life-long accountant got put in the middle between Tom and Eric by having him value the business. In the end, neither side wanted to use the accountant because both wrongly felt he “took sides” because he didn’t always agree with either Tom or Eric. So, without a neutral third party, Tom and Eric haggled back and forth over the price of the business for close to six months. Tom wanted $3M+ on $250K/EBITDA and Eric didn’t want to pay beyond $500K for 70% of the business. At the time of this writing, they are deadlocked, angry, tired, frustrated and unsure of what their next moves are.

What Can be Done to Fix the Problem?

The first thing Tom should do is focus on building sales back up in the business. He should stop blaming his son and take the responsibility for the state of the business. After all, he is the majority owner and the buck stops with him. Tom needs to stop whining and get going in building his business. He should work *with* his son, not against him and learn to value other opinions.

After getting sales back up, he should let Eric run an increasingly large segment of the business. This will give Eric needed experience in case he does find himself the owner of the business someday. Just because Tom is the majority owner in the family business doesn’t mean that he should run the business. Eric is fully capable of running the business, if Tom would just coach him.

Thirdly, he should realize he has given away 30% of the business and as a consequence, adjust his expectations for how much cash he is going to get from the sale of his part of the business. It’s sad, but true, Tom and Jenny will need to downsize their retirement because of unwise choices they made earlier on in their professional lives.

Lastly, Tom should take his business to market and find out how much it really is worth. Accountants can give you figures all day long, but until you’ve taken it to market to find out what real buyers think, you really don’t know what its worth. Tom should consider selling all the shares to a third party and letting his son walk away with a wad of cash so that both of them can focus on having a family, father/son relationship. Jenny needs this too. She needs assurance that she will be able to see her grandchildren. The entire family really needs to learn to be a family without a business. It will be difficult for them – but a good transition.

Summary

Good stewardship of a business which God has given to you means stewarding well your exit from the business. Simply giving stock to your children can cause unwanted and unforeseen consequences. Your exit can be thwarted and muddied by how you manage the sale process. Finding competent consultants who do this for a living is one of the best things you can do to ensure that you’re exiting your business well, realizing as much value as possible and then putting that cash to work as God directs in His kingdom.

Bill English

Lessons from the Life of Joseph Part IV

Genesis 39.21 – 40.23:

“But while Joseph was there in the prison,the Lord was with him; he showed him kindness and granted him favor in the eyes of the prison warden. So the warden put Joseph in charge of all those held in the prison, and he was made responsible for all that was done there. The warden paid no attention to anything under Joseph’s care, because the Lord was with Joseph and gave him success in whatever he did.

Some time later, the cupbearer and the baker of the king of Egypt offended their master, the king of Egypt. Pharaoh was angry with his two officials, the chief cupbearer and the chief baker, and put them in custody in the house of the captain of the guard, in the same prison where Joseph was confined. The captain of the guard assigned them to Joseph, and he attended them. After they had been in custody for some time, each of the two men—the cupbearer and the baker of the king of Egypt, who were being held in prison—had a dream the same night, and each dream had a meaning of its own. When Joseph came to them the next morning, he saw that they were dejected. So he asked Pharaoh’s officials who were in custody with him in his master’s house, “Why do you look so sad today?” “We both had dreams,” they answered, “but there is no one to interpret them.” Then Joseph said to them, “Do not interpretations belong to God? Tell me your dreams.”

So the chief cupbearer told Joseph his dream. He said to him, “In my dream I saw a vine in front of me, and on the vine were three branches. As soon as it budded, it blossomed, and its clusters ripened into grapes. Pharaoh’s cup was in my hand, and I took the grapes, squeezed them into Pharaoh’s cup and put the cup in his hand.” “This is what it means,” Joseph said to him. “The three branches are three days. Within three days Pharaoh will lift up your head and restore you to your position, and you will put Pharaoh’s cup in his hand, just as you used to do when you were his cupbearer. But when all goes well with you, remember me and show me kindness; mention me to Pharaoh and get me out of this prison. I was forcibly carried off from the land of the Hebrews, and even here I have done nothing to deserve being put in a dungeon.”

When the chief baker saw that Joseph had given a favorable interpretation, he said to Joseph, “I too had a dream: On my head were three baskets of bread. In the top basket were all kinds of baked goods for Pharaoh, but the birds were eating them out of the basket on my head.” “This is what it means,” Joseph said. “The three baskets are three days. Within three days Pharaoh will lift off your head and impale your body on a pole. And the birds will eat away your flesh.”

Now the third day was Pharaoh’s birthday, and he gave a feast for all his officials. He lifted up the heads of the chief cupbearer and the chief baker in the presence of his officials: He restored the chief cupbearer to his position, so that he once again put the cup into Pharaoh’s hand—but he impaled the chief baker, just as Joseph had said to them in his interpretation.

The chief cupbearer, however, did not remember Joseph; he forgot him.”

God Has Not Left Us or Forgotten Us

In Genesis 39.21 – 40.23, Joseph is sent to prison. Once in prison, Joseph earned the trust and confidence of the warden enough to be put in charge of the prison and its’ prisoners. In this passage, we also learn that Joseph interprets the dreams of the former butler and baker with each dream coming true exactly as Joseph predicted. The butler was restored to his position, the baker was hanged. The frustrating part for Joseph as that the Butler forgot all about him after being released. Joseph sat in prison another two years with no hope of getting out. While he might have been in the pit a few hours, he was now in prison a few years.

God sent Joseph to prison to further work on his character and “readiness” for the ministry to which God would one day call him. No ordinary trial could have revealed to Joseph that which he needed to learn about himself. God had to take extra-ordinary steps by giving Joseph a long-term trial of suffering in order to surface that within Joseph which needed the most work – his independence. His independence needed to be transformed into his full dependence on God so that God could use him to literally save the known world from starvation. It is the combination of time and stress that will prepare Joseph.

But the Lord had not forgotten Joseph. Genesis 39.21 tells us that “the Lord was with Joseph” and that it was the “Lord [who] gave Joseph favor with the prison warden”. What is interesting to me is that in the midst of his prolonged uncertainty about his future and his life purpose, God was at work giving him more experiences and skills for the life call that God would place on him.

As Christian Business Owners, we sometimes feel alone, frustrated and we wonder if God really understands the nuances in our business. “Why does this happen to me?” we ask ourselves. The story of Joseph reminds us that God is always at work, even when it appears that He has abandoned us. God’s purposes and plans cannot be thwarted by man – just read Job, chapter 42 for further confirmation on this. But we should be aware that some trials last more than a few days or weeks. Some will last years – heaping stress upon stress until that part of you which keeps you from serving God fully is ground to fine dust and what is revealed is a strength of character and a purity of motive that you would not have had any other way. Business ownership is not for the faint of heart. If you’re going through difficult times now with your business, consider that God is working on you, not your business.

Leading Your Business Means Leading a Diverse Group of People

Notice that the warden doesn’t bother to worry about anything with Joseph in charge of other prisoners. The contrast could not be more stark. In Potiphar’s House, Joseph was in charge of those who could be described as:

  • Law-abiding
  • Compliant
  • Socially acceptable
  • Connected
  • Wealthy
  • Influential
  • Polished culture

By contrast, in prison, Joseph is in charge of those who:

  • Made mistakes – perhaps unwitting
  • Rebellious – sometimes
  • Social outcasts
  • Disconnected
  • Lost their wealth
  • Lost influence
  • Less polished culture

When God calls us to lean an organization, we need to realize that we’re being called to lead a diverse group of people. Some will be law-abiding and get their work done, on time, as requested. Others will be less polished, sometimes rebellious and won’t really care if they make serious mistakes. God’s call as a Christian Business Owner is to lead them all. Joseph was learning how to do just that.

Joseph’s Did Three Things Right in Stewardship

Joseph was an excellent steward for three different bosses who never cared one whit about God. When we look at the life of Joseph, he had three core bosses: Potiphar, the prison warden and Pharaoh. Potiphar placed his house and attendants under Joseph’s care. The prison warden placed the King’s and his government’s law-breakers under Joseph’s care. Finally, Pharaoh placed his entire kingdom under Joseph’s care. Have you ever wondered what Joseph did to deserve all of this trust?

First, he paid attention to and furthered the interests of his masters. Biblical Stewardship is all about the agenda of the master, not the steward. For example, when Joseph started to gather the grain and then sell it back to the people (especially foreigners), he was keeping the interests of Pharaoh in mind since the impoverishment of his own people and the countries around him could only make Pharaoh that much stronger.

Secondly, Joseph made sure he had a good relationship with his boss. We never see Joseph usurping power or going behind the backs of his superiors. Later, we’ll see how he coaches his brothers to speak with Pharaoh and displays significant use of protocol with Pharaoh when asking him for Goshen in which his family can grow. Joseph showed proper deference to his leaders and, from what we can find in the Bible, he never talked evil about them behind their backs.

Finally, Joseph engaged in conflict resolution to the betterment of his master. Here, I’m thinking of how Joseph resolved the problem of the people not being able to purchase more grain because they were out of money. Joseph agreed to take their land and livestock, but did it in such a way as to better Pharaoh’s financial position.

Summary

As Christian Business owners, we should take seriously any entrustment given to us, especially from those who don’t believe in God. When a customer entrusts to you the completion of a product or service, we should take that seriously and work hard to complete our part of the effort.

But we should also realize that God may very well use the ebb and flow in our business to refine us a Disciples of Jesus Christ.  He’ll work on us until we’re ready to fulfill our life-long purpose – which is to accurately reflect the character of Jesus Christ.

An Open Letter to Pastors Considering a Work/Faith Ministry in Their Local Church

Creating a work/faith ministry is something that many pastors are considering right now. It’s the “hot” new ministry. The “in” thing to be doing. It will lose its’ luster in a few years, but for now, it’s hot, hot, hot!

When creating such a ministry, it will be easy to overlook the humble Christian Business Owner (CBO). Developing a ministry to CBOs is one of the more challenging things that a pastor can do when it comes to new ministry development. There are a number of potential reasons for this:

  1. CBOs are a busy group of people
  2. CBOs tend to be isolated due to the nature of the demands on their time
  3. CBOs tend to have needs that are substantively different than others in your congregation
  4. CBOs tend to be smart and sometimes, rather opinionated. So you can’t just throw anyone in front of them and expect the CBOs to follow
  5. CBOs tend to be a small group, numerically. So you’ll tend to avoid spending your scarce resources on numerically small group
  6. CBOs tend to be influential within their industries, so they can be difficult to impress.  Ministry leaders who are accustomed to serving up shallow or thin materials to the “dumbed down masses” will find this won’t work with CBOs
  7. CBOs are sometimes beat up from one week to the next, so they’re accustomed to variations in emotions and schedules.  This can translate into variations on how they “feel” from one week to the next.
  8. CBOs often suffer in silence, especially if their business is going bad.  They’ll put on a good face, but they’ll need to you to be able to “read” them and know how to draw out of them what’s really going on in their businesses.  Don’t count on their spouse knowing all the details either.

If you, as a Pastor, were to divide your flock into two very dissimilar groups, it would be employers and employees. For the employers who come to your church, what needs do they have? I’ll be most Pastors have no idea, even though they lead their own staff and “business”, if you can look at it that way.

While everyone is jumping on the work/faith ministry bandwagon these days, bear in mind that there is a niche group – employers – whose needs are vastly different and, in some respects, mutually exclusive to the needs of the employees you’re likely meeting in your work/faith ministry.

Here are some of their needs that you, as a Pastor, might want to consider as you think about how to reach the employers in your church.

First, business owners are leaders and in many cases, while they lead staffs and budgets that are larger than yours, it doesn’t mean you can’t relate to them about leadership. Consider incorporating leadership training into your work/faith ministry.

Secondly, Christian business owners have a unique stewardship responsibility before the Lord that is not unlike the responsibility you have as a Pastor to a church. But their stewardship responsibilities are very unique when compared to the employees in your congregation. If you’re unfamiliar with Biblical stewardship, then please take some time to learn about it. You’ll swiftly see that business owners are walking a difficult path

Thirdly, CBOs tend to make tradeoff decisions on a near-daily basis. They are seasoned and accustomed to saying “no” to one party in order to say “yes” to another. If you develop a ministry for CBOs, make sure it is of high quality or you’ll find them opting out for something else.

Fourthly, CBOs tend to be very busy people. One Harvard Business Review study found that CEOs spend an average of 9 minutes on a task, sometime juggling as many as 50 projects at a time. Don’t be offended if they seem distracted – it’s because they are.

Lastly, CBOs needs (whether they know it or not) are to connect Biblical Theology with their daily work. They need both theology and very practical ways of implementing that theology. When you (or anyone else) teaches them, give them handouts they can immediately use to improve themselves or their businesses based on the topic involved.

CBOs, generally speaking, are not needy people. So they won’t clamor for your attention. But this doesn’t mean they don’t have needs. Try meeting with some of your employers in your congregation and ask them how your church can minister to them. It will be an exercise worth doing.

Bill English

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