I’ll Get to It Later: The High Cost of not Planning your Exit from your Business

John’s father, Dan, started their family business during the depression. Dan had figured out how to improve the process of generating usable materials from the earth’s raw materials, like minerals, food waste and so forth. While his invention didn’t generate billions in sales, his customers found his invention to be, literally, the only thing on earth that could help their production processes achieve what they had hoped for.

Dan died in the early sixties. He left his business to John who ran is successfully and profitably until 2015, when he suddenly passed away. His successor, Mike, was his right-hand-man who had worked in the business with him since the early sixties. While Mike knew the business well and had run their engineering department for nearly 40 years, their customer relationships were primarily with John. Sales immediately began to slip and no one knew what to do about.

In 2016, John’s children decided to sell their father’s business along with the land and buildings. Because the business had declined in sales and profitability over the ensuing 12 months after John’s death, they learned that it was only worth a fraction of what it had been worth. Truth was, it was taking on debt and had lost half of their employee base – many of those leaving had been key engineers who knew how Dan’s invention worked and what their improvements had been.

In the end, each of the three children ended up with ~ $400K after the business, land and buildings were sold.

$400K, you say? Not a bad deal, eh?

Well, it is when you consider that had John developed and implemented a succession plan, his children could have had ~ $100K/year for the next 20 or 30 years.

Would you rather have $400K now or $3M over 20 years. I don’t know about you, but I’ll take the latter. In real terms, John cost his heirs the chance to receive at least $2M more each than what they did receive.  The  cost of not having a succession plan was very high.

John had no succession plan. None of his children were interested in his business. While their family relationships were good, none of them wanted to work in “dad’s business”. They had their own dreams and ambitions. John didn’t mind – he wanted his kids to be happy, so he was happy to support them in their pursuits.

But think about it for a moment: What if his kids had been offered the opportunity to continue to own the business while hiring an outside, trusted person to run it? Truth is, they never considered this option and it cost them dearly.

There’s only three ways an owner will leave his/her business:

  • Sell
  • Die
  • Liquidate (bankruptcy)

Obviously, the first is the best option since the owner gets in cash the equivalent to the value s/he built in his/her business.

Now, we’ve all heard about “family owned and operated” businesses. This is often held up as the ideal for small businesses. It has a romantic flavor to it – Dad starts a business, the family joins in, the clouds part, the angels sing, butterflies flutter about each morning and all is right with the world.

But there is another option and it is this: have the family own the business but have non-family personnel run the business. The family assumes two of the four roles in any corporation: shareholder and board members. The non-family personnel assume the other two roles: corporate officer(s) (think CEO, President, CFO) and employees.

So, the family members – who are the owners and board members – hire a good CEO, name her as the top Corporate Officer and entrust to her the responsibility to carry out their vision of the company, bake in their values and return a profit to them each year. This is not unlike what the master did in Luke 19 with the parable of the talents.

Let’s assume this is a $12M/year business and it has a net profit of ~ 8%/year, or ~ $960,000. While the family members don’t get salaries, as owners they can take was is called an “Owner Draw”, which is ordinary income to them, but is money taken out of the business for their personal use. So, let’s give each of the three children $150,000/year in an Owner Draw. This would leave the CEO with $510,000 of working capital to us in the next year to help build and grow the business.

Here’s the catch: it’s not up to the kids to implement this succession plan – it’s up their parents – whoever was an owner in the previous generation.

Think about it: If you own a business today and you know that your kids are probably not going to want your business, you can still provide for them by hiring non-family to run it and then having your kids take out a certain percentage of the net cash profit each year. Your business can continue to provide for you children and grandchildren long after your departure from this earth simply by thinking ahead and implementing a thoughtful succession plan. It will take at least 5 years to implement, so if you’re past 50, it’s time to start thinking about.

There are other options, of course. You can sell your business or you can wind it down and liquidate it. But all things being equal, I have a difficult time understanding why you wouldn’t want to provide for your children and grandchildren by hiring competent, non-family executives to run your business.

And best of all, you can designate a certain portion of the profits be placed either into a family foundation focused on giving to Christian ministries or given directly to certain ministries you want to support. And you can continue to support them long after you have passed.

Now, you might ask: “is leaving an inheritance supported in the Bible?”  I think the answer is “yes”.  Consider Ecclesiastes 5. 13-15:

13 “I have seen a grievous evil under the sun: wealth hoarded to the harm of its owners,  14 or wealth lost through some misfortune,
so that when they have children  there is nothing left for them to inherit.  15 Everyone comes naked from their mother’s womb,
and as everyone comes, so they depart.  They take nothing from their toil that they can carry in their hands.”

For my purposes in this article, please note that it is a “grievous evil” is a “misfortune” creates a situation in which a parent’s wealth is not passed on to their children.  To my way of thinking, “misfortune” can easily cover situations in which the parent’s laziness and lack of planning creates a less-then-optimal inheritance for their children.

If you own a business and need to discuss a succession plan, contact me at bill.english @ theplatinumgrp.com. It will cost you nothing to have a conversation with me and it may help you achieve some of your most important goals.

But for sure, don’t die without a succession plan that has been implemented for your business. That, in my opinion, is horrible Christian Stewardship.

Bill English