Tax. The three-letter word that is not incredibly exciting and probably creates a sense of dread above everything else. Unfortunately, as one renowned politician once said, tax and death are the only things in life that remain constant.
Starting a new business can be exciting and exhilarating both on a professional and personal level. While it’s a new milestone in your life, challenges do exist and one of the most common problem faced by business owners, is the proper setup, administration and ongoing management of your finances and business accounts.
Building a business is hard work. Successfully maintaining it’s growth is another challenge altogether. As a business owner, running a business is incredibly overwhelming especially when you’re expected to be competent across all areas of operations.
Operating a small business can be a challenge, but one of the biggest difficulties is making the most out of your valuable resources: time, skills and knowledge. As experienced professionals in small business consulting, we often see business owners working harder and longer, but still failing to achieve their business goals and objectives.
Once I had to prepare MY OWN succession plan…I truly understood how my clients felt…AND… how our own anxieties can complicate these matters even further.
I’d now like to share with you the underlying strategies I employ to help families deal with this very difficult process. The reason it is a “difficult process” is that family members on all sides of the succession planning spectrum suffer from the same problem (but rarely talk about it openly). That problem is insecurity/frustration.
If we can make ALL the participants feel secure that their income/rights/family are going to be looked after – then the whole process is far simpler – and a whole lot quicker! The first step in making ANY headway in this process; is to UNDERSTAND and to RESPECT how the others are feeling.
Consider the following BEFORE you do anything:
It is human nature to find it very confronting when the very people (who you consider “work for you”) start wanting to be involved in the decision-making or start asking questions about when you are moving on. It is confronting because:
“The Bosses” (usually Mum and Dad) become insecure about losing control of the purse-strings. This is not because they want to roll around in piles of money…but because they are not sure whether they will still be able to earn the same amount of money that they have previously enjoyed…once they “let go”.
In other words; “what if the kids want to put us on meagre wages/drawings from now on? We don’t want to live on the bread-line after working so hard to build things up to this point. We want to savour the fruits of our labour!”
Also, “The Bosses” will normally be required to guarantee the borrowings of those taking over (because “The Bosses” own all the assets at this point). They will not feel comfortable about putting all that they’ve worked for “at risk” – especially if “the workers” outline any big plans that will involve lots of borrowing early on in piece.
This is usually amplified by the fact that “The Bosses” are getting on in age…and simply can’t just “start again” if things don’t go to plan. Therefore, they will want to retain a certain degree of control of what happens after they “let go”. This is mainly driven by “The Bosses” perceived need to be able to take extra money out of the business for personal stuff…and risking their assets (as mentioned above). This normally results in some “hefty legal paperwork” to safeguard their position.
This needs to be properly explained to “the workers” or else they may feel like “The Bosses” can pull the rug out from underneath them at any time; Leading to insecurity. On the other hand, without the legal paperwork in place, and the ability to draw money, “The Bosses” will feel insecure.
It is important to get the paperwork right…and to make sure that the wills, enduring powers of attorney etc are all dovetailed in together. It is a major source of insecurity for everybody if they feel like there are loose ends.
“The Bosses” certainly will not enjoy having to justify their expenditure to “The Workers” in future. Therefore “The Bosses” will immediately increase their wages/drawings to prevent this happening.
In fact, “The Bosses” sometimes go on a spending spree just prior to retirement (fix up the rental property that they are going to live in, update the car, buy a caravan etc) because they think they will be “held accountable for this type of expenditure in future. Therefore, they tend to “get it done” before they hand over control.
So, “the workers” need to bite their tongues if they think “The Bosses” are taking too much out of the business initially.
I find that over time, “The Bosses” continually reduce their drawings (or put the money back into the business) anyway. So don’t worry about it.
The initial amount that “The Bosses” go for is a bit of a knee-jerk reaction to letting go. Remember: they can always give it back if it is too much…but it is their greatest fear to ask for more money. So…don’t start them off on a figure that is too low for their lifestyle – or they will become insecure.
On an emotional level, “the bosses” also experience a loss of identity. They’ve always been “Bob the Farmer” or “Bob the Engineer” and when they retire – they feel like they have to stop doing what they’ve always done…and will be consigned to the scrap-heap. In effect, they are worried about what they will do next to occupy their day.
Another emotional consequence of letting go – is that “The Bosses” don’t want to favour one child over another. Therefore, they will try to “even things up” as much as possible between the kids. This can become complex…if the value of the business is greater than its earning capacity. This may cause “The Bosses” to give up – and talk about selling up. Again, this is frustration/insecurity talking – they don’t really want to sell – but it does come up for discussion when “The Bosses” can’t see how they can maintain their lifestyle and still be fair to everybody.
Finally, “The Bosses” need somewhere to go/something to do. Therefore, you need to plan early to find that house or villa in the place they’d like to spend more time in…and then agree on whether they will keep an active role in the business…or pursue their hobbies/hitch up the caravan instead. This is easier if “The Bosses” already have hobbies.
If “the workers” want to step up – it can be heaven (or hell). The difference between the two is how “prepared” the business – and more importantly “The Bosses” are for this transition to take place. It is not without its challenges:
Firstly, “the workers” need to position themselves properly BEFORE making any overtures about this to “The Bosses”
“The workers” don’t want to seem pushy, but then again, they are probably in their 30’s by the time they start talking about this type of thing. So…time is of the essence…for EVERYBODY. Putting it off is the worst thing you can do.
Unfortunately, if it is not put to “The Bosses” in the right spirit (or at the right moment) it sometimes can be seen as a threat by “the Bosses”.
In my experience, “the workers” are very appreciative of what “The Bosses” have had to do in order to build the business to its current level. “The workers” really want “The Bosses” to enjoy their senior years, have holidays and take whatever amount of money “The Bosses” need to fund their lifestyle. It is also my experience that “the workers” want to use “The Bosses” as a sounding-board as often as possible. Therefore “the workers” want the succession planning process to be a staged hand-over, not a door slammed shut in the face of “The Bosses”.
It is important that this message is conveyed to “The Bosses” by “the workers” as early as possible…so that we can eliminate the major insecurity of “The Bosses”.
The youthful exuberance of “the workers” will quickly lead to frustration if progress in “handing-over the reigns” is slow (or if “the workers” don’t feel like they are being listened to – in other words…the succession planning process is continually put-off).
As long as there is a plan…and there are set milestones that we can tick off along the way to reaching the ultimate goal – I find that “the workers” can handle a longer lead-time to the transition of power. This can give “The Bosses” enough time to get organised…and it can also give “the workers” some time to get their systems right – ie who does what (for example the bookkeeping etc).
The fact that “the workers” want to step up, is actually a blessing because it will mean that new ideas will be introduced to the business…and often, “the workers” youthful exuberance rubs off on “the Bosses”…giving “the Bosses” a new lease of life.
If you manage it right…the result is a mix of youthful exuberance and seasoned experience which is hard to beat. Your business will definitely benefit from it…as long as you LISTEN to each other.
Usually, “the workers” have a spouse and/or children. So…they are not just speaking for themselves…they have an overriding responsibility to their own family.
This change in attitude is usually picked up by “The Bosses” and for the first time, “the Bosses” will realise that their personal goals may differ from “the workers” personal goals. It is no longer a case of “yes Dad”.
“The Bosses” should not blame the daughter-in-law or the son-in-law for the change in attitude of the (previously placid) “workers”. “The Bosses” need to recognise that everybody wants what is best for their own family…and naturally…as the families are in different phases of their life-cycle…goals may differ.
“The workers” may also be siblings. Therefore, you may have brothers/sisters in the business…along with their spouses. Each of the siblings may be in a different stage of life (some with kids, some without kids/some married, some de facto or single).
So, what do we pay “the workers” during these various stages of their lives?
Just as “The Bosses” need to have adequate wages/drawings to fund their lifestyle, “the workers” need the same consideration.
It is grossly unfair for “the workers” to be struggling to pay their own bills or education costs.
These basics need to be covered by whatever wage/drawing “the workers” are on.
You would be surprised how often things get out of kilter without anybody noticing. Usually, “the workers” are not confident to bring this matter up at family meetings…therefore it gets ignored and the pressure builds up.
Often, the growth in “the workers” own family is unintentionally ignored…and they can be “underpaid” or sometimes there are disparities between siblings (for example, those with kids and those without kids of their own). This build up of pressure usually manifests itself in an argument. However, the root of the problem is normally inadequate wages/drawings. This applies to ALL parties.
Therefore, an annual wage/drawings review (at budget time) is paramount.
“The workers” can sometimes feel an overwhelming sense of frustration…if they are on a low wage/drawing.
This is magnified if the succession planning process is taking too long (or being put off). They don’t see how they will ever amass the assets that “The Bosses” have managed to build up over their working lives – if they can’t manage month-to-month with their own bills.
There is also a timing issue. If “the workers” are in their 30’s…they will feel that they don’t have much time to build up their own assets before they are facing the same succession dilemmas as “The Bosses” are facing now.
This creates a sense of hopelessness and it is this hopelessness that tends to drive them away from the family business. It all just gets “too hard” for them – and they become insecure about their future.
So, what we need is:
For compromise to be the underlying negotiating tactic
For each party to realise that this is a challenging process, and that it won’t happen overnight…but equally, it is unfair to keep the next generation hanging either.
For each party to understand and respect what everybody else is going through at this point in their lives – and how the succession planning process will magnify any insecurities/frustrations they may already have
For “The Bosses” to have a retirement destination in mind and something else to do…besides running the family business. (Staying put is fine…as long as everybody knows that is what they want to do)
For everybody to be involved at family meetings. It shouldn’t be dominated by one party.
Install an impartial chairperson at the family meetings if you need to
For the annual budget to include adequate wages/drawings for every member of the business – updated annually
A succession plan (with milestones that we can tick off along the way) to be put in writing and reviewed regularly
Legal agreements – including Wills/enduring powers of attorney etc to be updated in accordance with the plan – so that everybody knows where they stand
Regular meetings whereby each party can communicate openly about how the process is going (good or bad) along the way:
Fix the bad stuff
Keep doing the good stuff
Tick off the milestones
Keep everybody accountable (ie walk the talk!)
The “workers” need to remember that the “bosses” did not accumulate all their assets until they were well into their 50’s, because it’s only once your kids finish school, and a few relatives pass away that you get the capital to make some of the big moves. Crazy but true !
To have the guts to do one of the following if it is mutually agreed that the business is not capable of funding multiple families – or a mutually acceptable succession plan cannot be reached:
When the time is right: sell-up and make use of the proceeds for the benefit of all
OR…somebody has to make way for somebody else
Don’t forget – we have the skills and experience to drive this process. We also insist that you involve your Bankers/Financial Planners/Farm Consultants/Solicitors in the process too. Joint meetings where we can share our combined experience in these matters will help you to overcome the hurdles.
When starting a business, one of the most important things to do is decide on a name. Although it may seem relatively simple, over the journey, we’ve found this is in fact on the hardest tasks of all. Here are some tips to getting it right.